More sieve, less cake: how the banks nab your wealth

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Fairfax journalists Adele Ferguson and Ruth Williams have exposed yet another financial planning scandal, this time involving the National Australia Bank (NAB). Just as the Commonwealth Bank was beginning to slip out of public scrutiny for its own financial advice disaster, evidence has emerged of more sackings, cover-ups and inappropriate advice at NAB.

The revelations that NAB’s financial advice arm is fraught with compliance breaches, forgery and fraud has brought to light the need to revise policy around bank conflicts of interest. Australians expect to be given fair and unbiased advice from experts, not to be sold products from financial advisers that are aligned with the businesses building those financial products.

But the reality is quite the opposite. The big four banks (CBA, NAB, Westpac, ANZ) and AMP are ‘vertically integrated’, allowing them to both manufacture financial products and recommend them through their financial advice networks. This has led to a situation where bank-aligned advisers exhibit a strong preference for their own products and platforms over competing offerings, seemingly without regard to whether they’re really the best options for their clients.

A 2013 Roy Morgan Research paper, the Superannuation and Wealth Management Report, found that a majority of products sold by financial advisers were from the same group as the adviser recommending them. The report found that:

  • In the 12 months to June 2013, Westpac/BT had the highest proportion of their members being directed to their own products in the latest period, with 74.2 per cent, followed by NAB/MLC with 72.5 per cent.
  • Over the last five years, AMP remains the most self-referential, with over 70% of people using an AMP/AXA-linked Financial Planner ending up with AMP/AXA product.

This kind of conflicted advice can take two forms: promoting the bank’s own products, or promoting products that are managed externally but distributed via the bank’s platforms (where upfront and ongoing fees can be charged for ‘shelf space’) allowing banks another opportunity to ‘clip the ticket’.

John Berrill whose law firm Maurice Blackburn led a class action against Commonwealth Financial Planning, summarised that “An adviser working for a bank is likely to, under considerable explicit or implicit pressure to sell the bank’s own products, which may not be the most appropriate or cheapest.”

In the 2014 Stockspot Fat Cat Funds Report we found several examples where the exact same underlying investment (i.e. comparing apples for apples) was offered at two completely different prices on different platforms. All things being equal, you would expect your financial adviser to recommend the better priced option, right? However in many instances advisers are restricted to offering one version because they can only make recommendations from an ‘approved product list’ (or APL) which is controlled by – you guessed it – the parent bank or licensee.

Rhys Wood, an AMP financial planner trading under “Elite Wealth Solutions” provided a submission to the Financial System Inquiry (FSI) in April last year with his concerns that “as a result of the systemic bias within the [financial license] holder organisations, clients are not recommended to use alternative financial products provided by a competitor of the [financial license] holder’s parent company regardless of any superior ability to meet the client’s needs”.1

Think of it this way, would you trust the advice from a doctor if you knew they were employed by a drug manufacturer and that they were only allowed to prescribe medication from a list set by that same drug manufacturer?

This is the impact that vertical integration has on the integrity of the financial advice industry in Australia. While government policy has a large part to play in protecting consumers moving forward, we believe technology will have the greatest impact on financial advice over the next decade. This is one of the reasons we established Stockspot – to help improve transparency and open up access to unconflicted advice outside of the influence of financial product manufacturers.

1 AMP planner blows whistle on product bias
 

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Chris Brycki

Stockspot Founder and CEO

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