This week the big banks got more bad press when the corporate regulator ASIC declared that their huge networks of financial advisers were failing to operate in the best interests of their customers.
The report, which covered the financial advice arms of the Commonwealth Bank, Westpac, ANZ, NAB and AMP, found that an astonishing 75 per cent of advice provided was not in the best interests of customers.
And in 10 per cent of cases, consumers were actually worse off than they would have been if they hadn’t got advice.
To put it bluntly, ASIC’s message was this: banks are using financial advisers – supposedly the GPs of finance – as a tool to funnel your money into their products.
That’s a pretty damning finding, considering the whole point of financial advice is to help consumers make the most of their savings.
And it’s even more worrying when you consider that, together, the big four banks and AMP control more than three-quarters of Australia’s financial advisers.
What exactly are the banks doing?
When you enlist a financial adviser to invest your money, they have at their disposal a large but finite list of possible investments. These include managed funds, exchange traded funds, individual shares, life insurance policies, annuities and term deposits, to name a few.
This finite list of possible investments is known as an ‘approved product list’, or APL. It is compiled by the licensing body, which in most cases is one of the big four banks or AMP.
According to ASIC, the average APL is made up of 79 per cent external products, and 21 per cent in-house products – ie products manufactured by the bank.
But ASIC found that, while the percentage of the banks’ own products was very small, advisers were putting a wildly lopsided amount of their customers’ money – 68 per cent – into this small selection of products.
This, ASIC said, highlighted the problem of so-called ‘vertical integration’ – whereby institutions have control over pretty much every stage of the financial services supply chain.
While ASIC said vertical integration could provide “economies of scale and other benefits” such as convenience, it said there were also serious risks – chiefly that they were biased towards their own products, regardless of whether those products were in the best interests of customers.
“[C]onflicts of interest are inherent in vertically integrated firms, and these firms still need to properly manage conflicts of interest in their advisory arms and ensure good quality advice,” ASIC stated.
The Financial Services Council, the industry body representing the big banks, investment managers and life insurers, was quick to acknowledge the report, saying there was “still work to be done to address community and regulator concerns about the quality of advice in Australia”.
However, it defended the vertically integrated model, saying vertically integrated companies facilitate “easier access to financial services and stand behind their advisers as an extra layer of protection if things go wrong”.
How to spot a vertically integrated adviser
While more than three-quarters of advisers are linked to the banks or AMP, you wouldn’t know it to look at them.
Many apparently independent financial advisers, based in little offices in suburban shopping centres, with their own logo and business card, may in fact be aligned to a big bank.
So how can you spot them? ASIC tells The New Daily the most obvious way to find out is to ask them straight if they are aligned to anyone. Do that, and by law they have to tell you.
But if that isn’t your style, there are two sneakier ways to find out.
The first is: do they describe themselves as independent on their website or shopfront? If they do, then they are not aligned to a bank. That’s the law, straightforward and unambiguous.
And the second is this: go to ASIC’s moneysmart website and type in the name of the financial adviser in question. In the third line, it will tell you who they are “controlled by”. More often than not it will be CBA, NAB, ANZ, Westpac or AMP.