If there’s just one lesson consumers should take away from the AMP train wreck at the banking royal commission this week, it’s this: when it comes to picking a financial adviser, watch out for big banks.

The big banks have their fingerprints all over the financial advice industry in Australia, but often you need a forensic kit to spot them.

More than 80 per cent of financial advisers in Australia are controlled by the big four banks, plus the disgraced AMP – institutions that have regularly shown themselves willing to put their own bottom line ahead of their customers’ interests.

The revelations this week – which concerned Westpac, ANZ, Commonwealth Bank and AMP – would make anyone who cares about protecting their financial wellbeing think very seriously about entrusting their savings to one of these big institutions.

But the trouble is a lot of people are entrusting their savings to one of the big five without any idea that is precisely what they’re doing.

That’s because a large number of financial advisers who appear to be independent actually operate under the licence of these enormous institutions, often without any meaningful disclosure of this fact.

Hang on, what exactly is a financial adviser?

Financial advisers are the GPs of the finance world. Their job is to take care of your financial health.

You really only need to see a financial adviser when you’ve amassed a decent amount of wealth. As a result, in the past only higher income earners have used financial advisers.

But this is changing. Thanks to compulsory super, more and more of us are reaching retirement with substantial private savings.

The average household now retires with $355,000 in their super, according to the Association of Superannuation Funds of Australia.

That’s a lot of money, and it’s only the average. Half of households are retiring with more than that.

It’s a financial adviser’s job to help you invest that money to ensure it gives you a reliable income in retirement. This is obviously a valuable job and one that requires a high level of trust. That’s why this week’s revelations are so disturbing.

Advisers and the banks

Banks and companies like AMP are financial product providers. They have investment platforms, managed funds, stockbroking operations, insurance and pension products, and so on – i.e. they make all the sort of ‘investment vehicles’ you need to make your money last through retirement.

But they also control most of the financial advisers in the country. This is called ‘vertical integration’, and is crawling with potential conflicts of interest. It’s as if 80 per cent of GP’s in Australia were controlled by a handful of massive pharmaceutical companies.

Things are changing for the better

For all the appalling revelations this week, the fact is things are a lot better than they were five years ago. Before the introduction of the Future of Financial Advice (FOFA) reforms in 2013, financial advice was often nothing short of a racket.

Advisers were paid commissions for recommending products and were under no legal obligation to put their clients’ best interests before their own or the banks’. This incentivised all sorts of dodgy behaviour, and led to some spectacular scandals.

The term ‘financial adviser’ was really a euphemism for ‘financial salesperson’.

FOFA changed much of this, banning commissions and forcing advisers to act in the interests of their clients/customers (though there are some glaring exceptions which banks are exploiting to the max).

FOFA had nothing, however, to say about the inherent conflicts of vertical integration. And, as this week’s revelations have proved, these conflicts seriously compromise the quality of advice given.

Another important point is the big banks are moving away from ‘manufacturing’ investment products. Just this week CBA announced it was hiving off its investment firm, Colonial First State Asset Management. Others have done the same thing. This will decrease, but not solve, the problem of vertical integration.

What you can do

No doubt the problems of vertical integration will be seriously looked at in royal commissioner Kenneth Hayne’s final report.

In the meantime, if you decide to get financial advice there are some things you can do to protect yourself. The first is to check which bank, if any, the providers of that advice are licensed by. Truly independent financial advisers do exist, but they are rare and likely to cost a bit more.

You can either ask the adviser point blank who they are licensed by – they have to tell you the truth – or you can go to the adviser register on ASIC’s Money Smart website, and type in the name of the adviser you’re thinking of using. It will tell you whose licence they operate under.

ASIC’s Moneysmart website is an excellent resource, and indispensable for anyone considering getting financial advice.