In the wake of the Banking Royal Commission, the finance industry has been moving away from the “vertically integrated model” of providing advice; but there will be repercussions in the cost of advice for investors.
Vertical integration allowed a financial institution to create new products to meet customer needs, which could then be sold to them via its team of financial advisers. This situation, ripe with potential for conflict of interest, was one of the main areas of concern for the Commission.
Ben Smythe of The Australian Financial Review (AFR) spells out how “the biggest slice of the profits attributable to advice… came from the margins earned on the in-house products” and highlights the challenge for banks to make money from “delivering personalised, bespoke and un-conflicted financial advice” without this boost from cross-sales.
The Commission’s final report sought to address those conflicts with recommendations for a wide range of legislative changes, including (but by no means limited to): enshrining a requirement for mortgage brokers to act in the client’s best interests; having the borrower rather than the lender pay the broker’s fees; measures to address conflicted remuneration and commissions; and ending the practice of ‘hawking’ superannuation and insurance products.
Many banks are already working on how to adopt a conflict-free model of financial advice, and how to charge appropriately for the service. Clyde & Co notes that in the short term, financial institutions implementing recommendations and altering their processes will lead to increased operating costs. Some existing financial planners are paying up to $20,000 to update their qualifications, too. All this additional cost to meet new regulatory requirements will no doubt be factored into future fee structures.
AFR’s Tim Boyd has also reported that financial advisors are concerned that the necessity of increasing their fees could price their services out of reach of some people looking for investment guidance.
Corrs has suggested that for the average consumer with simple financial needs, digital, automated financial advice may be viable. “Robo-advice” would automate some elements of compliance, though it’s not likely to be suitable for high value clients needing more complex advice.
The final costs for conflict-free financial advice will vary, naturally, but if the Commission’s recommendations are enacted, at least they won’t be hidden.
If you would like some reasonably priced, unconflicted financial advice, speak with a professional investment adviser at United Global Capital today on 03 8657 7640 or email firstname.lastname@example.org for a no cost, no obligation consultation.