A tangle of financial advice

Summary: The corporate regulator has its sights on financial advisers, especially those tied to financial services companies including the major banks.

Key take-out: ASIC has found that a high percentage of advisers linked to banks have ignored the best interests of their clients.

The Future of Financial Advice (FoFA) legislation introduced by the Federal Government in 2013 was squarely aimed at cleaning up the ugly face of Australia's financial advice sector.

Above all, the FoFA legislation was designed to totally eliminate the prospect of conflicted financial advice by outlawing adviser kickbacks and commissions, specifically to ensure that advisers acted in the best financial interests of their clients rather than themselves or product providers.

In 2002, when I worked for a major financial services group, I recall writing a communication to the firm's most-prolific aligned advisers, informing them that they were being flown to the Sun City resort in South Africa (all-expenses paid) with their partners as a reward for the amount of company business they had written throughout the year. The financial advice industry was totally driven by undeclared commissions and rewards.

Those days, thankfully, are over – and there is no doubting that the FoFA changes implemented almost five years ago have done a lot to improve the credibility of the financial advice sector – but it is also clear that major problems do still exist.

That was brought home last week when the Australian Securities and Investments Commission released a rather damming report following recent investigations into the quality of financial advice being provided by Australia's biggest financial institutions.

ASIC reviewed the financial advice provided by AMP, ANZ, Commonwealth Bank, National Australia Bank and Westpac, and found that their advisers had not acted in the best interests of their clients in 75 per cent of cases. Even worse, in 10 per cent of the client files investigated by ASIC, it found customers were likely to be significantly worse off as a result of following the advice provided.

The findings are alarming, but should we be totally surprised?

We know that ever since the FoFA reforms became law that several of the financial advisory divisions within the banks have been under the spotlight for providing poor financial advice, and have been the subjects of litigation seeking compensation for investors.

Yet, given ASIC's latest investigations cover a period from January to the end of March last year, it's evident there are still serious problems, especially when it comes to licensed advisers employed by the big banks and others recommending their company products over external ones.

ASIC chairman Peter Kell noted that, in 10 per cent of the files reviewed, it was readily apparent that customers were likely to be significantly worse off as a result of following the advice received.

“For the balance of the files (i.e. 65 per cent), the fact that customer files reviewed were non-compliant does not mean that the advice, if implemented, would result in negative outcomes,” he added. “However, these files did not demonstrate that the customer would be in a better position following the advice.”

The high level of non-compliant advice, combined with the high proportion of funds invested in in-house products, definitely suggests that the advice licensees reviewed may not be appropriately managing the conflict of interest associated with the vertically integrated business models of the big banks.

So, what is being done to rein in these advisers (and to create even greater transparency)?

ASIC says it has instigated a range of measures to improve the quality of advice, enhance the recruitment checks used when appointing advisers, and to strengthen its data analytics capacity to identify and evaluate higher-risk advisers.

The regulator has also started a program to assess the conduct of advisers reported by institutions as being subject to serious compliance concerns, and will take banning action where necessary.

Furthermore, it is introducing improved processes to ensure that, in the future, promised financial advice services are actually delivered to the clients that paid for them.

“We will also consult with the financial advice industry and other relevant groups on a proposal to introduce public reporting on approved product lists and where client funds are invested for advice licensees that are part of a vertically integrated institution.”

That ASIC is working towards further cleaning up the industry can only be construed as a good thing. But the fact that it still has to is very concerning.