Institutions have advice wrapped up
Questions are being asked about the independence of the biggest providers of financial advice, writes John Collett.
Questions are being asked about the independence of the biggest providers of financial advice, writes John Collett. Financial planners working for the big banks and AMP - or aligned to them - funnel most of their clients' money into their own products, according to a recent study. It throws doubt on whether advisers are acting in their clients' best interests or the interests of their own bottom line.According to a survey by Roy Morgan Research of financial-planning clients, AMP-aligned planners are directing more than 80 per cent of clients' superannuation money into AMP's own super funds. Planners working for and aligned to the big banks are also directing more than two-thirds of clients' super money to home products, although ANZ has the lowest home bias of 46 per cent.An industry communications director at Roy Morgan Research, Norman Morris, says the "lack of independence regarding these planners' approved products raises the question of whether the best interests of the clients are always being served".Roy Morgan's Superannuation and Wealth Management in Australia report shows the bias to home products has changed little in the past three years. It also reveals that a large portion of clients of financial-planning firms owned by financial institutions or aligned to them, but branded differently to the institution, believe their financial planner is independent.'Home' biasWhile planners aligned with Westpac have reduced their home bias on superannuation from 77.5 per cent to 67 per cent in the past three years, AMP is steady while the Commonwealth Bank has increased its home bias from 73.5 per cent to 77 per cent in the same time.The results are not the actual levels of home bias but the perceptions of the clients of financial advisers who were asked by Roy Morgan Research who they believed was the manager of their super fund. However, the trend is broadly supported by other available research on actual fund flows into superannuation products.The research director at superannuation researcher Rainmaker, Alex Dunnin, says: "The majors have, generally, a bias to referring clients to their home products." That should not come as a surprise as it is the "whole point of wealth groups investing millions to build vertically integrated product manufacturing and distribution chains", he says. "Indeed, their shareholders would be horrified if this wasn't the case."However, planners who promise independence and recommend "house" products should be giving "damn good explanations" about why those products are being recommended, Dunnin says.A spokeswoman for AMP, Amanda Wallace, says AMP-aligned planners act only in the best interests of clients."Above all else, customers want good advice and good products at a competitive price, backed by a strong brand that they can trust," she says. "This is what we aim to deliver to our customers and AMP's business model means customers can take comfort knowing the strength of AMP stands behind the quality of our advice."Marianne Perkovic, the general manager of CFS Advice, the advice arm of the Commonwealth Bank, says the advice is in the best interests and appropriate for clients' goals and circumstances.The extent of the actual home bias, though strong, is likely not as great as the survey results indicate.That's because many of the super products, though labelled and managed by AMP's funds management arm, employ other fund managers to manage part of the money.The clients see only the branding of the super product as AMP, though a portion of their money is going to fund managers who are external to AMP.It is a similar situation with the other financial institutions that also outsource a portion of the funds' management to external managers.IndependenceThe survey found considerable confusion about the planners' independence among the clients of financial firms that are branded differently to their parent. About half the clients of Hillross, which is owned by AMP, and of Garvan and Godfrey Pembroke, which are owned by NAB/MLC, said "yes" when asked if they considered their planner to be independent.The law requires planning firms disclose any links they have with others, such as fund managers, life insurers and financial institutions.The founder of financial planner Hewison Private Wealth, John Hewison, says many clients are likely to be fully aware of their planner's ownership links and report they are receiving independent advice. However, it also could be because ownership links are not being made sufficiently clear to clients, he says.AMP-owned Hillross, for example, has several references to AMP as the owner on the Hillross website. It makes a virtue of having a big brand standing behind the advice. But RI Advice Group (the former RetireInvest), which is owned by ANZ, keeps the link in the background. The RI Advice website did not say it was owned by ANZ, but this information has since been added following inquiries for this story by Weekend Money.In RI Advice's financial-services guide, which can be downloaded from its website, the link is only mentioned on page 10 of the 14-page document.According to the Roy Morgan survey, 42 per cent of RI Advice clients said they believed their financial planner was independent of any financial institution.RI Advice, like Hillross, is the "external" financial-planning arm of a financial institution. These external financial-planning arms, called "dealer" groups, provide the licence under which small financial-planning businesses operate.Each practice is acting somewhat like an agent of the licence-holding dealer group and the institution that owns the dealer group.Part of the explanation for the confusion over independence could be that, as the clients are receiving advice from these small firms, they make the assumption that they are independent.Norman Morris, of Roy Morgan Research, says planning firms tend to use the investment platforms of the institutions with which they are aligned. That is likely to partly account for the high levels of home bias reported by clients of planners. Typically, a planner will only use one or two of these investment platforms through which the money is subsequently invested with other fund managers.Perkovic says the Commonwealth Bank-owned investment platforms have some of the best features and lowest costs in the market, which keeps the costs of advice and investments down for clients.Go in eyes wide openThe vast majority of financial planners work directly for one of about eight or so financial institutions or planning firms that are aligned with them. Relatively few are genuinely independent.However, the chief executive of the Association of Financial Advisers, Richard Klipin, says good advice is offered across the market and is not dependent on ownership structure.Financial institutions have strong and robust processes and management and consumers are comfortable with them, Klipin says. On the other hand, some consumers prefer advice from planners who are totally independent from any institution. Klipin says disclosure of any links is the most effective way of dealing with any conflicts of interest that might arise.The key document for anybody shopping around for an adviser is the Financial Services Guide (FSG). This document can often be accessed from the financial-planning firm's website. The Australian Securities and Investments Commission says any firm that does not provide its FSG should be crossed off the list. The FSG shows who owns the firm, how the planners are paid and if there are any restrictions on the advice they can give or products they can recommend.