Who's behind your financial adviser?
November 18, 2009
PORTFOLIO POINT: Too often, consumers think they are getting 'independent' financial advice when in fact it is a brand belonging to the big six.
Do you know who you're dealing with when it comes to financial planning? A new survey - impeccably timed in the context of a government re-examination of financial planning - offers a new picture into the depth of "structural corruption" in Australian financial services.
The report, from Roy Morgan Research, briefly made headlines a few days ago, but most media outlets did not take the trouble to read its 70 pages. They should have made the effort, the results are remarkable.
It's not just that most people don't realise the people advising on financial planning products are often employed by the people who sell them. Worse, thousands of investors have no idea that a range of popular adviser brands - Financial Wisdom, Godfrey Pembroke, RetireInvest and many more - are owned by product providers.
Take for instance Godfrey Pembroke, a well-known brand advertised widely on television and elsewhere in the media. About 65% of the people dealing with Godfrey Pembroke did not know it is owned by NAB.
And if, those same investors were to know that the bulk of recommendations by the Godfrey Pembroke sales force were NAB products, they might think differently.
In essence, report offers hard evidence on the innocence of most Australian investors when it comes to financial planning . take a look at the table below to find out who owns what. Even seasoned Eureka Report members may be surprised with what they find.
|nWho owns who in Australian financial planning|
||NAB, MLC, Garvan, Godfrey Pembroke, Apogee, AdvantEdge|
||Commonwealth Colonial First State, Financial Wisdom|
||AXA, Charter Financial Planning|
Crucially, the issue of product advice and independence comes up again and again in the various inquiries into recent disasters in the financial planning sector. Westpoint, Fincorp, Timbercorp, MFS Premium Income Fund and Great Southern Plantations were often recommended to investors by financial advisers who were being paid significant commissions.
This has focused a lot of the current discussion about the financial services industry on commissions and their potential to corrupt the financial planning process. The Ripoll inquiry, whose report is due to be tabled in parliament next Monday (November 23), is focused on the financial planning industry, and some of the issues that have led to consumers being failed by it (to read more, see A superannuation blueprint).
The Morgan report, Superannuation and Wealth Management in Australia, written by Norman Morris, says more than 70% of superannuation recommendations by financial planners within the big six firms (AMP, ANZ, AXA, CBA, NAB and Westpac) went to fund managers "related" to the licensing of the financial planner.
What is equally concerning, from a transparency point of view, is that so often many customers of financial planning firms did not recognise who owned those firms. For instance, more than 61% of Financial Wisdom clients believed they were dealing with an independent firm; in fact it is owned by the Commonwealth Bank.
AMP and AXA topped the list for related recommendations in superannuation products - AMP with 83% and AXA with 78% of recommendations to their own fund manager. The following table sets out this data.
Source: Roy Morgan Research
For the record, there are strict conditions under which a financial planning firm can describe itself as independent. First, it cannot receive any commission payments from a financial product, or it has to rebate these commission payments back to clients in a timely manner. Second, it has to have a licensing/ownership structure separate from any financial product provider.
The firms at the heart of this survey are clearly not independent, and cannot describe themselves in any way to be independent, but the data shows that in a significant number of cases their clients do consider them as such.
This is a major concern. If more than 70% of recommendations from financial planners owned by the big six firms flow to their own fund managers, then at the very least clients should understand the ownership relationship and the fact that they ARE NOT getting independent financial advice - as defined in the Australian context.
The following table looks at how clients perceive the financial planning firm they have dealt with - as either a 'tied' adviser (related to a major financial services group), an independent adviser or an accountant.
The results suggest a complete failure of the Financial Services Reform Act from earlier this decade, which had the aim of ensuring clients understood the payment structure and ownership structure of advice; that is, to have any potential conflicts of interest clearly disclosed.
Source: Roy Morgan Research
An AMP presentation made in September suggested AMP has the largest "competitive distribution advantage" (financial planner force) with 1658 planners. AXA is fourth with 1243.
Adding the two "distribution advantages" together would leave AMP-AXA with almost twice the number of advisers of the next biggest financial services firm (ANZ/ING, which has 1587). A merger of the two sales forces is a distinctly possibility with a bid from AMP in conjunction with AXA SA) on the table for AXA Australia.
The "structural corruption" of the financial services industry runs deeper than just commissions. There remains an issue for consumers in understanding the level of independence around advice that they are given.
Scott Francis' articles in the Eureka Report