The Financial Services Royal Commission is poised to reveal widespread failure across the Australian financial planning sector, according to GlobalData Financial Services.
The effects could be more than a fine and a slap on the wrist, and a focus on vertical integration; the inherent conflicts also mean the industry has to brace for significant change ahead.
The Royal Commission is in full swing and will shine a further spotlight on an industry whose reputation has already been battered by recent miss-selling scandals, and violations of FoFA’s ‘best interest’ duty, which requires financial advisers to act in the best interests of their clients.
In fact, it has recently surfaced that a stunning 90% of advisors providing SMSF advice failed to comply with the best interests of their clients.
Earlier this year, when the Australian Securities and Investments Commission examined whether advice to switch to in-house products satisfied the best interest requirement, 75% of advisers failed to demonstrate compliance.
So what’s next?
A wind of change is blowing through the industry. The reputational damage has already been significant and the bloodbath is not over yet.
CBA is up next; this comes after the Royal Commission learned that AMP’s financial advice business puts profits before customers, at least according to the headlines.
Given the significant media attention the Royal Commission has attracted, customers are likely to think twice about the type of provider they opt for.
This will drive growth of the independent advice market. Even demographics that are not typically drawn to independent financial advisers (IFAs) will find themselves more likely to opt for independent advice when they learn their trusted banking partner has been pushing products that are not in their best interests.
However, that’s not all. On the flipside, financial planners are likely to ditch the big four banks and AMP to set up their own businesses.
In an industry plagued by a shortage of talent, that will be a big headache for Australia’s wealth giants. Our Global Wealth Managers Survey shows that 8 out of 10 wealth managers already agree that it is increasingly difficult to hire new relationship managers or other front-line staff.
Admittedly, the number of financial advisers has increased from 18,000 in 2009 to 25,000 in 2017, but only a third have a university degree.
Addressing this issue, new compulsory education requirements for both new and existing financial advisers will come into effect on January 1, 2019.
Shortage of talent
While this has the potential to raise the professional, educational, and ethical standards of financial advisers, it will also cause advisers to leave the industry, further aggravating the shortage of talent.
Yet, the most drastic change relates to the viability of the vertical integration model. Australia’s big incumbents engage in both the provision of personal advice and the manufacture and sale of financial products, such as superannuation and insurance.
Transitioning away from the vertically integrated model into a conflict-free model seems increasingly likely. This will be the biggest change to the industry since the big four banks moved into the wealth space more than 15 years ago.
Already at the end of 2017, ANZ announced the sale of its OnePath Pensions and Investments business to IOOF, and CBA divested its insurance business CommInsure Life. Looking to the future there have also been rumors that NAB could spin off its wealth business.
At the beginning of 2018, The Australian Financial Review’s Street Talk column reported that the lender is considering spinning off and floating its funds management business MLC, its corporate superannuation arm Plum, its financial planning arm, and its retail broker JBWere.
One thing is for sure: as the Royal Commission is bound to reveal further failings, the wealth industry, which has previously been on a relentless path of horizontal and vertical consolidation, is about to get a strong push towards fragmentation and divestment.
For more insight and data, visit the GlobalData Report Store (https://www.globaldata.com/store/). Verdict is part of GlobalData Plc.