Is there enough will to separate product from advice?
ANALYSIS
While the Government searches for mechanisms to avoid a repeat of the circumstances around the collapse of the Shield and First Guardian funds there has been little mention of the age-old argument for the separation of products and advice.
For the past two decades it has been widely argued in the Australian financial service industry that product manufacturers should not be in the business of providing financial advice and it was, indeed, a core theme of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services sectors.
Counsel assisting that Royal Commission, Rowen Orr asked whether “it is necessary to enforce the separation of products and advice”.
It has to be remembered, of course, that the Royal Commission was held at a time when the four major banks between them employed nearly three-quarters of financial advisers and Orr’s question was asked in the context of advisers recommending bank products.
Today, that same question can still be posed, but in the context of Managed Investment Schemes (MIS) with one the classic examples being the collapse of Dixon Advisory related to the failure of its US Master Residential Property Fund and the advice provided by Dixon advisor around that product.
It was the advice provided around that product that led to the matter becoming the first major burden for the Compensation Scheme of Last Resort (CSLR) and, equally, it was the advice provided around the Shield and First Guardian funds that means they are going to prove a future burden to the CSLR.
The difference between the Dixon collapse and the Shield and First Guardian collapses is that the Dixon advisers were directly employed by the product provider, while the advisers who recommended Shield and First Guardian were, at best, operating within a related party ecosystem.
The point, of course, is that the consequences of the failure of Shield and First Guardian were capable of referral to the Australian Financial Complaints Authority (AFCA) because they involved investors having received financial advice.
AFCA’s determinations regarding Shield and First Guardian, if left unpaid, will then feed into the cost of the levies imposed on financial advisers to fund the CSLR.
It is now more than five years since the Financial Advice Association of Australia (FAAA) outlined a five-year policy platform which included the separation of products from advice.
Former FAAA chief executive, Dante De Gori argued that the future regulation of financial advice should focus on the broad nature of contemporary financial and not limit its focus to financial products.
““The law should be changed to separate the regulation of financial products from the regulation of financial advice,” he said.
Five years later the Government is looking for answers but how to completely separate product from advice remains in question.
The most obvious soultion to fix these problems is also the most dangerous politically therefore never going to happen as all sides of the political spectrum have been bought off by the banks and super funds!!
Yep the product providers often thrive from buying adviser distribution.
Corrupt Canberra won’t dare fix it now, especially with ISFs being the newer version of Vertically owned everything, including the dream of Uneducated, Unqualified BackPacker, Call Centre Sales jockeys.
It seems that the DBFO legislation may be designed for advice to be built off vertical integration.
I wonder where we would be if unions and the ALP didn’t have arguably strong vested interests in super?
Suspect things would be very different….