Vertically integrated businesses are “seriously conflicted” and the model should be investigated by the regulator, according to Synchron’s Don Trapnell.
Mr Trapnell, who is a Director of independently-owned licensee, Synchron, encouraged the Australian Securities and Investments Commission (ASIC) to look deeper into the potential for conflicts of interest arising from vertically integrated businesses. He said this was particularly important in light of the best interests duty set out in the Future of Financial Advice legislation.
He argued that the model in which institutions that own licensees can manufacture products for distribution by their own adviser forces represented “conflict of interest in its purest form”.
“Yet it is described, in the euphemistic vocabulary of the financial advice industry, as vertical integration,” he said.
According to Mr Trapnell, the ownership of an Australian Financial Services Licensee (AFSL) should be clearly stated in the Financial Services Guide and all other documentation a financial adviser provides to a client. In addition, he believes advisers should clearly explain the ownership structure under which they operate at every opportunity.
“I believe institutionally-owned licensees may not currently be providing enough guidance to their advisers on this issue, nor encouraging them to have open and frank discussions with their clients that clearly explain the relationship between the licensee, the adviser and the products being recommended, in terms the client really understands,” Mr Trapnell said.
…more discerning clients want to know that the advice they receive is not biased…
He also predicted a ‘phoenix phase’ for independently-owned licensees, who suffered during the Global Financial Crisis when many advisers sought the safety of institution-backed dealer groups.
“Although it’s fair to say some advisers left independently-owned licensees during the Global Financial Crisis to go to licensees owned by large institutions, they will now return,” he said.
“This is because more discerning advisers want to provide advice that does not kowtow to an institution and more discerning clients want to know that the advice they receive is not biased towards the products manufactured by an institution which also owns the adviser’s licensee.”
