As expected, the Banking Royal Commission has well and truly aired the dirty laundry of the big banks, however I was, like us all, shocked at the scale of wrong doing. While there will be inevitable consequences even for the financial advisers who’ve always acted in their client’s best interests, I am pleased this last step in the process of change has begun and people soon will no longer have their financial futures destroyed by poor advice at the hands of these institutions.
When the best outcome is paying for service you never receive, the time for change is near.
How did this mess occur?
Around 40 years ago “financial planning” consisted of big insurance companies hiring agents to knock on doors or cold call to sell life insurance policies. Over time these policies began to include investments, to help people grow wealth for their future while still insuring their life to protect their family. A noble concept, however in reality these life insurance products were expensive, had low returns and resulted in a significant commission payment to the agent. So significant in fact that your policy was sometimes protected from redemption until you met retirement age, long enough for the insurance company to recover the initial cost of sales.
Over time and in line with the compulsory superannuation regime being established, the big 5 (NAB, CBA, ANZ, WBC, and AMP) took over the old life insurance companies and developed them into their financial planning and wealth management divisions. Some of these early advisers left the bank and set up related financial planning firms that don’t look that different to a lot of firms that exist today.
Two problems came from this.
Problem One: vertical integration and what that means for the client. Vertical integration is where a bank manufactures a financial product (superannuation, investment, loan or insurance policy) and employs or aligns with advisers to promote these products with the bank’s customers. Recent regulations enforcing advisers to act in their client’s best interests should’ve stopped these advisers from transferring their clients financial products to a more expensive, poorer performing bank product, however evidence from the banking royal commission suggests this did not have the impact ASIC would’ve liked.
The reason why? Problem Two: A robust culture of commission and sales was ingrained in the earliest “financial advisers”. Top “selling” advisers were considered heroes among their peers and other bank employees coerced and rewarded to fill the appointment schedule for their branch financial advisers. With the enticement of a sizeable performance bonus that motivates some, or the threat of losing their job that motivates others (for a short period), it should be no surprise that the primary focus for bank advisers is sales, not spending time looking after and reviewing the existing bank customers, many of whom have paid and continue to pay for contracted services they never received.
New education standards requiring advisers to have at minimum a financial planning degree (or a related field) and post graduate qualifications may make it less appealing for unethical advisers to enter the industry and will likely encourage the older salesmen to retire.
So, who’s to blame? The planners who chose to align with the banks in the first place (or didn’t leave), the banks themselves, ASIC as the regulator of the financial advice, or us, the shareholders who demand financial returns and vote out Directors who don’t achieve that? The truth is they are all to blame, equally.
As ugly as this royal commission is for the banks and most of the industry, and as sad it is for the banks’ customers, we should not lose sight that most ASX listed companies have similar transgressions, or worse. Whether is be the use of slave labour down the value chain, a major mining company bribing governments, or mining and resource companies killing people and the environment, the root cause is the same. An unhealthy obsessive focus on profit and maximising shareholder wealth, rather than enriching the lives of the people they employ and serve.
Until companies embrace purpose over profit, we will continue to see the issues of the banking industry show up in other industries and professions.
As for the wealth management industry, stay tuned for more announcements of large institutions selling their soon to be unprofitable wealth management arms and an exodus of advisers to become self-licenced.
If you are reading this and are a client of a bank adviser or are invested in Colonial (CBA), BT or Asgard (Westpac), Onepath (ANZ) or MLC (NAB), it’s time to get a second opinion. Don’t hesitate to reach out to see what good financial advice can look like.
