As the full extent of the issues plaguing the financial planning arm of Commonwealth Bank of Australia were laid bare, Professional Planner asks: are vertically integrated business models appropriate in a post-Future of Financial Advice (FoFA), professional world?
Don Trapnell, a director of independent licensee Synchron, says vertical integration is the greatest threat there is to financial planners discharging their best interests obligation, both in accordance with the FoFA, and professionally.
Matt Lawler, chief executive officer of Yellow Brick Road, says “vertically integrated businesses are not evil, as long as they are managed properly”.
“What you’ve got to do is make sure the system works from the client backwards, and that you protect the sanctity of the adviser client relationship,” Lawler says.
And Mark Spiers, general manager of advice for BT Financial Group, says vertical integration gets a bad name when things go wrong, but more often than not it isn’t the business model at fault but the culture of the organisation.
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Sure, vertical integration can work well. Everything can work well if it is managed properly. The problem is that there is a conflict of interest that clients are unaware of. With vertical integration, the adviser usually recommends a product (whether that is a platform or investment product) that is manufactured by a related party to the licensee.
Is it a coincidence that AMP advisers tend to recommend AMP products and platforms whereas Garvan advisers tend to recommend MLC products and platforms? Who are we kidding as an industry?
Clients trust that their advisers are providing unbiased advice. If they understood the relationships between advisers, licensees, platforms and fund managers they would be far more careful before placing trust in their adviser. In many cases they would seek different arrangements where there was no conflict of interest.
And that should be the key test for whether something works – what would the client do if they really understood?