For too long, advisers have been ignoring the voice of the client and listening to the “siren song of finance” in recommending the products of institutions for which they work, Commissioner Kenneth Hayne spelled out in his interim report, which landed on Friday.
But it won’t be the blunt tool of more legislation that the commissioner will recommend policymakers use to fix the problem, he said.
“Prevention of improper conduct – like prevention of poor advice – begins with education and training,” he wrote. “It is by education and training that advisers and staff more generally are made aware of why certain procedures are to be followed. In some cases, the procedures may reflect legal requirements; in others they may reflect the particular requirements of the relevant licensee. But in every case, those who know why the step is required are more likely to take it than those who know only that the relevant manual requires it.”
Hayne’s words validated the prediction of The Ethics Centre’s Simon Longstaff, who told Professional Planner in the lead-up to the interim report that empowerment of individuals – not the dismantling of commercial enterprise – would be at the core of Hayne’s thinking.
“When an entity provides financial advice, whether it provides the advice by its employees or by an authorised representative, it is the voice of risk and the customer voice that must dominate,” Hayne stated. “When considering the prevention of improper conduct and the promotion of desirable conduct it is those voices that must guide the entity. In the case of fees for no service, however, it was the siren song in the voice of finance that dominated.
“It is the siren song of finance – for the entity and the individual adviser – that leads to misaligned incentives. Far too often it has led to advisers preferring their own interests to the interests of the client. And too often, pursuit of the adviser’s interests has seen the giving of inappropriate advice.”
Hayne pointed to ASIC’s January 2018 report Financial Advice: Vertically Integrated Institutions and Conflicts of Interest as a reference for his point that advisers’ wills had been bent towards their financial interests and not those of their clients.
ASIC’s report showed that the approved product lists maintained by advice licensees controlled by the five largest banking and financial institutions included products manufactured by third parties. In fact, third-party products made up nearly 80 per cent of the lists. But the report also showed that, overall, more than two-thirds (by value) of the investments clients made were inhouse products, Hayne stated.
Hayne went on to outline that at the level of individual licensees, the proportion varied from 31 per cent to 88 per cent (by value) invested with in‑house products. By product type, the proportions invested with inhouse products varied: 91 per cent for platforms; 69 per cent for superannuation and pensions; 65 per cent for insurance; and 53 per cent for investments.
Taken as a whole, the report shows that advisers favour inhouse products.
“The result is not surprising,” Hayne wrote. “Advisers may be expected to know more about the products manufactured by the licensee with which the advisers are associated than they know about a rival licensee’s products.
“Advisers will often be readily persuaded that the products ‘their’ licensee offers are as good as, if not better than, those of a rivals. And when those views align with the adviser’s personal financial interests, advising the client to use an in‑house product will much more often than not follow as the night