IMAP's Toby Potter (left) and Lonsec's Lucasz De Pourbaix (middle) at the Conexus Research Forum.

Commissioner Kenneth Hayne’s reluctance to recommend separation of product and advice in his final report makes it possible for potential conflicts in managed accounts to flourish, despite his assertions that all conflicts between duty and interest should be “eliminated, rather than managed”.

The commissioner – following ASIC’s lead – stopped short of recommending an end to vertically integrated practices in the final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. He remained, he said, “unconvinced” that the benefits would outweigh the costs.

In doing so, he inadvertently cast aside concerns from many within the industry – and ASIC – that conflicts of interest lie within the provision of managed account services.

The scope of these conflicts was laid bare in an article Lonsec CIO Lukasz de Pourbaix published last week, titled “Managed accounts can’t fly under the regulatory radar”.

“While the royal commission has not mandated separation between product and advice, best-interest obligations and conflicted remuneration are certainly areas of focus,” de Pourbaix writes. “There will be increased scrutiny on the governance structures overseeing in-house managed portfolios, including the composition of the investment committees and the range of qualified and experienced professionals involved in investment decisions.”

De Pourbaix warns that increased focus on remuneration structures will come, especially with regards to fee rebates from fund managers and model management fees.

In an op-ed written for Professional Planner, The Fold Legal chief executive Claire Wivell Plater made clear that the majority of advisers have “genuine conviction” that managed accounts benefit clients.

“However, it must be remembered that managed account services benefit advisers as well,” she continues. “This means that advisers who offer managed account services must carefully manage the conflict of interest associated with in-house products.”

Tom Reddacliff, chief executive at Encore Advisory Group, is more pointed with his assessment of the potential problems with conflicts of interest in managed accounts.

“If you recommend a product and stand to make a profit from that product, how is that not conflicted remuneration?” Reddacliff asks.

Speaking to Professional Planner, de Pourbaix notes that firms running in-house managed account structures have another ethical question to ponder as well.

“If you have an in-house managed account structure and the advisers are recommending it to clients, what’s the mechanism to sack yourself if that solution isn’t in the best interests of the client?” he asks.

Not a central issue

Toby Potter, chief executive of the Institute of Managed Account Professionals, says licensees and advisers have every right to charge for their services in a way they see fit, as long as it’s within the law and satisfies best-interests duty.