Vertically integrated wealth management providers who are crystal clear about what products they offer shouldn’t be trying to comply with regulatory guidance that is designed for full service providers, according to legal regulatory consultant Claire Wivell Plater.
The lawyer, who founded The Fold Legal and sits on a number of financial industry boards, says historic approaches to regulating vertical integration in advice miss the mark for advice practices that advise on proprietary products.
In a recent submission regarding the Quality of Advice Review Terms of Reference, Wivell Plater pointed out that there is “little, if any, guidance for… entities with avowedly vertically integrated advice models”, including super funds, managed account providers and large financial institutions who provide advice on their own products.
“These businesses have no desire to offer products or solutions other than their own,” she stated in the submission. “If they are transparent about the fact that they provide an inhouse or preferred solution, much of ASIC’s guidance on quality financial advice and compliance with the best interests duty is unsuitable for their business model.”
Those businesses struggle with the current settings, Wivell Plater continued, which many interpret to mandate broad-based approved product lists and consideration of alternative products in all situations.
As long as a vertically integrated practice makes its position clear, Wivell Plater argues, they should be able to feel comfortable recommending their products to a client if those products meet the client’s needs and objectives – without addressing the broader market.
“Everybody’s allowed to design their own service,” she says. “If I go to a Toyota dealer, I know they only sell Toyotas, I don’t go there looking for a Hyundai or a Mercedes. They’re branded Toyota, and help with Toyotas is what I’m expecting. That’s what an avowedly vertically integrated business looks like.”
Approved product lists are appropriate for businesses that choose to offer a broad palette of products, she continues, but not all advice businesses do. Further, the lawyer notes, they’re not necessarily required to under ASIC’s RG 175 (356), which states: “The best interests duty does not prevent or require the use of approved product lists.”
Providers of managed discretionary accounts in particular, she says, feel constrained by a lack of clarity on the appropriate guardrails.
“There’s this perception that every advice business must have an APL, but, for example, why would an MDA provider have one?” she says.
“They design their MDA product with their client base in mind; if it isn’t suitable for a potential client or there’s no good reason to switch out of the client’s existing product, they would simply decline to provide ongoing investment advice.”
On Friday Treasury released its final terms of reference for the Quality of Advice Review, where vertical integration was not included as a focal point.