After an investigation by Professional Planner revealed how Viridian Advisory had commenced a structural separation project to delineate its advice and product arms, compliance experts say the structure is too risky from a legal perspective.
What made Viridian’s structure potentially problematic was not the licensee ownership of a managed account service, but that advisers who work for Viridian would be required to have an ownership stake in the licensee, and thus benefit from a profitable product arm.
Outside of Viridian, it’s not unusual for advice practices, particularly self-licensed ones, to also have an in-house managed account service.
Integrity Compliance managing director Rhett Das tells Professional Planner he had clients unwind similar arrangements. “It doesn’t feel right,” he says of the Viridian arrangement.
“At the end of the day if someone asks for advice you can give them advice and you can have measures in place to ensure the conflicts are managed,” Das says.
“A lot of firms, once they go down this path – in my experience – think it’s probably too hard to manage those conflicts and a lot of them go it’s not worth it.
“With conflicts, if you can’t manage them, you’re supposed to avoid them. You can have the best legal advice in the world, you can have an opinion from [a] King’s Counsel, but you need to implement that and that’s the challenge.”
The scrutiny over managed accounts comes after Professional Planner uncovered unpublished and confidential documents about the concerns ASIC had with the provision of managed accounts by licensees, specifically managed discretionary accounts (MDAs).
MDAs are considered a product and advice service, while separately managed accounts (SMAs) like Viridian-owned Infinity Asset Management are considered a product.
But Das believes the SMA market would need to be an area of focus for the regulator as the product vehicles continues to surge in popularity.
“Where firms are charging licensee fees or these percentage-based fees, you just have to look at the reg guides that say there’s a presumption this is going to be conflicted,” Das says.
“You can have the best legal advice, but if a large amount of your clients are going into these products then it’s very hard to say that’s not a conflict that’s been managed. It’s going to be an issue in the future and will continue to rear its head as we get further away from the Hayne royal commission.”
Assured Support managing director Sean Graham says these types of structures also create friction with the financial adviser Code of Ethics as Standard 3 clearly states “you must not advise, refer or act in any other manner where you have a conflict of interest or duty”.
“You have to question whether that meets the code at an adviser level,” Graham says.
He notes a licensee offering a managed account as a service wouldn’t breach the code, as it doesn’t directly influence the advisers because the benefits are paid by and retained by the licensee.
“But when the directors or investors are also advisers it’s hard to do that,” Graham says.
“You’ve also got to look at the issue of who determines the APL; the directors and the licensees determine what’s on the APL. Are they pointing stuff on the APL because it’s an appropriate product or the best product…or have they put in there over an equivalent or better one because they’ve got an interest in it?”
While advisers are governed by the Code of Ethics and Best Interest Duty, Graham says advisers are often employees (as is the case at Viridian) or authorised representatives who are bound to employer-led restrictions.
“There are real limitations on an adviser’s ability to exercise independent judgement and in an organisation where a licensee has an interest in the products it’s really hard to manage those conflicts effectively,” Graham says.
Graham says there is nothing wrong with vertical integration – the issue is how the conflicts of interest are managed.
“There’s an old Roman proverb which I’ll translate from Latin: you can take the bank planner out of the conflicted arrangements, but you can’t take the conflicted arrangements out of the bank planner,” Graham says.
“One of the difficulties of vertical integration is you can have all the compliance, you can put frameworks in place, you can have Chinese walls, you can put a whole range of behavioural and structural controls in place but one of the ways you can figure out whether someone’s serious about those controls is who’s checking them.
“Banks had their internal compliance people and ASIC’s various reports have shown they’re ineffective.”
