I have always believed there are not many professional responsibilities greater than providing advice to help someone manage and invest their life savings. Yet at times it makes me cringe to admit being in the financial advice industry when I see advice being used as a distribution channel for the sale of financial products.
In his final report, Commissioner Hayne concluded the duty for advisers to act in the best interests of clients has not been effective in managing the inherent conflicts of interest when an entity producing and selling products is also advising customers on what to purchase. The damage of such conflicts has been highlighted in detail by Jonathan Shapiro from the Australian Financial Review in his reports on Dixon Advisory.
As someone who used to work at Dixon Advisory, I understand the flaws in a vertically integrated advice model when combined with a sales culture, it’s one of the main reasons set up my own firm. As has been reported, the most prolific example of this behaviour was their US Masters Residential Property Fund (ASX: URF). It has been said to have accounted for up to 67% of their profits with a staggering $272m in fees and expenses extracted from the fund since listing in 2012. Putting this into context, the fees charged are almost equivalent to the entire market capitalisation of URF today. At what point do such conflicts call into question whether the “advice” provided was in the best interest of the client? Quite frankly, it’s a disgrace.
The law does not protect consumers from conflicted advice if the conflicts are disclosed and accepted, as is the way with vertically integrated advice models. This is a practical inclusion in the legislation. However, it’s clear how this can be abused and consumers need to be vigilant or seek advice where no inherent conflicts exist.
Remuneration structures drive culture and genuine trust in financial advice cannot be built when conflicts exist. Unconflicted remuneration where clients pay for advice directly rather than advisers being paid from products is the best way. When seeking to put someone in the privileged position of providing you with advice, conflicts of interest cannot be ignored!
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.