Consider Twice Before Seeking Financial Counsel From Your Bank

The Australian Securities and Investments Commission recently reviewed the financial advice provided by the four largest banks and came to this unexpected conclusion (ASIC).

Even more shocking was the finding that 10% of the guidance left investors in a worse financial situation.

Using a “vertically integrated corporate model,” Commonwealth Bank, National Australia Bank, Westpac, ANZ, and AMP provide “in-house” financial advice and control more than half of Australia’s financial planners.

68% of client assets were invested in ‘in house’ goods as opposed to external items that may have been on the firm’s list, as discovered by ASIC’s investigation.

Why the integrated financial advice approach employed by banks is problematic

It’s hard to think that banks can maintain a straight face and assert that they can strictly adhere to the requirement that advisers operate in the client’s best interests.

Under the integrated financial advisory approach, various expenses including adviser fees, platform fees, and investment management fees total between 2.5% and 3.5%.

The typical split of expenses is as follows: 0.8% to 1.1% for adviser fees, 0.4% to 0.8% for platform fees, and 0.7% to 2.1% for managed fund fees. These costs are not only opaque, but also excessively high, limiting the client’s capacity to achieve actual rates of return rapidly.

There is not necessarily an incentive for the financial advisory arm to make a profit because the banks can generate money by advertising their own goods in the upstream portions of the supply chain due to the fees built into the banks’ business model.

This business model, however, is defective and cannot persist in a world where individuals expect greater accountability for their investments, greater fee transparency, and greater investment control.

The truly independent financial consulting firms in Australia that offer separately managed accounts have made every effort to avoid employing managed funds and maintain competitive fees.

The banks have refused to acknowledge their catastrophically flawed integrated approach to advice. When the Australian Financial Review contacted the Financial Services Council (FSC), which represents ‘for-profit’ wealth managers, for a defense of the tiered fee agreements, a spokeswoman stated that no generalizations could be made.

There are basic faults in the advise paradigm, and it will be interesting to watch what the forthcoming banking royal inquiry does to address some of the difficult issues surrounding integrated financial advice.

Numerous financial experts are asking for the separation of bank-affiliated financial counseling, as bias and failure to act in the clients’ best interests become increasingly apparent.

Chris Brycki, the CEO of Stockspot, explains: “Investors should receive fair and impartial financial advice from experts who will act in their best interests. What Australians currently receive is product promotion by salesmen who are compensated by banks.”

Brycki calls for structural reform to address the difficulties generated by the overwhelming market power of the banks so that consumers are protected, advisors are better educated, and incentives are aligned.

Stockspot’s yearly analysis on high-fee-charging funds reveals that banks are recommending bank-aligned investment products to tens of thousands of customers, despite the availability of potentially more suitable alternatives.