Advisers should exit vertical integration

Financial advisers who want to future-proof their business should consider transitioning away from the vertically integrated system and into a “conflict-free” environment, according to Greenzone.

The firm, which provides advice to financial planning businesses transitioning from a vertically integrated model to a conflict-free advice model, said leaving the vertically integrated model would be beneficial for the client, due to which financial advice businesses would also benefit.

The firm’s founder, Geoff Rimmer, who was previously head of private wealth at Equity Trustees, said the issue within the vertically integrated model was systemic and added advice was not the root problem.

“When you have a look at the things that get added on in terms of the platforms, the very limited approved product lists (APLs), mean that you could have up to 100 basis points added into that part of the vertically integrated system,” Rimmer said.

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“Now, on $1 million, over a 20-year period, if it is 100 basis points, that’s $1.2 million. If everyone started to look at it from that angle, you can’t un-know it. Then you might be motivated to do something about it.”

A whitepaper by Greenzone in August titled ‘Who moved my cheese? The Future of Financial Advice’ quoted a recent market review from Bell Potter, which said 400 advisers departed the vertically integrated system of the banks and AMP in the first six months of this financial year.

“If the trend continues, ignoring the estimated 2,000 salaried advisers employed by the banks, the emerging trend away from the vertically integrated model is already well over 10 per cent annually,” the whitepaper said.

Rimmer also said a Royal Commission was inevitable but added it could be one that covered entire financial services industry, with the pendulum gradually swinging back into the superannuation discussion.

“But the vertically integrated system is what we think needs reform. Out of all of this, we’re saying to advisers, strategically if you want to future-proof your business, you need to be thinking about moving out of the vertically integrated system and into a conflict-free environment,” he said.

But Rimmer warned the failure rate of advisers who established their own Australian financial services licence (AFSL) was high, with many having to return their licences to the corporate regulator due to lack of understanding of their obligations.

This included areas such as understanding how to construct and manage a risk APL and an investment APL, and forming an investment committee with appropriate governance.