Due to conflicts surrounding the link between product and advice, large parents of financial planning groups should use monitoring mechanisms to ensure the advice provided to clients is appropriate.
This is one of the recommendations made by the Australia and New Zealand Shadow Financial Regulatory Committee, which published a statement exploring some of the challenges facing the financial advice industry in providing appropriate and quality advice.
One of the biggest challenges identified by the committee is the consolidation in the financial planning sector and the “decline of independent/individual advisers”.
This trend has both good and bad features, the committee said.
“Among the negative features are increased agency problems – and potential conflicts with fiduciary duties – of the link between the adviser and product supplier, less visible remuneration arrangements and possible lessening of competition in both the advice and product spaces,” the statement said.
“Clients of such groups should expect that financial product choices will be limited primarily to those of the product parent provider.”
On the plus side, the committee said financial advisers working for large organisations can be expected to provide advantages to clients from having to comply with the institution’s own processes and practices, and from access to a larger institutional knowledge base.
“Provided that the institution has in place effective governance and compliance arrangements risks, of unsuitable advice should be reduced,” the committee stated.
Furthermore, their scale would allow for effective ex post class action law suits if systematic errors are made.
Adequate standards were not apparent in the aftermath of the global financial crisis, as evidenced by bank involvement with Storm Financial in Australia and sales of subprime mortgage bonds in New Zealand, according to the statement.
This is why large parents of financial advice groups should consider using a range of monitoring and governance mechanisms such as “mystery shopper” techniques to assess quality of advice, as well as specialist internal audit/compliance arrangements focused on ensuring quality of advice and product suitability, the committee recommended.
