Milana Pokrajac examines the advantages and disadvantages of vertically integrated advice compared to self-licensing and non-aligned advice.
Related: Vertically integrated dealer groups – weighing up the pluses and minuses
Vertically integrated – pros and cons
Pros
Resources
When it comes to large instos, one thing is certain: they have all the resources they need to make sure they properly service their clients/business partners.
Being aligned to a dealer group that is owned by one of the big six financial services institutions in Australia brings with it many benefits, including access to practice development support, marketing services, advice tools, compliance consulting, back office support, educational tools and training, access to referral partners, research services and technical consulting.
These are the things a non-aligned advice group would find more difficult to provide without having to charge astronomical fees, while self-licensed practices would have to pay for those services themselves.
Dealer fees
With resources and size comes scale, and a positive factor about bank-owned dealer groups is that they can easily offer cheaper fees to financial planning practices than most advice groups from the independently-owned sector.
Cheap fees means practices can invest more money into their business or spend it on things like practice marketing, front office and adviser supervision, while receiving full back-office support and other dealer services at the same time.
Adviser education
Large institutions also have the resources to organise their own professional development (PD) activities for their advisers at heavily subsidised prices. The mother-firm can also bear all or part of the cost of their advisers attending educational events; it is not uncommon for some regionally-based advisers to have their flights paid for, as well.
Given that, as things currently stand, product providers will not be able to sponsor educational events organised by industry bodies (due to perceived conflict of interest) and educational activities will become less accessible as a result, cheap or free PD days will become a big part of a dealer group’s value proposition.
Comfort
Financial planning practices aligned to institutionally-owned dealer groups can find comfort in the deep pockets of their parent company if anything goes wrong. If one adviser breaks the law, behaves unethically or acts to the detriment of their client, a large institution can pay for remediation plans, client compensation and other requirements that might be imposed by the regulator.
Furthermore, institutions come in handy in the event of the business owner dying, as they provide good and effective succession plans, in most cases.
Link to product
When a financial planning practice is planning to – or is predominantly already using – a particular platform, then belonging to a dealer group which is owned by the same company that owns the platform could be a useful thing.
Many institutions offer the usage of their platform at heavily discounted rates to advisers belonging to their dealer groups.
Cons
Link to product
Commercial alignment is very important if a financial planning practice is to join a dealer group that is owned by a product manufacturer.
However, when the product or platform is low-quality, has poor administration or is expensive it creates significant problems.
Furthermore, it is not uncommon for large institutions to use professional development activities to promote their own products and platforms to the adviser base, which can often create frustration and a feeling of being ‘pushed’ into selling a particular product.
Stigma
Storm Financial and Commonwealth Financial Planning scandals from 2008/2009 have shone a bright spotlight on the links between financial advice groups and product manufacturers, whether it be ownership or a commercial agreement.
While the Future of Financial Advice reforms will help remove all or most conflicted remuneration from the advice sector, there remains a large amount of scepticism among consumers when it comes to seeing an adviser whose firm bears a name (or a licence) of a large financial services institution.
Treatment of advisers
Some vertically integrated dealer groups do not provide as much control and independence to financial planning practices with regards to marketing, branding, client engagement and compliance as some non-aligned dealer groups do.
This means they can be prone to treating their advisers like quasi-employees, which can be a source of frustration for some financial advisers if they are not culturally aligned to that particular dealer group.
Focus on FUM
Vertically integrated dealer groups can be prone to contradicting themselves around values/business objectives, which comes as a result of being owned by a product manufacturer.
While most institutions have come out in support of the best interests duty and the fee-for-service remuneration model, the commercial reality is that they will also want to have a conversation about the new funds under management inflows that are in the pipeline for the house platform or product.
A couple of major banks have told ASIC their salaried advisers are still subject to revenue targets.
Easy to hide
With a large organisation comes a complex hierarchical structure and more bureaucracy than can be found anywhere else.
Sometimes when there are too many people at a dealer group, accountability becomes a problem as it is easy to hide when things go wrong.
This could include cases of rogue advisers, compliance breaches and failure to monitor/supervise financial advisers.
Independently owned – pros and cons
Pros
Control
Boutique structures generally have less of a grip on the way a financial planning practice runs their business in comparison to that of an institutionally-aligned dealer group.
Apart from providing open-structure approved product lists and the ability to be unfettered with the type of advice planners offer to their clients, independent dealer groups generally provide more control to practices in terms of the way the business is marketed, the way clients are engaged and the manner in which staff is managed.
Most non-bank aligned dealer groups have grown out of small financial advice businesses, so the management generally has more empathy for small businesses which might not exist within more institutionalised management structures.
Alignment of values
Non-bank-aligned dealer groups pride themselves on being independent of large financial services institutions and thus attract practices which value that independence. Cultural alignment is very important and many practices find ‘advice integrity’ to be at the core of their values, which is why they choose independently-owned dealer groups.
Alignment of values can also come in the form of business culture, dedication to education and professionalism, team culture and what “quality advice” means for both parties.
Freedom of choice
Non-aligned dealer groups generally have open-architecture approved product lists, which gives advisers absolute freedom of choice. Furthermore, this provides clients with confidence that the advice they are receiving is completely strategic in nature.
If a product is recommended as part of advice, both advisers and clients can be confident there was no bias in recommending it.
Despite this being the case with some bank-owned dealer groups, the ownership structure of non-aligned dealer groups provides advisers and clients with confidence that the advice provided was ‘independent’.
Specialist support
Many independent dealer groups know they have limited resources to support their network. Rather than trying to be “everything for everyone”, groups in this sector – especially small-to-medium ones – tend to provide excellent specialist support for different client segments, such as self-managed super funds.
Many experts predict this is the way the small-to-medium sized dealer groups are heading in the post-FOFA environment.
Easy access to upper management
Dealer groups outside of the institutional structure generally have simpler senior management teams, the members of which have generally built the businesses themselves from the ground up.
This means the decision makers and staff within the dealer group would usually be more accessible to their aligned financial planning practices and their advisers.
Given that new initiatives do not have to go through multiple sign-offs elsewhere in the business, adviser feedback is generally acted upon.
Cons
Dealer fees
Unlike with vertically integrated advice groups, dealer fees charged by independently-owned businesses are not subsidised, as there is usually not enough scale for it to be achievable.
This means financial planning practices will generally have to pay more money for the services provided to them by non-aligned dealer groups.
For some, it may be too high a price to pay for independence and open approved product lists.
Resources
Despite some non-institutionally owned dealer groups being almost as big as bank-owned advice businesses, they often don’t have the same resourcing to hold advisers’ hands if that is what they are seeking.
In the case where an aligned adviser is proven guilty of providing poor advice and there is a run-in with the regulator, the dealer group might not be as well resourced as bank-owned businesses to construct good remediation plans and compensate those affected.
Training and education costs
Larger independently owned dealer groups have their own adviser training staff and programs, with training services being usually worked into the dealer group fee.
However, smaller ones have to outsource such services, the full cost of which is borne by advisers themselves and is generally higher.
If the sponsorship by large institutions of professional development days is in fact found to be a conflicted payment (the Government is currently being consulted on this matter), industry bodies will find it more difficult to fund and organise educational events themselves, which means it will be more difficult and more costly to access continual professional development.
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There have been some dealer groups that have had a poor track record with the Australian Securities and Investments Commission and the Financial Ombudsman Service, which created a concern amongst advisers about who else in this sector of the market may have similar problems.
Recent examples include licence cancellations of Morrison Carr, Addwealth Financial Services, and AAA Financial Intelligence. Professional Investment Services, WealthSure and AFS Group (which subsequently collapsed) all had a run-in with the regulator in the last few years.
