What's more shocking is that 10% of the advise investors received really put them in a worse financial situation.
The Commonwealth Bank, National Australia Bank, Westpac, ANZ, and AMP offer "in house" financial advice through a "vertically integrated corporate model" and collectively own more than half of Australia's financial planners.
It is hardly surprising that the ASIC assessment discovered that advisers at these banks preferred financial products related to their parent company, with 68% of client assets put in "in house" items as opposed to external products that would have been on the firms list.
The problems with the banks' integrated financial advisory model
It's unbelievable that the banks can claim they can uphold the requirement that advisors always operate in the best interests of a customer while maintaining a straight face.
The integrated financial advice model has multiple levels of fees, such as platform fees, investment management fees, and adviser fees, which together total 2.5–3.5%.
An adviser fee of 0.8% to 1.1%, a platform cost of between 0.4% and 0.8%, and a managed fund fee of between 0.7% and 2.1% are typically the fees that are broken down in this manner. These costs are not only unclear, but also prohibitively expensive, making it difficult for the client to immediately realize true rates of return.
The financial advisory arm may not always be motivated to turn a profit because of the layers of fees built into the banks' business model, which allows them to profit from upstream parts of the supply chain by marketing their own goods.
This business model, however, has flaws and cannot endure in a world where investors are seeking greater control over their investments, better accountability for their investments, and increased transparency regarding costs.
It is interesting that the Australian firms offering separately managed accounts that are truly independent have made every effort to avoid utilizing managed funds and maintain reasonable fees.
The banks have refused to acknowledge the grave flaws in their integrated approach to advice. The Financial Services Council (FSC), a top organization that promotes "for-profit" wealth managers, was contacted by the Australian Financial Review for a defense of the tiered fee agreements, but a spokeswoman stated no generalizations could be drawn.
It will be interesting to watch what the next banks royal inquiry will do to improve some of the difficult issues surrounding integrated financial advising because the advice model has significant weaknesses.
Due to blatant bias and failure to serve consumers' best interests, several financial experts are asking for the separation of financial advice provided by banks.
Australians now receive product pushing from salesmen who are paid by the banks, according to Chris Brycki, CEO of Stockspot: "Investors should receive fair and unbiased financial advice from experts who will act in their client's best interests."
Brycki is urging structural reform to address the issues brought on by the banks' monopolistic market dominance in order to safeguard consumers, improve the training of advisors, and align incentives.
Thousands of bank customers are being suggested bank-aligned investment products despite the possibility that better alternatives may be available, according to Stockspot's annual study into high-fee funds.
Paul provides financial planning information as well as financial advice.