Even more startling, 10% of advice was discovered to put investors in a worse financial situation.
Commonwealth Bank, National Australia Bank, Westpac, ANZ, and AMP provide 'in house' financial advice through a """"vertically integrated business model,"""" and collectively control more than half of Australia's financial planners.
It's no surprise that ASIC's review found advisers at these banks preferred financial products linked to their parent company, with 68% of client funds invested in 'in house' products rather than external products on the firm's list.
Why the integrated financial advice model used by banks is flawed
It's difficult to believe the banks can keep a straight face and claim to be abiding by the duty of advisers to act solely in the best interests of their clients.
The integrated financial advice model has multiple layers of fees, including adviser fees, platform fees, and investment management fees, totaling 2.5-3.5%.
Fees are typically divided as follows: an adviser charge of 0.8% to 1.1%, a platform fee of 0.4% to 0.8%, and a managed fund fee of 0.7% to 2.1%. These fees are not only opaque, but also sufficiently high to limit the client's ability to earn real rates of return quickly.
Because the banks' business model incorporates layers of fees, there is no incentive for the financial advice arm to make a profit, because profits can be made in the upstream parts of the supply chain by the banks promoting their own products.
This business model, however, is flawed and will not survive in a world where people demand greater accountability for their investments, greater transparency regarding fees, and greater control over their investments.
It is worth noting that truly independent financial advisory firms in Australia that provide separately managed accounts have done everything possible to avoid using managed funds and keep fees competitive.
The banks have refused to admit that their integrated advice approach is fatally flawed. When the Australian Financial Review contacted the Financial Services Council (FSC), a peak body that represents 'for-profit' wealth managers, for a defense of the layered fee arrangements, a spokesman stated that no generalizations could be made.
The advice model has fundamental flaws, and it will be interesting to see what the upcoming banking royal commission does to address some of the contentious issues surrounding integrated financial advice.
Many financial commentators are calling for the separation of financial advice from banks, as obvious bias and failure to meet clients' best interests becomes more apparent.
""Investors should receive fair and unbiased financial advice from experts who will act in the best interests of their client,"" says Chris Brycki, CEO of Stockspot. What Australians currently get is product pushing from bank-paid salespeople.""
Brycki is calling for structural reform to address the issues caused by banks' dominant market power in order to protect consumers, better educate advisers, and align incentives.
According to Stockspot's annual study of high-fee-charging funds, thousands of bank customers are being recommended bank-aligned investment products despite the possibility of more appropriate alternatives being available."""
