Think Twice Before Getting Financial Advice From Your Bank

This alarming statistic comes from the Australian Securities and Investment Commission’s (ASIC) recent evaluation of financial advice provided by the main four banks.

Even more astonishing, 10% of advise was shown to put investors in a worse financial situation.

Commonwealth Bank, National Australia Bank, Westpac, ANZ, and AMP provide ‘in house’ financial advice via a “vertically integrated business model,” and jointly own more than half of Australia’s financial planners.

It’s no surprise that ASIC’s assessment revealed advisors at these banks preferred financial products linked to their parent business, with 68% of client assets put in ‘in house’ items rather than external goods on the firm’s list.

Why the integrated financial advising approach used by banks is problematic

It’s difficult to imagine the banks can maintain a straight face and claim to be abiding by the responsibility of advisors to operate only in the best interests of their clients.

The integrated financial advising model has many levels of costs, including advisor fees, platform fees, and investment management fees, totaling 2.5-3.5%.

Fees are typically divided as follows: an advisor charge of 0.8% to 1.1%, a platform fee of 0.4% to 0.8%, and a managed fund cost of 0.7% to 2.1%. These costs are not only opaque, but also sufficiently expensive to impede the client’s potential to achieve actual rates of return fast.

Because the banks’ business model incorporates layers of fees, there is no motivation for the financial counseling arm to earn a profit, because profits may be produced in the upstream sections of the supply chain by the banks pushing their own goods.

This business model, however, is defective and can not persist in a world where individuals expect more responsibility for their investments, better openness about costs, and greater control over their assets.

It is worth noting that genuinely independent financial consulting businesses in Australia that provide separately managed accounts have done all possible to avoid utilizing managed funds and keep fees low.

The banks have failed to recognize that their integrated advisory model is catastrophically flawed. When the Australian Financial Review contacted the Financial Services Council (FSC), a major group that represents ‘for-profit’ wealth managers, for a defense of the tiered fee agreements, a spokeswoman said that no generalizations could be drawn.

The advise model has basic faults, and it will be fascinating to watch what the next banking royal inquiry does to address some of the critical issues surrounding integrated financial advice.

Many financial analysts are asking for the separation of financial advising from banks, as clear bias and failing to meet customers’ best interests becomes increasingly 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 presently receive is product pushing from bank-paid salesmen.”

Brycki is pushing for structural change to address the issues produced by banks’ overwhelming market position in order to safeguard customers, effectively educate advisors, and align incentives.

According to Stockspot’s yearly study of high-fee-charging funds, thousands of bank clients are being suggested bank-aligned investment products despite the possibility of more acceptable alternatives being available.