The Approved Product Lie

In April 2014, the ifa editorial team sifted through submission after submission to the Financial System Inquiry. Most of them were authored by professional spinners arguing the financial system was in good health and there was ‘nothing to see here’.

But one stood out: a seemingly innocent letter from an AMP-aligned financial adviser and practice owner named Rhys Wood. The institutional dealer group model is plagued by “systemic bias”, Mr Wood politely offered, with approved product lists (APLs) the key vehicle for stopping client money from flowing to competitors.

Outside of this publication, Mr Wood’s submission did not receive much traction despite it blowing the lid on arguably the industry’s biggest sleeper issue and acting as a rare on-record whistle-blow on vertical integration’s inherent flaws. It wasn't picked up by the mainstream press and was largely ignored by FSI chair David Murray (perhaps predictably, given his former life as boss of the country's largest vertically integrated financial institution).

Over the next four years, the instos have gone about the process of 'broadening APLs' and made a lot of self-serving noise while doing so.

Their executives and board members have fronted parliamentary inquiries week after week and distributed press statements pointing to a new philosophy of “open architecture” and the increasing number of products that advisers under their control can technically recommend.

ASIC’s review of advice provided by a number of licensees owned by CBA, ANZ, Westpac, NAB and AMP, released on Wednesday, has shown once and for all that this entire defence of “open APLs” is bogus.

The institutions now pay daily lip service to freedom, but their underlying commitment to restriction and share of wallet has never faltered.

The review – which, it must be stressed, was conducted in the post-FOFA period of 2015-17 – found that 68 per cent of all client funds across these businesses were invested in financial products owned and operated by related entities. A review of sample files where advice to switch products to an in-house product was provided also found that in 75 per cent of cases the FOFA best interests duty was not complied with.

While the behaviour differed across licensees, the report found that “in most cases there was a clear weighting in the products recommended by advisers towards in-house products”.

Now, judging by the comments on the news article and on social media, many of you are unsurprised by the news, seeing it as nothing more than a confirmation of something everyone in the industry already either had first-hand knowledge of or strongly suspected.

But while it might not be surprising, given the decade of whispers and the scandals already exposed, we should not be so complacent or cynical as to accept the status quo as acceptable.

The report’s findings are actually quite significant for a number of reasons.

First, the finding of in-house product bias comes despite consistent pleading of innocence to the contrary, indicating deliberate deception to Parliament and the media.

Second, it comes despite the associated finding that 79 per cent of financial products across the reviewed licensees’ approved product lists were external, meaning there must be other reasons and factors to recommend in-house at play other than the APL, whether financial incentives, dodgy in-house research, restrictive model portfolios or other nefarious means of controlling the flow of money.

Third, the bias was evident not just in the employed advice channels that you would expect (NAB Financial Planning, ANZ Financial Planning, etc), but from self-employed businesses licensed by bank subsidiaries with independent-sounding names like 'Securitor' and 'Millennium3'. Advisers in these channels, and their managers and owners, consistently maintain they are just as independent as any of their non-bank or self-licensed peers. This report suggests otherwise.

Fourth, there is very little evidence of the conflicts on the public record. The report provides documented evidence that negates the spin put out by the banks and their lobbyists

Which leads us logically to the fifth and by far the most important reason this report matters: while you might know about the murky incentives and undisclosed ownership structures and product bias, the vast majority of consumers do not, as indicated by Roy Morgan surveys year after year.

Indeed, the entire system is designed with the very aim of duping the consumer and providing a false façade of independence.

For once, this report goes to the very heart of the biggest issue affecting quality of service in the financial system and the associated consumer harm and reputation damage.

It is a far bigger issue than this ridiculous notion that lack of adviser education is the problem. We hear consistently that all of the industry's woes are because too few have university degrees and it needs to 'professionalise', repeated ad nauseum by the associations looking to take a cut, institutions looking for a PR distraction and 'journalists' who have been drinking so much insto kool-aid they have lost the scepticism once integral to their craft.

And it is certainly a bigger problem than independently-owned and non-aligned businesses calling themselves that. In fact, it proves that these business models are fundamentally different to those that are institutionally-owned and should be allowed to market themselves accordingly.

Under its previous leadership, ASIC too often took the bait, focusing on these red herrings and diversion tactics.

Let us hope this report is a sign James Shipton’s ASIC will truly put client best interests first.