‘Destructive influence’: AIOFP argues for grandfathered vertical integration ban

Vertical integration has been the source of myriad issues in financial services for decades, with the collapses of Dixon Advisory and United Global Capital (UGC) the most notable recent examples.

At its heart is the disconnect between what clients think they’re getting – advice – and what they are often actually receiving – product sales. While the effects of this structure were a prominent issue all throughout the financial services royal commission, commissioner Kenneth Hayne declared it didn’t need to be addressed.

“I am not persuaded that it is necessary to mandate structural separation between product and advice,” Hayne said in the royal commission’s final report.

Indeed, he concluded that “enforced separation of product and advice would be a very large step to take”.

“It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs, and the Productivity Commission concluded that ‘forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system’,” Hayne said.

The fallout of vertically integrated product and advice firms collapsing is now set to have an even greater impact on financial advisers through the Compensation Scheme of Last Resort (CSLR).

According to the CSLR actuaries report, 92 per cent of expected claims paid for FY25–26 relate to UGC and Dixon at $44.57 million and $12.25 million, respectively.

Meanwhile, the FAAA has modelled the FY26-27 levy as potentially hitting $123 million, largely on the back of Dixon complaints.

Speaking on the ifa Show last week, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston said putting the onus for covering the cost of these failures on advisers, and by extension their clients, is “just ridiculous”.

“If the fund hadn't failed, those people's money would be there accumulating capital gains or interest or depending on what type of fund they're in, and everything would have been alright,” Johnston said.

“But the fact is the fund failed and we think the product manufacturers should be held liable for the failure of their own funds. We think that vertical integration is a problem. This is what's happened with Dixon's and that's what happened with the other one [UGC].

“We think the integration should be banned – grandfathered, of course, for those who are doing it now, but [banned] for anyone else.”

Arguing that it is a positive that the vertically integrated banks are now out of advice because “they weren't very good at it”, Johnston said there needs to be a clear delineation between the services.

“It should be you are either an adviser or you're a product manufacturer. And virtual integration is just that halfway point and confusion comes in,” he said.

“It's conflicted for clients. It induces poor advice because people are leaned on to use their own internal products and those type of conflicts shouldn't be there, in our view. So, that's the quickest way to fix it.”

In a letter to AIOFP members, Johnston also raised the need for a ban of the structure, placing it as one of the three “critical structural issues” the advice profession must address ahead of the election, along with the disciplinary regime and government overreach.

“[Vertical integration] has been the most fundamentally conflicted and destructive advice influence for consumers over the past 30 years,” he said in the letter.

“It was responsible for duping consumers into trusting bank owned/independent looking advisers who placed their entire savings into expensive, poorly performing or failed funds … vertical integration should be banned with current operators grandfathered but ASIC must keep a close surveillance eye on them.”

Broadly, Johnston argued sectors should be split between advice or managed investment scheme (MIS) product manufacturing.

“We do not consider managed accounts to be 'vertically integrated' and super funds should be permitted to have internally trained 'product information officers' to assist members with their own products and services,” he added.

Advice a financial services ‘punching bag’

While vertical integration is at the top of the AIOFP’s list, Johnston has also argued for a more centralised “universal code of conduct and disciplinary regime” and an end to government overreach.

“The Advice community currently has a once in every three-year window of opportunity to end the 16-year phantasm of stupendous government overreach into our profession. No other profession has had to endure the level of government interference we have suffered since the collapse of Storm Financial in 2007,” he said.

“The Ripoll Inquiry, FOFA then the Frydenberg/O'Dywer era of LIF, FASEA, compliance overload and grandfathered revenue ban followed by the CSLR which has the potential to be cataclysmic for consumers and our profession.”

The core problem, he added, is that Canberra has no “fear” of advisers politically, leading to the profession becoming the “punching bag of the financial services universe”.

“Somehow we get blamed for just about any industry ill but unless we start throwing a few punches back it will continue and can only get worse,” Johnston said.

He added: “Allow me to be brutal about some aspects of our profession. Too many do not want to do any heavy lifting and rely on others to do it. The problem is the independent advice profession stands alone in the market, there is no other stakeholder to step in to fund or fix things – we must do it on our own.”