Vertical (dis)integration – are you conflicted?

Thanks to the royal commission, everybody is talking about vertical integration and in-house conflicts. We explain what this means and highlight four things you can do to manage conflicts effectively.

I’m a financial adviser. Am I conflicted?

Probably. Vertically integrated structures are pretty common in the wealth management industry. It’s not just the big banks that use them.

• Do you recommend financial products (including managed accounts) that are issued or operated by your licensee or corporate group?
• Do you recommend financial products that will give you, your licensee or your corporate group some type of financial benefit?

If you answered yes to either of these questions, congratulations! You’re conflicted.

So, is my business doomed?

No. Commissioner Hayne toyed with the idea of separating product and advice – known as ‘structural separation’ – but in the end he rejected the idea.

But don’t celebrate just yet.

While Hayne decided that it should be possible for advisers and licensees to manage in-house conflicts effectively, he was damning of the poor consumer outcomes caused by in-house conflicts in recent years.

We expect ASIC to scrutinise vertically integrated structures and in-house product recommendations this year. So advisers and licensees need to be able to demonstrate that they understand the conflict and can manage it effectively.

How do I do that?

You have to place your client’s interests above your own. In most cases, your client will have an existing product. So you should:

• Perform a comparative analysis of the pros, cons, fees, risks and benefits of their existing product v your in-house product; and
• Explain why your in-house product is better for your client than their existing product. It’s not enough to just tell the client you have a conflict.

In-house product recommendations will generally be inappropriate if:

• The benefits of the in-house product are lower; or
• The costs of the in-house product are higher.

The exception to this is if there is a clear justification for your recommendation. For example, if your in-house product addresses a specific client need or objective that the existing product doesn’t.

If you can’t easily explain why you’re recommending your in-house product, don’t do it.

Is that all?

No. You have to record all of this on the client file and explain it in the statement of advice. Most advisers don’t do this adequately.

If your advice is not properly documented and explained, you are effectively guilty until proven innocent.

So, what should I do?

You can demonstrate that you are managing your in-house conflicts by doing these four things:

1. Properly research your client’s existing product;
2. Link each recommendation to your client’s needs and objectives;
3. Explain why your in-house product is better for your client than their existing product; and
4. Record all of these things on the client file.

Simon Carrodus, senior associate, The Fold Legal

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].