Freeing up the advice process

It was the mutual societies back in the 19th century that employed teams of salesmen to sell their products.

As the banks created products, they too employed sales teams to distribute them.

And until very recently, local banks distributed their own products.

National Australia Bank (NAB) didn’t add outside fund manager products until 1997 and the Commonwealth Bank (CBA) only moved into the outside world when it bought Colonial First State (CFS).

Westpac only began selling its own products a few years ago and the acquisition of BT expanded the product line-up.

However, selling other bank’s products still does not include mortgages, although some institutionally-owned dealer groups have a broader reach.

As one bank executive put it, seeing a NAB mortgage product advertised in a CBA branch is still a long way off.

But in financial services, the ground map is changing and the bank-owned dealer groups are having to offer non-biased advice to meet the demands of the Australian Securities and Investments Commission and the Financial Planning Association (FPA) guidelines on conflicts of interest.

MLC Licensees general manager Greg Miller says the group has been working for some time to remove conflicts of interest from advice.

“We had been working on that for some years before the FPA code of conduct was introduced,” he says.

“We have thought about conflicts for some time, almost since MLC was purchased by NAB in 2000.”

Miller says the reason behind removing conflict at all levels is ultimately for the client.

“We have toughly applied removing conflicts to all areas of the business, which is benefiting the adviser,” he says.

“We have removed the weighted commissions from the business to enable the adviser to deliver the right advice.

“MLC advisers can recommend the best product for the client regardless of any payment structures.”

CBA-owned Financial Wisdom has also worked at removing bias from its advice.

Financial Wisdom general manager Paul Barrett says dealing with the issue of bias in financial advice comes from the leadership shown by the dealer group.

“Bias and separating it out of advice comes through the leadership position of the dealer group and the intention of the business,” he says.

“It is about what we are doing today and tomorrow.”

Barrett admits advisers currently see Financial Wisdom as just a bank-owned dealer group, but he argues the group has become something else.

“We want people to see us as a premium advice business,” he says.

“We need to enhance that culture across the board, which is why we remunerate based on the quality of the advice we deliver.

“If we don’t take a leadership position, we will never achieve that change.”

Barrett says renumerating on advice rather than product sales has been the leadership direction achieved by the group.

Some banks have separated their product sales teams and advice chain.

Macquarie Wealth Management associate director Doug Webber says the bank has two separate means of distribution.

“Distribution of all products by Macquarie can be through the dealer group,” he says.

“However, direct sale of the products is done through a sales force that doesn’t give advice.”

This sales team has to present to the dealer group to get products on the approved list.

“Before we can sell any Macquarie products they have to be approved by us,” he says.

“That is something we are very cautious about.”

Webber says the dealer groups research Macquarie products and if they are approved, they are not weighted for remuneration to avoid any bias.

“Certainly there are Macquarie products on our approved list, but the list doesn’t just have Macquarie products.”

Financial Wisdom only puts CFS products on its list after they have been reviewed internally.

“We will put internal products on out list, but only after they have been reviewed by the investment committee,” Barrett says.

“Internal products have to be submitted for review and they don’t always get on. It is about being non-biased.”

Barrett says the reviewing process also extends to platforms and again some CFS options haven’t made it onto the approved list.

Westpac has taken a similar approach to Macquarie, with BT as the product manufacturer and Westpac Financial Planning the advice arm.

Westpac Financial Planning head of advice services Chris Davies says it is about having the appropriate diversification between product manufacture and providing advice.

“All of wealth management is at BT, and financial planning is under Westpac, so there is a clear distinction from Westpac’s point of view,” he says.

“All financial planning advice is about putting together a portfolio with different managers and styles, not just our own products.”

BT has to submit its products to Westpac’s approval committee to gain a place on the approved list.

“As an advice business, we need to put together an approved list that has different managers and styles,” Davies says.

“We treat everybody the same and managers wanting to go on the list have to perform before the investment committee.”

Davies also points out there are BT products that are not on the Westpac approved list for one reason or another.

MLC products are neither guaranteed instant approval when it comes to gaining a place on the approved list.

“MLC products still have to be approved by the adviser groups,” Miller says.

“The approval committee undertakes due diligence on all products regardless of whether they are MLC or not.”

And the adviser is not duty bound just to select MLC products from the list either.

“We have continuously followed the principles of financial services reform when it comes to conflicts,” he says.

“There is no automatic selection of in-house products by our advisers.”

MLC’s remuneration structure for advisers is based on any products sold and is not weighted to the in-house products.

Miller says most of the advisers in the group want to be recognised for giving good advice.

“Most of our advisers get a good feeling about being an adviser attached to MLC and are not tainted by extra payments to the adviser through in-house product sales,” he says.

Financial Wisdom has implemented a number of changes to the remuneration structure to remove itself from being seen as a bank product pusher.

Barrett said on January 1, this year, Financial Wisdom implemented a practice quality schedule that is applied across the adviser’s business.

“It looks at the quality of advice, financial strength of the practice and the business acumen being delivered by the adviser and their practice,” he says.

The advisers are scored on how well they achieve the standards set out by the dealer group, and this has been used to see who will attend the group’s annual conference.

“We will take 85 advisers to the conference this year, and it is those who have achieved the standard,” he says.

The dealer group is also looking to take the scheme further as part of a move to reward on merit rather than sales.

“We are talking to advisers on how to improve concept and apply it to remuneration,” Barrett says.

“This could include such areas as buyer of last resort, which would then be linked to how the practice performed.

“We want to apply quality to the valuation of the business.”

He argues that by applying a quality factor to the sale, it then won’t matter how much product the practice has sold.

The advantages of such a quality program has created benefits for the many stakeholders in Financial Wisdom.

“There are multiple benefits of this program for stakeholders in the business such as consumers, advisers and [CBA] shareholders,” he says.

“Practice quality can align all these needs and if the business has strong financials then everybody is benefiting.”

Barrett also points out that quality advice keeps the regulator happy, which is not a bad thing.

Westpac has taken the perception of removing bias from advice another step by allowing the client to take a plan away and, if they wish, seek a second opinion from another adviser from a different dealer group.

“We have a distinct fee for the financial plan,” Davies says.

“The client owns the plan and can take it away if they want.

“A percentage of customers take it to a second planner for an opinion and that is their choice, as no plan is definitive.”

Davies says by giving the client the option of seeking a second opinion, it is building trust between the Westpac adviser and the client.

“The financial planning industry acknowledges planners are moving into the coaching role and we have to build a relationship with the client and they have to trust us,” he says.

“We do get people staying with the plan and the adviser, and establishing that trust in the adviser is a key attribute for us.”