It’s going to be a close race to see whether the big banks split off their advice arms before Royal Commissioner Ken Hayne suggests that doing something like that might be a good idea anyway.
Quite frankly, it’s going to be about as easy for the big banks to sell their advisory businesses at the moment a it is to find a buyer for a pair of Sydney taxi plates.
Remember them? They hit just over $420,000 a pair in April 2011 and now you can pick them up on Gumtree for a bit north of $155,000 (unrestricted, make me an offer, no time wasters etc) thanks to the depredations caused by ride sharing services such as Uber.
The good news for the banks is that there’s no Uber lurking in the wings to demolish their financial advisory lunch.
But then again, there’s no obvious scramble of candidates looking these advisory businesses over with a view to making a bid.
We know for instance that CBA wants to float out Colonial First State Global Asset Management and we’d read that at one point AMP and Henderson were looking at it, but that was before the recent AMP unpleasantness.
The catch is the same reason why Commissioner Hayne is likely to reduce the advisory businesses’ value even further by the time his Royal Commission is finished: most of the value in the bank-owned advisory operations is in grandfathered commission streams.
Industry insiders say there are hundreds of billions of dollars trapped in costly, often underperforming, legacy products, earning the institutions an enormous annuity income stream at a juicy but almost certainly unsustainable profit margin.
As one put it, this has happened “because institutions are incentivised to keep clients in out-dated funds rather than transfer them into better solutions”.
“Legacy creates a culture of protecting margin at all costs.”
All of which suggests he is going to shine a strong light on grandfathering, which was one of the concessions made to the banks when the Future of Financial Advice (FoFA) legislation was voted through the Parliament and became law in 2013.
What was meant to happen was that as all new clients were to be put into un-conflicted arrangements with their advisors, or what is known as “fee for service”, then the old grandfathered commission arrangements would fade away.
They’re fading, but very slowly, because old fashioned advisors are leaving their old clients with the same asset allocation strategies as they have had since before FoFA came in. Because if they put the client into a new product now, they can’t charge commission.
Anthony “Jack” Regan, the AMP executive who was parachuted in to sort out the “fees for no advice” mess at the Royal Commission, said in evidence that AMP still gets about 60% of its revenue from grandfathered advice arrangements, and that’s five years after FoFA became law.
(By the way, he almost certainly got his nickname from the old British cops and robber’s series “The Bill” in which the hard bitten Scotland Yard detective Jack Regan was played by John Thaw. In his most recent episode, this Jack Regan was the one getting the rough ride.)
Putting aside the woes of AMP, clearly the Commissioner is going to recommend that grandfathering should be got rid of sooner rather than later.
And that’s what is causing the real scramble for the exits. Quite apart from the fact that the salad days of owning wealth arms are over for the big banks, because FoFA banned commissions on sales of new products, there’s the looming problem of how you value a commission stream that’s about to dry up.
That’s what’s really for sale: a promise of money in the future when that money flow may shortly be legislated to a halt.
The good news, for the banks, is that their wealth arms may well become more profitable, in an operating income sense, once they are split off and made properly independent.
Retirement savers will rush the doors of any organisation that can show it is more independent than most, although it’s really hard to be fully independent.
And even that’s not a perfect badge of honour. Sam Henderson’s, Henderson Maxwell advisory business can claim to be independent, but in his case it meant that 84 per cent of his clients were being tipped into a fund he controlled. Thanks for coming, as they say.
So where will ordinary mortals go for advice?
Commissioner Hayne’s got a job in front of him in terms of what he’s going to recommend, since the Federal Government will almost automatically take up his recommendations holus-bolus.
The big risk is that, if he cracks down too hard on the advisory industry there will be a big number of savers left without competent advice, and that would be an even bigger disaster than what we’ve seen at the Royal Commission.
Ponder on that for a moment.
Most particularly, let’s remember those big players which got such a scorching at the Commission are busy remediating the clients who were ripped off. Big players have deep pockets.
I’m not for a moment suggesting we should carry on as before. We’ve never needed a change in the conflict of interest rules as much as we do now.
But there is logic in having large institutions play a major role in financial advice.
If Mr and Mrs Average can’t get honest advice when they walk into a high street bank, where else are they going to get it?
Bear in mind that accountants may only advise on the setting up and winding up of SMSFs, and there will probably be a short term net exodus from the ranks of Licensed Financial Advisors because of the looming requirement that by January 1 2024 all advisors should have a relevant university degree.
In the long run we will have better financial advisers, but there will be some stresses and strains in the short term. And that’s before we see what the Commissioner recommends.
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