The vertical integration of the early 2000s happened very much by design and not by accident, and heavily increased the distribution network of retail funds.
Commissioner Hayne’s report had a specific focus on the benefits that flow to advisers and licensees, however, one area overlooked was the benefits that flow to product providers. Most platforms are products and from now, the onus of responsibility intrinsically lies with the adviser in ensuring all conflicts are reduced or removed.
Both the independents and the bank-based platforms have something in common. They are, for the most part, products, offering platform services to advisers and retail clients.
The use of product-led revenue models in the value chain of advice has brought us to this reform-based inflection point in the advice industry.
FASEA’s Code of Ethics puts the onus on advisers to remove conflicts and act in best interests of the client. Products should be used as an output of good advice, and all the providers in the value chain, such as platforms and fund managers, should be paid directly based on their value-added services.
So, where does that leave independent advisers and their search for technology and service providers? And how have expectations changed post-Hayne?
Honesty and integrity from service providers is paramount. Advisers want to build meaningful relationships and partnerships that enhance their own value proposition, as opposed to buying a product from a shelf or a “user license”.
Advisers also want open architecture that doesn’t restrict them from delivering what is in the best interest of their clients. They want the ability to choose from a competitive landscape of financial products and services based on what is most appropriate in achieving the client’s financial goals. Product restrictions add more compliance disclosures and potential issues with regards to best interest and can add further issues of conflicts onto the adviser.
From a features and benefits perspective, advisers need ongoing support and automation of compliance like audit trails, controls, alerts and monitoring, as well as accuracy through reconciliations. Flexible and reliable reporting systems that can integrate into financial planning software are therefore key to be able to achieve this. Additionally, advisers rightfully need a delivery mechanism that is flexible, and one that allows an expression of their own brand in continuity of communications like ROA’s and quarterly reporting requirements.
The technology should be of a standard that it reduces administrative staff time, therefore lowering cost, reducing human error and increasing the efficiency of managing models. Time saved on administrative and compliance tasks can then be better spent on delivering for clients and growing their advice business.
In echoing the sentiment by commissioner Hayne, the platform providers also need to move to transparent with administration fees, linking the true cost of the recommended platform to the service the client is paying for.
Advisers need to pay close attention to some of the fees or hidden costs being charged to their clients from platform providers, with revenue often being extracted from the assets of the client in a non-transparent way.
One of the more obvious ways that costs can be charged is by offering clients a very low cash rate. When interest rates were higher this was considerably more apparent, but it’s clear from a lot of the ASX-listed platforms that are forced to disclose where they generate their revenue from, that a large proportion of their margins have been made off clients’ cash. Not an ideal outcome for an adviser to explain to a client.
There are many issues to fix and navigate our way through, but the precedent has well and truly been set. Consumer expectations are high and the industry’s expectations of itself in restoring public trust and confidence are even higher. Advisers and advice, not products are the essential lead in the wealth value chain, and the ability for technology and service providers to help them deliver on the new status quo will go a long way in securing the best possible outcome for clients.
Shannon Bernasconi, managing director/CEO, WealthO2
