Vertical integration, so what?

by Julia Corderoy27 Oct 2014
ASIC has issued a warning about vertical integration in financial planning in its strategic outlook for 2014/15. In the report published last week, the corporate regulator noted the increasing trend to consolidate in the financial services sector. 

“Significant consolidation has taken place in the funds management industry, with the four major banks estimated to account for around 60% of total industry revenue in 2013–14.”

As a result, ASIC has said they will be focussing on in-house product recommendations by financial advisers.

“Vertical integration in banking and along the product distribution chain continues to pose challenges,” the regulator said.

“Advisers may persuade investors and financial consumers to invest in in-house products when that may not be in their best interests. Platform operators that are also advisory dealer groups are in a position to direct many clients to in-house products.”

Tania Milnes, general manager of Mortgage Choice Financial Planning told Australian Broker that Best Interest Duty ensures the adviser always places the client’s interests ahead of their own, but it is when differing incentives are involved which causes a perceived conflict of interest.

“The perception that vertical integration distorts an adviser’s recommendations often arises when the institution on the register of the dealer group elects to pay a higher level of commission, offer a remuneration model, or lower their dealer group fees, to its aligned advisers as an inducement for business,” she said.

“While this practice does not guarantee advisers will send more business to that particular institution, especially given the value financial advisers place on their professional advice, it does place them in a perceived conflict.”

While the Commonwealth Bank has a 17% stake in Mortgage Choice, Milnes says that they take deliberate steps to ensure they stay out of the firing line when it comes to any perceived conflict of interest. 

“Mortgage Choice has taken deliberate steps to avoid this perceived conflict with its advisers operating under a 'paid the same' philosophy for insurance related advice,” she said.

The issue of vertical integration doesn’t only arise for financial planners; it often causes debate in the mortgage broking industry as well – for the same perceptions of commission related conflict of interest.

Another mortgage provider who has been partly acquired by Commonwealth Bank is Aussie Home Loans. But Aussie chief, John Symonds told Australian Broker that he can give absolute assurance that this doesn’t have any effect on its brokers or what loans they write.

“Seven years ago, Commonwealth Bank acquired 33% of Aussie and since then they write about 20% less volume than they did before they had any equity. Mortgages have become more and more competitive now and all the players, both big and small, are fighting hard and are finding it tough to increase market share,” he said.

“We’ve got a thousand brokers out there, and it is the brokers who are in front of the customers. They go through our panel of funders, rates, terms and conditions and turnaround times with the consumer to find the best deal for their situation. Brokers are independent contractors and they would have no interest in hearing the Commonwealth Bank, or anyone, try to tell them what to do.”

Symond says if vertical integration was a problem, then there would be no market for brokers – but it is quite the opposite.

“The whole reason why the broking industry has grown is because brokers promote what is best for that customer.”