The retreat from wealth management by Australia’s major banks in the past two years was supposed to spell the end of the issues raised by the vertically integrated financial services model. But the recent collapse of high-profile firm Dixon Advisory shows that versions of the model — where one entity controls product, platform and advice — still remain.
It is now three years since Australian High Court judge Kenneth Hayne released his damning report into misconduct in banking, superannuation and financial services, the nation’s largest industry by revenue and home to the world’s fifth largest pensions pool.
After nearly a full year of hearings that exposed shocking practices in the industry, the Hayne Royal Commission in early 2019 issued a one thousand-page report that included recommendations for sweeping changes to clean up conflicts and prosecute wrong-doers.
Among those practices was the charging of ongoing advice fees to the dead, preying on the nation’s most vulnerable people with aggressive sales techniques, and systemic-level conflicts in which blatant product pitches were dressed up as independent advice. At the centre of many of these scandals were the big four Australian banks, politically powerful and hugely profitable.
Progress to date
The Conservative government, which had long resisted the inquiry, subsequently promised to act on all 76 of Hayne’s recommendations. Three years later, while much progress has been made, there is still a way to go in cleaning up the industry altogether.
On the plus side, the big four banks are now out, or all but out, of wealth management. While Hayne stopped short of recommending the forced dismantling of vertical integration, the damage to the banks’ brands from the scandals was such that they moved on their own.
Separately, the corporate regulator, the Australian Securities and Investments Commission, issued civil penalties of $AU110 million and took disciplinary action against Commonwealth Bank of Australia, National Australia Bank, ANZ Banking Group, Westpac-related BT Funds Management, Colonial First State Investments and insurer Allianz.
Of the 13 referrals made to the regulators by the Hayne for further investigation, there were six civil court cases, while two criminal cases were brought.
While all that sounds good, there are still claims of a poisonous sales culture within Australia’s banks. Leaked focus group reports by bank employees allege that if anything things have got worse since Hayne, with managers putting sales benchmarks ahead of doing the right thing.
Vertical integration lives on
At least, the banks are out of wealth management. But that doesn’t mean vertical integration is dead altogether. In January this year, the once-respected pensions specialist Dixon Advisory went into administration, faced with mounting penalties, compensation claims and class actions.
The 36-year-old company, whose clients were mainly self-managed superannuation funds, had started as a pure retirement advisory firm. But in recent years, under a new generation of the founding family, Dixon started to sell in-house products to clients.
Chief among these was a business that bought up distressed apartments on the US east coast. The US Residential Masters Fund, as it was known, renovated and flipped apartments. Dixon clients not only owned units in the fund, but also the debt and hybrid capital to keep it going.
In 2018, Dixon Advisory merged with broking firm Evans & Partners and listed on the Australian Stock Exchange as Evans Dixon. The entity described its business as providing asset management services and financial advice — particularly to trustees of self-managed super funds.
As the Australian Financial Review noted recently, it was at this point that things started to go wrong. Dixon Advisory clients were strongly encouraged to buy into the initial public offering on an entity that was overly reliant on fees charged by the US property venture. Their retirement nest eggs were in an undiversified, highly leveraged and highly risky property play.
More than 4000 clients, many of them Australian self-funded retirees, subsequently lost control of their savings in the collapse, that at its heart was down to a conflicted business model.
Why does it keep happening?
So why didn’t the changes wrought by the Hayne Commission stop this happening? Put simply, Hayne, while discouraging the conflicts inherent in vertical integration, stopped short of advocating a complete separation of product from advice. His idea was that the best answer was more disclosure about conflicts, leaving clients to make up their own minds.
But as many observers are now saying, that was clearly not enough. Dixon Advisory had a good name and its wealthy clients, many of them retired public servants, had long built up relationships with their advisers based on trust and mutual respect. More fine print was unlikely to solve the issue.
The Dixon collapse has also thrown the spotlight on a wider issue in Australia, which is the departure of thousands of advisers from the industry under the ever growing weight of compliance obligations and the difficulty of running a profitable business.
This is the nub of the whole issue. While vertical integration led to unmanageable conflicts and often poor advice to consumers, its dismantling leaves open the question of how to deliver quality, affordable advice at scale to people other than high net-worth retirees.
It is this question which is going to dominate yet another government inquiry in the coming year. The Quality of Advice review, a recommendation of the Hayne Commission, will consider what changes are needed to improve Australians’ access to affordable advice. But going by many of the past inquiries, any radical changes (like making advice tax deductible) appear unlikely.
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