Investors can take some valuable lessons from ASIC’s latest report on the shortcoming of financial planners. The regulator highlighted a number of steps that should have been taken, but often are not, during the advice process. Armed with this knowledge, investors can make sure their planners fulfill their obligations.

ASIC conducted a review of how Australia’s largest banking and financial services institutions manage the conflict of interest that arises as a result of institutions engaging in both the provision of personal advice to retail clients and the manufacture of financial products under a vertically integrated business model.

The institutions under review were AMP, ANZ, Commonwealth Bank, National Australia Bank and Westpac.

In 75 per cent of the customer files reviewed, the adviser had not demonstrated compliance with the best interests duty and related obligations.

ASIC says the fact that 75 per cent of the customer files reviewed were non-compliant does not necessarily mean that these customers were significantly worse off as a result.

However, in 10 per cent of the advice files reviewed, the regulator had “significant concerns” about the impact of non-compliant advice. For these customers, switching to a new superannuation platform resulted in inferior insurance arrangements and/or a significant increase in ongoing fees, without additional benefits being identified.

Some of the specific issues, which should raise red flags for investors, include:

• insufficient research into and consideration of the customer’s existing financial products;
• failure to base judgments on the customer’s relevant circumstances;
• unnecessary replacement of financial products, where advisers recommended that a customer switch to a new product when their existing product appeared to be suitable to meet their needs and objectives;
• advisers made basic inquiries about their customers’ circumstances but did not investigate all relevant circumstances.

“There were a number of failed files where the adviser demonstrated that they had conducted a reasonable investigation into the customer’s relevant circumstances and formulated an appropriate strategy, such as consolidating super and taking out a suitable level of insurance cover,” ASIC said.

“However, instead of considering the customer’s existing financial products as a potentially viable option to effect the strategy, the in-house products were recommended.”

ASIC says an adviser who recommends and in-house product must acknowledge the conflict of interest. The adviser is required to demonstrate that advice recommending an in-house product is in the best interests of the customer and that it is appropriate.

“Where an adviser recommends replacing one financial product with another, they should only do so if they can demonstrate that the customer is likely to receive additional benefits as a result. Benefits would include lower costs, greater convenience or the availability of extra features that are relevant to the client’s needs,” it says.

On average, in house products made up 21 per cent of the adviser groups’ product lists. Where customers received personal advice they put 68 per cent of their money into in-house products.

Seventy-eight per cent of all customers, both new and existing, who made a new or additional investment during the review period, as a result of receiving personal advice, transacted through in-house products.

“We do not expect the proportion of customer funds invested in in-house products to be the same as the proportion of in-house products on an approved product list but the high level of non-compliant advice combined with the high proportion of funds invested in in-house products suggests that the advice licensees were reviewed may not be appropriately managing the conflict of interest associated with a vertically integrated business model,” ASIC says.

ASIC says its concerns are not limited to a few non-compliant advisers or even a few non-compliant firms. Instead, they reflect broader system issues within the financial advice industry, driven by conflicts of interests relating to ownership and remuneration and unacceptable levels of competence compounded by weaknesses in the regulatory framework.