We live in a world where the convergence of technologies has created new business models; and industries re-imagined due to the leaps in AI / Machine learning, Cloud and Platform experiences – a future we all now expect to be well within the societal norm.
…but the stories of divergence on the other hand are few and far between, particularly in the world of Asset and Wealth Management.
The disturbing evidence of misconduct in the Financial Advice industry, courtesy of the Hayne Royal Commission; has re-surfaced the unrelenting proposition of separating financial advice from recommendations of financial products manufactured by the same institutions that own the advisers licensees (the technical term is a vertically integrated business model).
Vertical integration is an understandable but unfortunate response to the economics of the Financial Advice industry, and it’s not a structure limited to the large financial institutions being investigated by the Royal Commission. Slowly but surely though, vertical integration is just a symptom of a much deeper and systemic disease and therefore a divergent model is perhaps the inevitable path towards gaining customer trust and painting a new image of adviser professionalism.
Counsels assisting Commissioner Hayne have mercilessly made it abundantly clear that the propensities for companies to mislead the regulator and for advisers to put their interests ahead of customers have been alarmingly frequent and voluminous. Not surprisingly, there has been a considerable amount of talk regarding the conflicts of interest inherent in a vertically integrated model, in particular the validating need for the banks to divest their financial advisory businesses.
However, not many have stopped to think about what the landscape could look like assuming that the Royal Commission recommends this outcome. Nevertheless, it is clear that the personal costs and damages to families and individuals from the reported scandals means doing nothing isn’t acceptable or even sustainable and that a course correction is much anticipated across the board.
Divergent, the 2014 American dystopian sci-fi film based on the novel of the same name by Veronica Roth, offers a somewhat amusing yet applicable analogy; in a post-apocalyptic Chicago, survivors are divided into five factions based on their dispositions.
Source: Divergent Movie
- Factions define how they want their members to think and act in a certain way (aka the Licensees / Product Manufacturer)
- Members within each faction have been conditioned to think and act a certain way (aka the Advisers)
- Now, the rare breed of members called Divergents can’t be confined to one way of thinking and exhibit independence with multiple traits of other factions.
Let that marinate for 30 seconds…
As we wind back the clock and remind ourselves that prior to the Royal Commission, there have been 3 instances of government intervention which have spanned every 10 years or thereabouts.
- In 1992, the Trade Practices Commission (now the ACCC) reviewed the practices of the life insurance industry. This review led to requirements for full disclosure of fees on financial products.
- In 2001, the Financial Services Reform (FSR) Act formalised the provision of financial advice and standardised it across all investments, insurances and superannuation.
- In 2013, the Future of Financial Advice (FoFA) reforms banned conflicted remuneration including commissions on retail investment products and superannuation.
Therefore, with the Banking Royal Commission due to make its recommendations in 2019 and approaching another decade long milestone – will we finally see some fundamental structural change, and will we see the emergence of the Divergent Adviser?
What does this really mean? Perhaps the following types of Divergent Advisers provides an entrée to a future blueprint where the principles truly put the customer on centre stage:
- Wealth and Life Therapist (not affiliated with a bank, insurance or investment company)
“I don’t need any opinions on what I should do with my money or my level of cover… but I do want to know what options are available to me and understand what others have done.”
- AI / Robo Financial Adviser (digital, efficient and unbiased; that doesn’t need to charge asset-based management fees)
“I need a simple and easy way to invest and grow my savings; where I can track and monitor; and quickly view and be notified of any changes to the performance of my portfolio.”
- Financial Product Specialist (takes no commissions of any sort including insurance)
“I know my situation and don’t need any advice; but what I do need is to be educated on certain product features and compare them with other products; so that I can make an informed decision.”
Furthermore, the FinTech’s are also working tirelessly hard to provide customers with a myriad of consumer-led (not product-led) advice solutions (see mapping below). In many ways, this presents an opportunity for the Divergent Adviser to turn FinTech disruption to their advantage if they use technology to enhance engagement and become more relevant to their clients. On the other end of the spectrum, is the potential for increased regulation of FinTech’s due to an emergence of scandals (we only need one) that could eventually arise which could be reminiscent of the US startup – “Lending Club” farce.
In conclusion, the Divergent Adviser could provide a way to further navigate the turbulence that looks to befall the financial advice industry. Perhaps now, more than ever, there will be a greater awareness and understanding of the importance of financial literacy and where advice is only sought under the rules and engagement of a business model built on divergence; which could provide the answer we’re all looking for, but if in doubt the final instalment of the Divergent series may provide some closure.