YBR announced that Yellow Brick Road Investment Services has entered into a book sale and purchase agreement with INPRO Australia.
The transaction will see INPRO senior financial adviser Alex Kean acquire YBRIS’ advice service relationships, records and recurring revenues – impacting about 150 private clients.
YBR said the decision to sell is based solely on the YBR Wealth division focusing on the scale provided by the YBR branch franchisee and Vow adviser and broker network, and other platforms.
INPRO will pay $425,000 for the client book; about 80% of which is payable upfront. The remainder is to be paid 12 months post-completion, adjusted depending on revenues.
YBR executive chairman Mark Bouris said it is important that clients are provided with the best financial service possible, saying INPRO is in a better position to offer this than YBR.
“YBRIS is a stand-alone legacy business within the broader YBR Wealth division of the YBR Group and its portfolio did not fit within the operational structure required for a branch and broker focused network,” Bouris said.
INPRO is delighted with this announcement and is looking forward to working with YBR’s wealth clients, Kean said.
“INPRO has a long and proud history of working closely with clients to deliver tailored advice solutions in a professional, yet highly personalised manner. Our clients value our integrity, transparency and dependability which we’re confident the YBR clients will also embrace,” he added.
YBR will work with INPRO to ensure a seamless transition, he added. The transaction is expected to be complete within two months.
In what could be seen a a recognition of the intrinsic conflicts of interest between advice and product manufacturing, CBA has announced that it will demerge its wealth management and mortgage broking businesses. It will also undertake a strategic review of its general insurance business, including a potential sale. No financial details were provided, ahead of the AGM on 8th August.
CBA’s Retail Banking Services (RBS) division will now include Bankwest. In addition, RBS will also include Commonwealth Financial Planning, designed to deliver better customer outcomes through a new safer, simpler, and more scalable model for financial advice. RBS will also have responsibility for General Insurance while the strategic review of that business is underway.
CBA says these initiatives will result in the creation of a leading independent wealth management business and enable CBA to enhance its focus on its core banking businesses in Australia and New Zealand and create a simpler, better bank.
The demerged business, CFS Group, will include CBA’s Colonial First State, Colonial First State Global Asset Management (CFSGAM), Count Financial, Financial Wisdom and Aussie Home Loans businesses.
CFS Group will benefit from a separate listing and ability to pursue its own growth strategies.
CBA says the move will unlock greater value for shareholders through the separation of CBA’s wealth management and banking businesses.
ASIC should consider replicating the UK’s ‘restricted’ regulatory model in order to make financial advice affordable for more Australians, argues NMG Consulting via InvestorDaily.
In his latest Trialogue note, NMG Consulting partner Oliver Hesketh made the case for financial advice that is exclusively tied to in-house product.
The ‘tied’ advice regulatory model, which operates in the UK as ‘restricted’ advice, involves a “very clear understanding between the customer and the adviser that only in-house product will be offered”, Mr Hesketh said.
At present, holistic advice is prohibitively expensive for the vast majority of Australians unless it subsidised by a vertically integrated business model, he said.
“If vertically integrated advice models can no longer be tolerated, or the cost of regulation renders it unfeasible, that means around 900 thousand Australians would be left without any financial advice at all,” Mr Hesketh said.
Intra-fund advice, on the other hand, is of limited value to super fund members, he said (it doesn’t even allow the adviser to consider the superannuation balance of their spouse).
The solution could be to adopt a similar ‘tied’ regulatory model as the UK, which would “allow industry funds to offer a valuable, lower-cost proposition to more members than they can realistically target today”, Mr Hesketh said.
“It’s difficult to believe the regulator might entertain a tied advice regime right now, but in our view at least, consumers would be well-served by a third regulatory framework for financial advice that recognises the cost of maintaining true independence in advice may be more than the average Australian is prepared to pay,” he said.
Mr Hesketh will be speaking at the 18th Annual Wraps, Platforms and Masterfunds Conference on 1-3 August in Crowne Plaza Hunter Valley.
According to the Treasury, the retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework.
The first stage in this framework is the introduction of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993, which will require trustees to develop a retirement income strategy for their members. The covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement.
They have published a position paper which outlines the principles the Government proposes to implement in the covenant and supporting regulatory structures. Consultations close 15 June 2018.
The retirement income framework
The retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework. The framework is intended to:
enable individuals to increase their standard of living in retirement through increased availability and take-up of products that more efficiently manage longevity risk, and in doing so increase the efficiency of the superannuation system and better align the system with its objective; and
enable trustees to provide individuals with an easier transition into retirement by offering retirement income products that balance competing objectives of high income, flexibility and risk management.
In December 2016, a discussion paper on Comprehensive Income Products for Retirement (CIPRs) was released for consultation[1]. Submissions closed on 7 July 2017. The Department of the Treasury (Treasury) received 57 written submissions on the discussion paper, and met with more than 100 organisations.
That consultation revealed that there is broad agreement on the importance of what the CIPRs policy is seeking to achieve, but divergent views on the best way to achieve the objectives.
In addition, some stakeholders stressed the importance of finalising the social security treatment of pooled lifetime income products first. The Government announced the treatment of the social security means test rules for new and existing pooled lifetime income products in the 2018‑19 Budget.
Having taken steps to remove barriers to the introduction of pooled lifetime income products, the Government plans to prioritise progress on the development of a retirement income covenant.
The Government has also announced it will progress the development of simplified, standardised metrics in product disclosure to help consumers make decisions about the most appropriate retirement income product for them. Other elements of the framework will be developed progressively:
reframing superannuation balances in terms of the retirement income stream they can provide, by facilitating trustees to provide retirement income projections during the accumulation phase; and
a regulatory framework to support the other elements of the retirement income framework including definitions, any necessary safe harbours, requirements for managing legacy products and other details.
Retirement income covenant
On 19 February 2018 the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced the establishment of a consumer and industry advisory group to assist in the development of a framework for CIPRs.
The central task of the advisory group was to provide advice to Treasury on possible options and scope of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993 (SIS Act). The group strongly supported the idea of a retirement income covenant and provided advice on the proposed framework. This feedback has helped shape the proposed approach set out in this paper.
As part of the Government’s More Choices for a Longer Life Package in the 2018-19 Budget, the Government has committed to introducing a retirement income covenant as a critical first stage to the Government’s proposed retirement income framework. This will codify the requirements and obligations for superannuation trustees to improve retirement outcomes for individuals.
Existing covenants in the SIS Act include obligations to formulate, review regularly and give effect to investment, risk management and insurance strategies; but not a retirement income strategy.
Introducing a retirement income covenant will require trustees to consider the retirement income needs and preferences of their members. It will ensure that Australian retirees have greater choice in how they take their superannuation benefits in retirement. This should allow retirees to more effectively choose a retirement product that aligns with their preferences, improving outcomes in retirement. The proposed obligations for inclusion in the covenant are outlined in the section ‘Covenant principles’.
The covenant will be supported by regulations to provide additional guidance and outline in more detail how trustees will be required to fulfil their obligations. Appropriate enforcement will also be part of the framework. The ‘Supporting principles’ section outlines the principles and guidelines that would be included in regulations (and possibly prudential standards). Implementation of these regulations may require adjustments to existing regulations and instruments.
Finally, additional principles have been identified that may be appropriate for inclusion in the retirement income framework, but which are not being fully developed at this time. These principles will form part of the regulatory framework to be progressed at a later date.
The covenant and supporting principles would apply to trustees of all types of funds except Australian eligible rollover funds (ERFs) and defined benefit (DB) schemes that offer a DB lifetime pension. The Government considers that it would not be appropriate to require trustees of these fund types to develop a retirement income strategy because ERFs do not have any members in retirement and a DB lifetime pension already reflects an implicit retirement income strategy.
While all members of the advisory group provided valuable input and insights which have helped inform this position paper, the positions expressed in this paper are those of the Government.
The retirement income framework, including the covenant, will be implemented with an appropriate transition period to allow sufficient time for industry to adjust. The Government proposes to legislate the covenant by 1 July 2019 but to delay commencement until 1 July 2020. This timing would allow the market for pooled lifetime income products to develop in response to the changes to the Age Pension means test arrangements announced as part of the 2018-19 Budget and for other elements of the framework to be settled.
[1] Treasury, Development of the framework for Comprehensive Income Products for Retirement, Canberra, 2016.
Macquarie Group is consolidating its private bank and private wealth businesses to concentrate its growth strategy on high net-worth (HNW) clients, a move it expects to affect advisers.
This underscore the transition in wealth management, as players morph their businesses in the light of the “best interest” requirement, and the fact the providing such advice is costly, and cannot be done en masse. So the focus will be on HNW investors.
HNW clients are already the exclusive focus of Macquarie’s private bank. They are also a substantial proportion of its private wealth business.
The announcement was made by Macquarie’s Banking and Financial Services group (BFS), which also looks after retail banking activities. The gearing towards HNW investors in the bank’s private wealth and banking business will have no impact on BFS’s retail banking strategy which includes home lending, deposits and credit card solutions for consumer clients.
Macquarie head of wealth management Bill Marynissen said concentrating on one client segment will enable it to deliver better on a comprehensive and tailored wealth and banking offering that can take clients from wealth accumulation stages through to retirement.
“Focusing on attracting high net-worth clients is a logical evolution of our private client business and we believe it is a space in which we can be a market leader,” Marynissen said.
“We have carefully assessed growth opportunities in the high net-worth segment against the strong fundamentals of our business. These include a deep understanding of the high net-worth segment, our wealth and banking expertise and suite of solutions, and the capacity to build on our existing digital capabilities.”
Australia has more than 1.2 million adults with wealth of $1.3 million or more, ranking it among the top 10 countries globally for HNW individuals. The segment swelled 7.4% or by 80,000 adults since 2011.
Many advisers will be impacted by the decision to concentrate the focus of the combined private bank and private wealth businesses to HNW clients, according to Macquarie’s wealth management division.
“Macquarie is supporting these advisers in a number of ways, including by facilitating discussions with other firms and assisting with their transition,” the bank said.
ANZ will no longer factor in sales incentives while calculating bonuses for its financial planners and boot them out if they fail an audit twice, the bank announced today.
As ANZ attempts to revive its advice business after Royal Commission hearings and ahead of IOOF acquisition, chief executive Shayne Elliott admitted the bank had failed some of its financial advice customers.
“We know it has taken too long for changes to occur, so where we see solutions we will act. That’s why we are getting on with these initiatives now,” he said.
On April 23, it was revealed ANZ kept a “leaderboard” that ranked advisers on the revenue they brought in.
It changed its revenue-centric adviser remuneration on April 12 – less than two weeks before the RC’s questioning of ANZ chief risk officer and head of digital and wealth Australia, Kylie Rixon. The bank then limited revenue-based measures to only 15% of compensation criteria and abolished the leader board, Rixon said.
Today, ANZ said it has removed all sales incentives for bonuses and will now only asses performance on customer satisfaction, risk and compliance standards and ANZ values.
To keep its adviser pool clean of inappropriate planners, ANZ is promising to boot out planners if they fail an audit twice.
It is also placing higher expectations on the qualifications of its advice professionals after last month, senior counsel assisting Rowena Orr revealed that only 35% of all financial advisers have completed a bachelor degree or above.
Financial planners looking to work with ANZ will now need to have a relevant undergraduate degree and industry certification.
The bank said it will push existing planners to enrol in further training by January, 2019.
ANZ is promising to compensate 9000 clients who received unappropriated advice from ANZ professional, by the end of the year.
Earlier last month, ANZ footed a $50 million bill in compensating its fee-for-no-service bungle for its Prime Access Clients, also copping an enforceable undertaking from ASIC.
At the time, ASIC said the compensation program was “nearing completion”.
ANZ anticipates $50 million in legal costs stemming from the Royal Commission for the year ending September , it revealed in an earnings report.
The bank’s wealth business is set to be acquired by IOOF.
On April 24, IOOF announced that it has cleared all regulatory hurdles in acquiring OnePath’s pension and investments and four aligned dealer groups.
The deal was announced in September 2017 and at the time IOOF would pay about $975 million.
On May 2, Financial Standard reported that IOOF had updated the market on ANZ’s 1H18 financial results, ahead of the acquisition.
ANZ’s 1H18 results reveal that cash profits in its wealth division slid by 24% to $44 million. ANZ said this was because of a non-recurring lenders mortgage reinsurance profit share being included in the 1H17 results, strengthening of claims provisioning in 1H18 and lower new business volumes in ANZ Financial Planning.
The bank is also offering a no-cost advice review to all its financial planning customers who “may have concerns about their current financial position”, it announced today.
There is currently no legal requirement for product providers to move legacy clients into cheaper products, but that could change in the wake of last week’s royal commission hearings, says NGM Consulting.
Product providers could be the next in line for an explicit ‘best interests’ obligation following the revelations at the royal commission hearings last week, says NGM Consulting.
In its latest ‘Trialogue’ article, NGM Consulting noted a distinct “adjustment” at last week’s hearings when it comes to product providers.
“It relates to the test that we should use when making ‘conflicted decisions’, where the interests of consumers are at odds with the commercial interests of the firm,” said NGM.
Counsels assisting the commissioner delved into examples where product providers had a range of products, said NGM – “the more contemporary of which are unambiguously known to be better and cheaper than the older, legacy products.”
“An adviser might be expected to shift the client into the better product, but as a product manufacturer many have declined the opportunity to carve up their own revenue line to ensure clients are shifted to the more contemporary product solution,” said NGM.
One example came about in evidence of AMP head of platform development John Keating, who failed to explain why clients had not been moved out of platforms AMP’s own benchmarking guide rated as ‘uncompetitive’ with the broader market.
It is unlikely product providers would fall into legal trouble for this kind of behaviour, said NGM – “until now”.
“There is a test of ‘community standard’ being applied to decisions made by for-profit institutions,” said the consulting firm.
“Regardless of where this all lands, it’s clear any attempt to walk-back the standard from the new high set by the commission will not help the industry’s reputation.”
Public hearings into the financial advice sector continued on Friday as BT Financial Advice general manager Michael Wright continued giving evidence.
Counsel assisting Rowena Orr grilled Mr Wright on the remuneration practices of Westpac/BT and whether its planners could be considered professionals when they are incentivised with sales targets.
Mr Wright said that while advisers are not viewed as ‘professionals’ by Australians in the same way that doctors are, the perception is changing for the better.
Furthermore, he said, the ‘balanced scorecard’ for Westpac advisers will be changed to include more non-financial factors.
“We’ll be setting peoples’ remuneration off their qualifications, based off their competency as an adviser, based off the standards that they go through with advisers,” he said.
“We will not set people’s remuneration – fixed or variable – based off how much money they write,” Mr Wright said.
However, Ms Orr pointed out that one-fifth of the ‘balanced scorecard’ for the company’s advisers will include financial measures.
“We debated this long and hard. The reality is we want to have a viable, sustainable, professional business. We’ve not a charity,” he said.
“We considered removing revenue from the scorecard and having 100 per cent non-financials,” Mr Wright said.
From 1 October 2018, Mr Wright said, BT will be ending grandfathered commissions for superannuation and investments – although risk commissions will remain (as per the Life Insurance Framework).
When it comes to the advice business he oversees, Mr Wright said he would be “delighted” if BT moved to a completely fee-for-service model.
However, with his “BT product provider hat on”, he said there is a first-mover disadvantage to being the first institution to end grandfathering completely.
Today we take a look at the latest from the Royal Commission into Financial Service Misconduct, which recommenced its hearings yesterday again, with a focus on the Financial Planning Sector.
Financial Advisers provide advice on a range of areas of consumer finance, investing, superannuation, retirement planning, estate planning, risk management, insurance and taxation.
ASIC says between 20 and 40% of the Australian adult population use or have used a Financial Planner. That means that around 2.3 million Australians over 18 received advice. A number of issues have surfaced in recent years, including charging fees for no service, or advice not provided in full, the provision of inappropriate financial advice, as well as improper conduct by financial advisors and the misappropriation of customer’s funds.
There has been massive growth in the number of financial advisers, to more than 25,000 up 41% from 2009. 5,822 Financial Advice licences were issued in Australia to firms able to offer advice. What you may not know is that the top five players in Financial Advice in Australia are the big four banks and AMP, who together have nearly 48% of the $4.6 billion dollars in annual revenue. 30% of advisers work for one of the major banks and 44% work for the top 10 organisations by revenue, so it is very concentrated. Then there is a long tail of smaller organisations with 78% operating a firm with less than 10 advisors. The average advice licence covers 34 individuals operating under it.
There have been a number of significant scandals relating to the provision of financial advice in recent years.
Townsville based Storm Financial encourage investors to borrow against their home to invest in indexed share funds, in a “one size fits all model” of advice. Storm collapsed in 2009 will losses of more than $3 billion dollars. Around 3,000 of its 14,000 clients had suffered significant losses. Many of the investors were retired or about to retire, and with limited assets and income. Some lost their family homes or had to postpone their retirement. The founders were found to have caused or permitted inappropriate advice to be given and had breech their duty of care under the corporations’ act. Specifically, the one size fits all model of advice failed to take into account individual circumstances which led to devastating consequences for the individual investors. They had focused too much on the profitability of the business as opposed to the best interests of individual investors. ASIC worked with a number of major players for customers who had made investments through Storm. CBA undertook to make $136 million dollars in compensation to many CBA customers who borrowed from the bank to invest through Storm and who had suffered financial losses. This is in addition to $132 million CBA paid under the Storm resolution scheme. ASIC looked at settlements distributed by Macquarie Bank to Storm investors leading to a revised agreement where the bank agreed to pay $82.5 million by way of compensation and costs. Bank of Queensland agreed to pay $17 million as compensation for Storm related losses.
The second scandal involved Commonwealth Financial Planning Limited. A whistle-blower revealed allegations of misconduct within CFL to ASIC in 2010. It was suggested that some advisers were encouraging investors to invest in high risk, but profit generating products which were not appropriate. Some were even switching products without the client’s permission. This also included forging client signatures. When the GFC hit in 2008, thousands of CFL clients, many of whom were nearing or in retirement, lost significant amounts as a result of this misconduct. More than $22 million was paid to clients in compensation for receiving inappropriate financial advice from two financial planning advisers. Later it became evident the misconduct was more widespread so CBA implemented a second programme of compensation relating to advice from advisers. Their Open Advice programme had conducted more than 8,600 assessments, of which more than 2,500 required compensations to a total of $37.6 million has been offered.
So turning to the hearings. First up was Peter Kell from ASIC who described the “Fee for no service” problem.
The Future of Financial Advice reforms (FOFA) has tightened the rules, but the fees can be significant. And as we will see, some players simply took the fees to bolster their profits.
Next up was AMP, and we heard over the next day or so of more than 20 occasions when AMP failed in their duty to notify ASIC of a number of potential breaches.
Despite the fact AMP was aware of a range of issues they simply allowed the practices to continue. There was an absence of monitoring activities, what AMP said it was going to do to ASIC, e.g. training for staff in new procedures was different from what they actually did. The issues had been occurring since 2009, and AMP acknowledge that on at least 20 occasions they made false and misleading statements to ASIC about potential breeches.
Worse, the Royal Commission revealed today that AMP’s law firm, Clayton Utz, removed outgoing chief executive Craig Meller’s name from a draft of a critical report about the business.
So once again we see the cultural norms in financial services driving poor behaviour, which may bolster profits but at the expense of their customers, and an apparent willingness to avoid the issues with the regulators. This is shameful, but not surprising.
So we see mismanagement again, and failure of regulation.
We suspect we will see more of the same in the day ahead. Frankly I am not surprised because the cultural norms we see displayed here are precisely the same as were observed in the previous lending related hearings. The quantum of change required within our financial services organisations is profound and I also believe the scope of the Royal Commission should be expanded to include the role and function of our regulators.
Multiple failures are clearly costing households dear. But then the companies seem willing to cop the settlements, and move on, without root cause analysis and fixing the problem. This is not acceptable behaviour in my book and is well below community expectations.
Wells Fargo’s review of its wealth management business threatens to broaden its reputational damage, according to Moody’s.
Last Thursday, Wells Fargo & Company filed its annual 10-K report with the US Securities and Exchange Commission. The report disclosed the existence of an ongoing review by Wells Fargo’s board of directors into potentially inappropriate referrals or recommendations at its Wealth and Investment Management (WIM) business, as well as a separate company review of fee calculations within WIM that resulted in overcharges for some customers. The existence of these reviews is credit negative.
Before last week’s disclosures, Wells Fargo’s inappropriate sales practices centered on its large retail banking operations. Since September 2016, when Wells Fargo first announced regulatory settlements related to retail banking sales misconduct, the bank has also disclosed issues in its auto lending business and in its assessment of fees for mortgage rate-lock extensions. These disclosures have resulted in significant reputational damage.
Consequently, we believe Wells Fargo’s reputation would suffer further if inappropriate practices were found in its nationwide WIM business.
Wells Fargo has made rebuilding trust its top priority, and over the past year and a half has taken numerous credit-positive steps to strengthen its governance and risk oversight. However, the widespread nature of Wells Fargo’s wrongdoing also resulted in a broadly publicized consent order with the US Federal Reserve that restricts the bank from growing its balance sheet beyond its year-end 2017 size and calls for more enhancements to its governance and risk management.
These circumstances, and the heightened scrutiny that Wells Fargo faces, magnify each additional revelation of inappropriate practices. Therefore, although the newly disclosed reviews into Wells Fargo’s WIM business are in their preliminary stages, we believe they undermine the bank’s effort to rebuild trust.
Moreover, the board’s review into whether there have been inappropriate referrals or recommendations affecting WIM’s brokerage and other customers was initiated in response to inquiries from US government agencies, raising the possibility of another regulatory sanction at the conclusion of the review. Similarly, Wells Fargo’s filing highlighted a separate internal review of policies, practices and procedures in its foreign-exchange business that is also a response to inquiries from government agencies.
Wells Fargo’s 10-K also included a report from its auditor, KPMG, in which KPMG expressed an unqualified opinion on Wells Fargo’s financial statements and an unqualified opinion on the effectiveness of its internal controls over financial reporting. This is positive because it indicates that Wells Fargo’s auditors do not believe the bank’s aggressive sales practices compromised its financial reporting in any material respect.
