The value of independent ownership in banking and financial services has never been clearer as the Royal Commission is now in full swing.
The mammoth inquiry into the conduct of the industry has uncovered a key finding; vertical-alignment in banking and financial services has a bleak future.
It’s an unfortunate truth with many Australians having had their lives rocked as the big four (and others) failed to deliver on their promises and demonstrate competence in their conduct, or act in the best interests of their clients.
Could this be due to conflicts in remuneration and ownership structures? Absolutely.
There are several cases being presented that demonstrate a shortfall in the ability of the big four banks, and those who distribute their products to place consumers’ best interests before their own. Many consumers have lost their homes as collateral for a loan that should not have been approved and even more have been charged for services they’d never received.
Here’s a little background on a key conflict
In 2017, an ASIC review of mortgage broker and lender remuneration uncovered that not only are many brokers receiving both upfront and trail commissions, lender’s staff are also receiving monetary incentives. The regulator even saw volume-based payments in absolute dollar terms over $300,000 which they also found may have influenced broker and lending staff behaviour.
ASIC’s report said that this remuneration culture was providing an incentive for the broker or lender to place their customer into larger or inappropriate loans, leading to the poor consumer outcomes we’re seeing discussed in the media today.
Further to conflicted remuneration issues, ASIC also found that ownership structures aren’t providing an environment conducive to healthy competition or responsible conduct. Many of the big four banks, who manufacture lending products for consumers, also own that product’s distribution channel.
This vertically-integrated business model means that whilst a broker or aggregator may appear to have a large menu of products available, the ultimate owner of those who manufacture those products may be significantly smaller. For example, Aussie Home Loans, a prominent home loan broker, advertises a product menu of lenders including CBA, Bankwest, and Aussie. The hidden reality is that all these lenders are owned by the Commonwealth Bank of Australia, further supporting that the value of independent ownership in banking and financial services has been never been clearer.
It’s happened before
In 2013, the financial advice sector went through a similar experience, known to many as the Future of Financial Advice (FoFA) reforms. The rationale for the reforms was to help protect consumers from poor financial advice and build trust and confidence in the sector. This transformative change in legislation targeted four key measures:
- Best interests duty – requiring all financial advisers to act in the best interests of their clients and place the client’s interests ahead of their own.
- Opt-in – requiring financial advisers to renew their client’s agreement to ongoing fees every 24 months.
- Fee disclosure statements – requiring financial advisers to disclose to their clients in plain terms the fees that they have paid for the past 12 months and the services to which these fees relate.
- Conflicted remuneration – placing a ban on all remuneration that could influence any general or personal financial product advice to retail clients.
Pre and post-implementation, this new regulatory framework exposed many shortfalls in financial planning organisations that were vertically-integrated or had conflicting relationships with the banks. Many clients were not advised in their best interests, many were paying fees for services they didn’t know they were entitled to and many clients were left worse off after receiving advice.
In short, FoFA built a stronger case for consumers to receive financial advice from an adviser external to a bank or large financial institution – someone independently-owned, and someone who was able to demonstrate they’re able to act in the best interests of their clients.
The benefits of receiving advice from an independently-owned adviser extend well beyond their professional framework. Their culture for client service excels too. This is because each client plays a significant role in the adviser’s business’ performance. A client of an independent adviser is not a number on a page, they’re engrained in the values of the business and are provided advice to the highest standard possible.
The same could be said for any independently-owned business in Australia’s banking and financial services industry and it’s certainly a feature that Trilogy advocates.
Our business is 100% owned by directors and staff. We know many of our investors by name and we are here, first and foremost, to provide products that we believe will help reach their financial goals. We take a best-practice approach to disclosure that many of our competitors ignore. In fact, we encourage our investors to research all our disclosure materials thoroughly before making a decision to invest, because we want to ensure they’re making the right decision for them.
It’s for these reasons, combined with the position of our products in the market, that the growing number of Australians who don’t trust the banks are turning to Trilogy for alternative investment products. The performance and returns provided by our flagship fund; the Trilogy Monthly Income Trust, has helped thousands maintain regular income in the perpetually low interest rate environment.
With the value of independent ownership in banking and financial services never clearer and interest rates showing no signs of increasing, now could be the right time to explore alternative investment products among your own portfolio.
To learn more about out how we’ve helped thousands of Australians from all walks of life achieve their goals, head to trilogyfunds.com.au/monthly-income or chat to a member of our Investor Relations team.
This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity and issuer of units for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722. Trilogy has issued a Product Disclosure Statement for the Trust which is available at www.trilogyfunds.com.au or by contacting us. Applications will only be accepted on the current application form that accompanies the PDS. You should obtain a copy, understand the risks, and seek personal advice from a licensed Financial Adviser before investing. Investment in the Trust is subject to terms and conditions, and risks which are disclosed in the PDS. These risks include the risk of losing income or principal invested. The Trust is not a bank deposit and Trilogy does not guarantee its performance. Trilogy provides only general financial product advice on its own products and does not consider your objectives or financial situation.