The Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry released its final report on Monday. The report includes 76 recommendations intended to address significant problems that were illuminated during the Royal Commission’s review process.
Within the wealth management sector, the main problems raised relate to episodes of:
- High fees and/or low value-for-money services,
- Conflicts of interest,
- Lack of transparency, and
- Poor access to quality, trustworthy financial advice for consumers.
The industry’s regulators, mainly ASIC and APRA, were also called out for being ineffective in enforcing and addressing the misconduct that was dramatically surfaced during the Royal Commission.
The report has not recommended major structural reforms of the financial services industry, but focuses on greater protection for consumers to restore public trust in a very important but flawed industry.
Key areas of recommended remediation in the wealth management sector focus on:
- Eliminating fee for no service arrangements,
- Eliminating commission arrangements that compromise a client’s best interests when receiving financial advice,
- Likely repeal of grandfather commission arrangements already in place,
- More robust education standards and disciplinary actions for financial advisors to improve the quality of services provided (the impact of potential requirements on advisors has drawn much debate as there is concern that increased compliance costs will lead to higher fees to clients),
- More stringent disclosure requirements if a service provider lacks independence.
Time will tell how many of the report’s recommendations are eventually adopted by policy-makers and regulators, especially with a federal election on the horizon. However, an optimal result in the long-term can be achieved if the following two broad themes are adopted:
Put the client’s interest first: We recognise that banks and wealth management institutions operate to make a profit and create value for shareholders. However, this should always be achieved by putting the client’s best interests at the centre of an institution’s activities and providing demonstrable value-for-money. Ultimately, this will create long-term client relationships that lead to greater shareholder value over time. As noted in the final report: “Providing a service to customers was relegated to second place”. Actions in the wake of the report must be viewed through a “client first” lens to produce the best “new version of Australia’s financial services industry”.
Embrace change: Fundamental change in an industry can be uncomfortable and costly at the onset. This needs to be recognised and embraced, as the eventual outcome will be a healthier, more stable and trustworthy industry. Of course, this is easier said than done. It will require a significant shift of cultural mindset, moving an institution’s desire to take risk at the expense of consumers to a desire to take risk (investing in the future) for the benefit of consumers.
This is where financial technology (“fintech”) can play a very important role.
Fintech is an emerging industry in Australia that aims to use technology to address many of the problems in the financial services industry. This technology leads to services and products that either compete with, or complement, traditional ways of delivering financial services, leading to increased competition that typically stimulates change from existing providers.
The fintech industry is responsible for many of the transformative innovations we’re already seeing (and using) in wealth management, from new methods of payments to digital “neobanks”.
Six Park is one of many fintech businesses making inroads in Australia, delivering investment management services (sometimes called robo-advice) in a highly professional, transparent and relatively low-cost manner. Importantly, our service is highly accessible due to the technology we have developed and the benefits of automation.
In the US, the Global Financial Crisis was a catalyst for change within the financial services industry. Consumers demanded better investment services, and innovative fintech companies stepped up to respond. In the robo-advice market, substantial independent services such as Wealthfront and Betterment now manage tens of billions of dollars for clients, while virtually every major financial institution has launched its own version of a low-cost/low-touch investment management service (Vanguard’s robo service manages more than US$100 billion, while the venerable Goldman Sachs has recently taken an ownership position in UK-based robo-advisor Nutmeg).
The fintech community is growing rapidly in Australia. At Six Park, we are seeing greater interest from traditional financial service firms to explore partnerships to deliver better solutions to a broader, underserved market. Our hope is that on the heels of the Royal Commission, this is a sign that real transformation of the financial services industry is under way.
Pat Garrett is Six Park’s CEO and co-founder.