In spite of existing regulation and considerable focus on managing conflicts of interest over the past few years, the Royal Commission proved that it remains a big issue. It begs the question of whether “managing” conflicts is enough or if we should be looking at solutions that help advisers avoid them altogether.
There was wide conjecture that the Royal Commission would lead to the end of vertical integration and thus a hard separation between product and advice. This action was ultimately deemed too costly and disruptive with the Commission taking the view that the model still holds some benefits for investors, including efficiencies of scale. The decision is debatable, but the fact is that there is a crisis of trust in the advice space and the issue of conflicts must be resolved.
So what can advisers do to avoid rather than just manage their conflicts? Here are our top go-tos for dealing with conflicts in the aftermath of the Royal Commission.
Many of the benefits touted by proponents of vertical integration can these days be achieved through technology, including efficiencies of scale and better access to affordable advice.
Advisers can also take advantage of emerging fintech solutions to streamline administration and provide clients with greater transparency of their assets and performance. These benefits, combined with an increasing preference for digital and self-service solutions, can go a long way in re-building investor trust.
Managed Discretionary Accounts
Traditional wraps and platforms also help advisers simplify administration and scale their businesses, but they introduce conflicts of interest. The good news is that there are alternative solutions which are just as easy for advisers to manage and support them to deliver best interest advice. At the top of the list are Managed Discretionary Accounts or MDAs which, if properly structured, can separate the investment manager from the planner and research provider.
Additionally, MDAs allow advisers to manage each client’s investment portfolio according to their defined objectives and risk appetite. HIN-based MDAs are even more ideal as they provide investors with greater transparency and beneficial ownership of their assets.
Rigorous compliance and disclosure
It’s incumbent on the entire industry to keep innovating and ultimately move away from products, services and business structures that come with inherent conflicts. Meanwhile, advisers must manage any and all conflicts in accordance with regulation and offer clients full disclosure if they are lacking independence. As highlighted by the recent report by IMAP on the Royal Commission and Managed Accounts, this will “materially assist clients in understanding the potential conflicts in the advice they receive.”