The Problem with Big Banks and Financial Advisers

Do you go into an Apple store to purchase a Samsung Galaxy?

Do you ask the Holden dealer about buying a Ford?

Of course not.

You know they can only promote and sell their product…irrespective of whether the competition is better or not.

But what about financial planning advice?

When you walk into one of the Big Six banks — CBA, NAB, Westpac, ANZ, Macquarie and AMP — do you expect to be given ‘conflict free’ advice…a competitor’s product?

In theory, the answer is ‘yes’. But in practice only the naïve would expect one bank to promote another bank’s product.

However, what if you walk into a planning firm that, for all outward appearances, doesn’t look like it has a direct or indirect association with one of the Big Six?

You go there thinking/hoping/praying you’ll receive advice that’s in your best interest…no bias.

Sorry to disappoint you.

In the business section of last Thursday’s The Australian was this headline:

‘ASIC slams banks over funds failure’


The banks are always being slammed by ASIC. Fat lot of good it does.

Anyway, don’t let the truth get in the way of ASIC’d latest public relations exercise.

According to the article (emphasis is mine):

The Australian Securities & Investments Commission revealed explosive results of its latest investigation into the nation’s financial advice industry…

Explosive results?

What could ASIC have possibly unearthed?

In its review that took place over two years — focused mainly on superannuation products provided by the major banks — the watchdog found financial advisers did not comply with their duty to act in the best interest of clients in 75 per cent of advice files it reviewed.’

Shock. Horror. Who would have thought that?

You know what’s explosive about that result?

That it is only 75%.

For sure, I thought the number would be higher.

The other explosive revelation was that it took two years and countless millions of dollars to discover what I and others could have told ASIC in two minutes.

The Big Six haven’t established, bought or taken ownership stakes in financial planning businesses because they’re hugely profitable enterprises.

The sole purpose for institutions getting involved in financial planning is to build direct pipelines to their products.

Fee revenue from fund management is gold…this is the honey pot in the investment business.

The so-called ‘explosive results’ are old news.

My book — How Much Bull can Investors Bear? — was written to debunk many of the investment industry myths.

The following are edited extracts on the thorny issue of ‘conflicts of interests’…

The share market resurgence in the 1990s and 2000s was instrumental in the growth of the investment industry. The highly profitable opportunity from having funds under management did not escape the attention of major institutions. Over the past two decades, the institutions have staked their claim in the industry by acquiring financial planning firms and fund management businesses…with the former channeling client money into the latter.

With nearly $3 trillion tied up in the wealth management industry (generating tens of billions in annual management and administration fees), it’s easy to see why the cottage industry of the 1980s is now dominated by the big end of town.

This is serious business.


With commitments to meet, very few planners can afford to adopt this contrarian advice model [cash up in a boom and buy in a bust]. This creates a conflict…do you stop clients from self-harm (and, in doing so, harm your income earning capacity), or do you go along to get along?

There are a number of inherent conflicts of interest in the financial advice business model…and the major conflict is that over 80% of financial planners have direct or indirect ties to institutions.


Financial planners rely on economic and market information that comes primarily from two sources: investment institutions and research firms. These commentaries are largely predictable. They’re always wise after the event, but rarely ever before it. In my opinion, institutional economists are professional marketers. They’re always going to stick to the script and promote the institutional line — ensuring money continues to flow into their employers’ funds.

The institutional economists are the media’s go-to people whenever a market or economic commentary is required. In spite of their pretty average (disappointing) track records, they project credibility. The public is constantly fed the same old spin — “things will keep going up”, or, if they are down, “they will soon go up”. Any economic downturn is destined to be a “soft landing”.

The name of the game is not to do or say anything that spooks investors or potential investors.


You don’t have to be a conspiracy theorist to appreciate that the investment industry will avail itself with the best and brightest marketers to convince you they have the solutions to your concerns.

However, the industry — due to an overreliance on the share market for its relevance — is part of the problem, not the solution.

The other major problem in the industry is figuring out “who owns who?” and “who is working for whom?” Is your adviser working for you, themselves, or their institutional owner?

This extract is from consumer advocacy group Choice, titled: Financial adviser reforms long overdue:

Conflicted Interests

‘Relationship adviser are co-dependent with the companies who make the products they sell.

  • Our [Choice] 2010 investigation revealed that Australia’s six largest financial planning groups had consistently directed customers to their own superannuation products.
  • The breakdown showed deep-rooted conflicts of interest, since advisers were clearly inclined to recommend products that stood to increase their commissions.
  • In all, advisers recommended products from their direct or indirect employer a whopping 73% of the time.
  • There were unlikely to be the best products for their clients.
  • Worse, these fee schemes are often ongoing (a phenomenon known as trailing fees ) and unaccountable.

‘In 2009 alone, around $1.3 billion in superannuation commissions flowed from consumers to advisers. That’s despite the advisers providing no service to the consumer.

Depending on your perspective, the industry’s business model either works like a charmor is deeply flawed. If you’re the provider of products and advice, the system is perfectly OK. However, if you’re the recipient of the advice and products, you need to tread cautiously.

Knowing how to spot the industry’s bull and bias is going to be critical to your financial well-being in the challenging times we face.


The fact that we’ve had government inquiries into the advice provided by the industry is proof of this [conflict of interest]. The incentives within the industry means there’s an inherent conflict of interest between the adviser and you.

Over 80% of financial planners are owned or associated with one of Australia’s six largest institutions the Big Four banks, AMP and Macquarie. All six have been named and shamed for doling out poor advice.

Institutions own or have a business arrangement with financial planning groups in order to ensure funds flow into their products. That’s the name of the game.

An adviser aligned with CBA is not going to recommend ANZ any more than a Holden dealer would recommend you buy a Ford.

Financial planners do not have appropriate advice targets; they have sales targets. They need to sell you their institutional master’s product. The financial planners I know are caring people with the highest of integrity, but they operate in an environment where the game is rigged towards the “house”.

As long as institutions are permitted to employ or own financial planners, the conflict of interest issue remains.

It’s this last point that’s the elephant in the room.

Blind Freddy can see that all it takes to stop the loop of bad advice and conflicts of interest is to ban product providers from having ANY association (direct or indirect) with financial planners.

The two should be separated by law…punishable with jail terms and asset confiscation for the offending executives.

A couple of high-profile examples is all it’d take to stop the conflicts of interest in their tracks.

For this to happen, the government has to decide who it’s governing for…the greater public good or the financial interests of the institutions?

We know the answer to that one.

Therefore, it’s a case of ‘caveat emptor’.

If you want genuine independent advice with absolutely no conflict of interest, then please go here.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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