This alarming figure comes from the Australian Securities and Investment Commission’s recent evaluation of financial advice provided by the big four banks (ASIC).

Even more astonishing, 10% of advise was discovered to put investors in a worse financial situation.

Commonwealth Bank, National Australia Bank, Westpac, ANZ, and AMP offer ‘in house’ financial advice through a “vertically integrated corporate model,” and collectively control more than half of Australia’s financial planners.

It’s no surprise that advisers at these banks preferred financial goods linked to their parent company, with 68 percent of client assets put in ‘in house’ items rather than external products on the firms’ list, according to ASIC’s investigation.

Why is the integrated financial counseling approach used by banks flawed?

It’s difficult to imagine the banks can maintain a straight face while claiming to follow the responsibility of advisers to behave only in the best interests of their clients.

There are layers of fees in the integrated financial advisory model, including adviser fees, platform fees, and investment management fees, totaling 2.5-3.5 percent.

The following is a typical fee breakdown: an adviser fee of 0.8 percent to 1.1 percent, a platform cost of 0.4 percent to 0.8 percent, and a managed fund fee of 0.7 percent to 2.1 percent. These fees are not only ambiguous, but they are also prohibitively large, limiting the client’s potential to achieve actual rates of return quickly.

Because the banks’ business model includes layers of fees, the financial advisory arm does not necessarily have an incentive to generate a profit, because profits can be made in the upstream parts of the supply chain by the banks pushing their own goods.

This business model, on the other hand, is defective, and it will not survive in a world where investors demand greater accountability for their investments, better fee transparency, and increased control over their assets.

It’s worth noting that in Australia, fully independent financial consulting businesses that offer separately managed accounts have done everything they can to avoid employing managed funds and keep fees low.

The banks have refused to acknowledge that their integrated advisory strategy is catastrophically flawed. When the Australian Financial Review inquired about the Financial Services Council (FSC), a major organisation that represents ‘for-profit’ wealth managers, a representative stated no generalizations could be drawn.

The advise model has basic faults, and it will be interesting to see what the next banking royal inquiry does to address some of the critical issues surrounding integrated financial advice.

Many financial experts are asking for a separation of financial advising from banks, citing blatant bias and failure to serve consumers’ best interests as reasons.

Stockspot’s CEO, Chris Brycki, states “Experts who act in the best interests of their clients should provide investors with honest and unbiased financial advice. Currently, Australians are subjected to product pitching by bank-paid salespeople.”

Brycki is pushing for structural reform to address the difficulties generated by banks’ overwhelming market position, including consumer protection, better-educated counsel, and aligned incentives.

Thousands of bank customers are being suggested bank aligned investment products despite the possibility of more acceptable alternatives being available, according to Stockspot’s annual research into high-fee-charging funds.


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