Synchron: Compliance, SOAs and vertical integration

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The measure of a good dealer group has changed in the past 18 months, according to Synchron director Don Trapnell.

Trapnell's risk-specialist dealer group now has around 280 authorised representatives. Eighteen months ago, the issue of money always came up early in his discussions with advisers, but Trapnell says now advisers are more worried about being protected in the event of ‘ASIC knocking on the door’.

“I’m not quite sure if the change is a result of ASIC getting very active and very vocal. I’m not sure if the change is a result of FoFA coming through and people becoming more conscious of compliance, I’m really not sure. However, it is a definite change and a definite trend away from chasing the dollar but more chasing the safety of advice.”

His formula is to tailor a compliance regime around clients rather than the licensee. “We worked it out that the best way to protect our license, was to protect our client. If you had a client that was fully informed, you had less chance of being sued.”

This starts with the statement of advice. Trapnell says they have a three-page SoA because that is what the client is more likely to read, rather than a 30-page SoA, and is more likely to pass the reasonable person test.

“The proof in the pudding on that one is the Storm model. Storm financial had a 126 page [SoA]. The clients signed every page – not initialed, signed…and the courts upheld it, they said a reasonable person wouldn’t read it.”

Running a licensee is about more than just compliance, says Trapnell. Although the compliance is a big part, and must be spot on, running a licensee is also about giving services to advisers and giving services to clients. He says that this would be hard for any licensee with less than 100 representatives, because they do not have the critical mass needed to fulfill compliance requirements as well as everything else.

CoreData just released its Licensee Research Report, which showed that more than 50% of advisers in the industry had been approached by one or more licensees in the past 12 months, asking them to switch licensee. Only 14.4% indicated a likeliness to switch.

Compliance support is still the most utilised licensee support service, followed by education and training, and technical services. All three experienced an increase over the past three years.

Product independence and compliance support also increased as factors to attract advisers to join a licensee, but remuneration was selected by the highest proportion of respondents, at 62.5%.

Trapnell has expressed concern that with the loss of non-aligned licensees, vertical integration models will do little to address the issue of conflicted advice.

“The challenge comes when distribution and product are owned by the same organisation. I’m not saying that a product manufacturer should not own a licensee, but they should not be permitted to direct the traffic, to provide advantageous terms for advisers that use their products. I believe that is conflicted remuneration in its rawest possible sense.”

Claims that the Best Interest Duty will stamp out conflicted advice are “rubbish” according to Trapnell, and while he is against any form of conflicted remuneration, he has welcomed news that the ban has been delayed to work out finer details.

  • GAB on 3/07/2013 1:18:22 PM

    The second last paragraph is a good one. How long can companies like AMP keep up with paying huge BOLR on their own products? I mean, if that's not conflicted what is? .....and yet I have to send out an FDS based on an already transparent fee because that apparanetly is conflicted remuneration and yet I'm a non-aligned adviser using what I believe is the best platform in the market amongst many others I could use.

    And now I read AMP is making their advisers join professional membership....well frankly, that's not enough....you need to look at your own institutional culture and professional code of conduct first. It starts from the top.

  • Concerned on 3/07/2013 1:55:34 PM

    Fair comment, I can't see how the AMP's, NAB's, Westpac's, Industry Funds etc can uphold conflicted renumeration and/or best interest. A product manufacture should not have and/or own a distribution method. As an independent it makes my blood boil, there is a divide, but big business is making the rules?

  • GAB on 3/07/2013 2:43:06 PM

    There is no incentive at all to become independent from the powers above...and I'm not suggesting we need to be, but seriously...there is no attempt from those at the top of the food chain to change their own model of remuneration, everything gets thrust upon the adviser...more education, more compliance, more threats of being sued for this and that. Now I realize that a dealer is not going to come out with a remuneration for advisers that affects its bottom line adversely, especially if shareholders profit could be affected...so really, these reforms are mostly ineffective and a pure burden. In fact it almost smells like a distraction....blame the adviser and make them do more to improve their standards, nothing to see anywhere else....move on.

  • Dan on 4/07/2013 7:41:19 AM

    I was with a institutionally owned dealer and as soon as they used the word vertical integration I was out. They also offered a remuneration model that still rewards product distribution. How that will pass the new laws is beyond me but they are still trying.

    It's certainly a step backwards, makes a mockery of FOFA and unnecessary burden on what is an already heavily regulated industry.

    I don't think we can unwind the institutions owning dealer groups now, its too far gone. What we can do however, is increase transparency by making the institutions drop all the various brand names they hide behind. Call a spade a spade.. I am an agent of.... that's a start.

  • Bruno Festa on 4/07/2013 9:43:46 AM

    GAB summed it up well, "nothing to see anywhere else....move on."
    Stakeholders +1, consumer =0

  • Steve on 4/07/2013 10:27:50 AM

    Sorry, but the future is no dealer groups. FP's should simply be licenced via Asic & Asic needs to step up & implement this to work. All the compliance nonsense that serves no one but the licensee needs to stop URGENTLY. Thats why fofa is a complete sham, a nonsense created by shorten a clueless, spineless poli with no real world experience. Your 3 page soa is on the right track it should always be a short concise document. Our industry needs to elimnate 3 things. The FPA, Dealer Groups & compliance nonsense/rubbish that a lawyer has dictated.
    Clients just want good advice, none of the above aids that.

  • PETER CORRIE on 13/11/2013 2:31:21 PM

    I think if you owned a dealer group eg AMP owns Hillross you would want your products distributed via that arm. Many of the products in the marketplace are very similar and if the consumer is not disadvantaged I don't see a conflict of interest or conflict of remuneration.
    In this example of AMP it is self interest, self preservation and a private arrangement between parties in a very competitive "Free" enterprise system.

  • Dan on 14/11/2013 8:00:18 AM

    Peter I understand why the dealer wants their products distributed via the FP arm...that's the ONLY reason they own dealer groups in the first place. Does not make it right for the consumer. A lack of transparency still exists and a planner's view on product is still altered as a result of this 'vertical integration'. My old dealer still rewards firms for recommending aligned product. What the! In addition, I believe there is a total lack of innovation in the industry....not helped by institutional ownership of distribution & inflows.

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