09 Sep 2014

EY argued that decades old industry approaches “have devalued advice by offering it as a loss leader into a product sale.”

The consulting group noted that this has resulted in “technical capabilities and skills required to deliver high quality advice being undervalued relative to sales capabilities.”

Another effect has been consumers’ “limited appreciation of potential conflicts, differing business models or the value of advice, especially in terms of it delivering financial wellbeing or peace of mind.

“As a result, the value proposition associated with a highly skilled, well-educated adviser delivering a technically proficient and robust advice has not been well articulated or understood,” EY said.

The document argued that the provisions of the Future of Financial Advice (FoFA) reforms have been heavily debated, but the real policy “elephant in the room” remains the economic model of some aligned advice businesses.

EY said ownership and vertical integration structures were not a problem in itself, but that conflicts arise when “inadequate transparency and disclosure to consumers of the main drivers of some adviser business models.”

This is especially the case when “cross-subsidisation and requirements to sell in-house products unduly influence business profitability and valuation.”

Another undesired effect of vertically-integrated businesses is “features that potentially distort the independence of advice delivery, product selection and service offerings.”

To EY, “these include remuneration or incentive structures, APL design and execution, the way advice is priced and KPIs regarding internal product sales.”

The submission asked for a sustainable industry model “where personal advice pricing moves beyond heavy cross-subsidisation and more accurately reflects the value provided and the marginal cost of production.”

But it warned that “if consumers fail to recognise the value of advice, this represents a barrier to transforming advice business models in a way that promotes accelerated development of scalable, sustainable and high quality advice solutions.”

EY said that these issues “require urgent attention from policy makers, industry and regulators.”

Written by Laura Millan for the Financial Standard.

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