Dixon Advisory debacle puts conflict of interest back in spotlight

Although we may have seen the back of traditional sales commissions within investment management, new issues are being raised on apparent conflicts appearing in key sectors from the sharemarket to mortgage brokers.

Conflict of interest — the danger the seller of an investment is concealing the benefit to them from your contribution of funds — remains the outstanding danger for consumers in Australia.

The new year has opened with administrators being called into high-profile investment house Dixon Advisory, as the wealth manager bunkers down to deal with class action activity that will hinge on conflict of interest claims.

Although we may have seen the back of traditional sales commissions within investment management, new issues are being raised on apparent conflicts appearing in key sectors from the sharemarket to mortgage brokers.

In each sector similar questions arise: Why did such a high proportion of Dixon clients find themselves in Dixon property projects within the confines of New Jersey? Similarly, why do stocks that broker firms finance in other channels, appear so often to be listed as “buys” by the same group? Why do some banks never appear on mortgage broker menus?

It just so happens there has been a raging debate around “conflict of interest” in recent months. Inside the wide-ranging attempts to reform our financial service system in the wake of the Hayne royal commission — the so-called “Code of Ethics Standard 3” became a hot potato as consumer groups, industry groups and government battled to gain an upper hand on what it means for everyday investors.

At present Standard 3 goes as follows: “You must not advise, refer or act in any other manner where you have a conflict of interest or duty.” To generalise, industry groups say the current wording means conflict of interest standards are unworkable and unclear, consumer groups say they are fine and should be left alone.

Certainly the examination of the issue was welcome and the now disbanded (Financial Adviser Standards and Ethics Authority) FASEA agency seemed to doing something worthwhile when it announced a full public review of Standard 3 complete with “consultation with stakeholders”.

Indeed, more than 40 representatives made submissions to the panel as FASEA wrangled over whether the Standard 3 should say something more pragmatic, such as “you must not enter any financial relationship that could reasonably be expected to influence the advice given”.

But here’s the thing — FASEA ducked the entire debate by passing it all over to the government, making the announcements of its resignation from the whole thing on December 20 when very few people were paying attentions to the finer workings of the Canberra bureaucracy. The issue is now back with government, which is expected to move on the matter in the months ahead.

As the regulation challenge gets tossed around for another year, the investing public is waking up to the fact that — though “commission-based” product selling in investment services did indeed get buried in recent years — in a market where there is always extraordinary amounts of money on the table the current protective framework is riddled with pot holes.

Conflicts of interest remain a key issue across many investment services. At the extreme end of the spectrum crypto promoters can push just about anything and advisers cannot — under current laws — even advise on the issue because legislation is still to catch up with this area.

By the end of last year the advice sector had shrunk in terms of employment numbers while the elevated education standards initially promised by FASEA are now going to be watered down.

As an investor you have to ask the right questions: How is an adviser compensated? Is the mortgage actually the cheapest on offer? Is the stock the best buy for you? You should not need to additionally ask if all is fair behind the scenes.

As the fallout from Dixon Advisory is likely to show, once an investment goes down the tubes the later revelation of conflict of interest offers little consolation. Conflicts of interest need to be revealed upfront otherwise investors are shooting in the dark.