A New Take on FoFA – The Future of Financial Advice…

Businessman holding money  - Australian dollars

In the politically correct world, FoFA is an acronym for Future of Financial Advice.

In the less politically correct world of The Daily Reckoning it’s come to mean something quite different. In line with our new definition, the Finance Minister should tell the big six institutions (CBA, NAB, ANZ, Westpac, AMP and Macquarie ) to FoFA — F*** off From Advice. It’s the only way for financial advisers to actually have a future.

ANZ Bank is the latest institution to recently be targeted by solicitors. They’re acting for disgruntled investors, suffering from poor financial advice.

You’re likely aware the government has a number of proposals to ‘fix’ financial planning — after a fair degree of lobbying from the institutions. But don’t be fooled. It’s all mere window dressing.

The reason public distrust in planners is at an all time high is the ‘vertical integration’ business model. Around 85% of financial planners are aligned (directly or indirectly) with the big six institutions. The planners are on their institutional master’s payroll for one reason — product placement. Financial advice is the veneer masking the real intent. And that is to put your capital into their master’s managed fund.

The serious money in the investment industry is derived from funds under management.

The six institutions are capitalised at tens of billions of dollars due to the income streams from ‘clipping the ticket’ on the products they provide, manage and administer.

Owning the distribution network that continually feeds money into these products has proved an excellent growth strategy. The recent scandals have been a setback, but not enough to jettison the vertical integration model.

Paying out millions in compensation is an annoyance, but that’s dwarfed by the billions of dollars of shareholder value created. And, of course, the higher share prices certainly don’t hurt the executives’ share options. Does this sound like a conflict of interest to you?

The vast majority of planners are good people trapped in a bad process. They’re trying to earn an income in a system skewed towards selling rather than advising.

In some cases the best advice could be to continue paying off your home loan and possibly increase life cover through your existing employer superannuation fund. This advice, while in your best interest, doesn’t generate one dollar of product revenue for the institution. If they continue to dispense this type of practical advice, your financial planner won’t last long.

Not all the blame lies with planners. Some clients have unrealistic expectations. They demand planners turn their financial ‘cow’s ear’ into ‘a silk purse’.

An ethical planner tells the client their expectations are unrealistic. And they’re unlikely to be paid for this frank assessment. Eventually the client finds a planner that tells them what they want to hear…everything is possible — trust me. In the short term the less than honest planner is remunerated and possibly even moved into management ranks. In the long term the ‘plan’ fails and the demanding client seeks retribution via the legal system.

The financial planning business model needs a complete overhaul…starting with telling institutions to FoFA.

Banning institutions from employing, owning, being aligned with or having a shareholding in a financial planning business is the first critical step in restoring public confidence in the advice industry.

Sure, the institutions would lose the guaranteed pipeline into their funds and some shareholder value would be lost. But whose long term welfare are we concerned about — the institutions or the public’s?

The institutions have demonstrated they cannot be trusted to separate the advice process from product placement. The proposed changes to the financial industry are a rearrangement of the Titanic’s deck chairs.

In the health industry, the government doesn’t allow pharmaceutical companies to own medical practices. The same principle should apply to the wealth industry.

If Ministers Cormann and Frydenberg had the public’s interest at heart they would stare down the institutions and all the industry’s vested interests.

Some planners employed under the current cosy institutional arrangement would not survive in a world without institutional support. They may lack the knowledge or skills necessary to deliver quality, impartial fee-based advice. As harsh as it sounds, that’s their problem. If they haven’t got the skills then why be in the advice giving business in the first place?

The newly independent planners need to adopt the hourly fee-based model used by the accounting and legal professions. There would need to be a transition period where percentage based remuneration (trailing commissions, ongoing management fees, etc.) is gradually replaced with the professional fee model.

These two changes alone would place pressure on institutions to sharpen their pencils and reduce management fees on their products.

The institutions would have to fight for business on the merits of their offering…rather than from the luxury of owning a funds flow pipeline.

If Ministers Cormann and Frydenberg read the DR, could either of you please explain to your fellow readers how any of these proposed changes cannot be in the best interest of the investing public? We promise you that your reply will be published in full.

Or perhaps the relevant opposition ministers could grasp the financial advice nettle and champion the proposed changes.

The realist in me says we’ll be waiting a long time before either party replies to us or acts in the public interest.

In fact, it will take the coming major market downturn (and it is shaping up to make the GFC look like a picnic) to ring the bell on the financial planning industry as we know it. Significant losses will see clients rush to exit the offices of planners across Australia. Enough will be enough.

The planning industry enjoyed the rising tide of the greatest bull market in history (in 1982 the All Ords index was a mere 400 points). Resting on the laurels of this fortuitous stage in the market’s history has blinded the industry to the need for change.

The 140-year history of share markets shows us in flashing neon lights there are times to be in the market and there are times to be out of the market.

The investment industry is primarily focussed on the former scenario. It has not transitioned itself to make a dollar during the latter.

From the ashes of the GFC MkII a new financial advisory model will rise, but it will be too late for many.

What can you do? Be a victor, not a victim.

Recognise the need for change before it’s too late. Put yourself in a position to capitalise on the market upheaval that is headed your way.

Err on the side of caution — take profits and reduce share market exposure to a level you are comfortable exposing to a potential 50% market downturn. Also, increase your cash holdings, pay down debt, and have adequate life insurance cover (approximately 15 times your annual salary). Finally, make sure your legal affairs are in place with an updated Will and Enduring Power of Attorney.

Be a victor rather than a victim of poor advice.


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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia 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 magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.

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