The decision that there will be no Royal Commission for financial planners probably means the institutions’ lobbyists are due for a big payday…a right royal commission for them no doubt.
All the right noises are being made.
ASIC has established an ‘Office of the Whistleblower’. Apparently, this is where corporate insiders can go and be treated seriously…until, of course, the lobbyists get involved.
We’ll also have a new public register listing all of the financial advisors in Australia along with their experience and qualifications. But the register stops short of detailing who the planner really works for…are they one of the 80%of planners employed, contracted or authorised by the major institutions? How are they paid — salary based on sales targets, sales bonuses, commissions on insurance products, all expenses paid conventions, etc?
The CBA has launched its own independent review into its financial planning division.
The institutions have signed onto higher education standards for their advisors.
As I said, all the right ‘noises’ are being made because ‘noise’ and plenty of it is the perfect distraction. It takes the focus off the real issue: the massive conflict of interest that exists when the ‘drug company owns the (poorly trained) doctor’.
The investment business is a multi-multi-multi-billion dollar industry. Securing a constant flow of money (and retention of funds) into the institutional products is critical to maintaining (and increasing) the capital value of these businesses.
Come with me into dreamland for a moment…in a world where government acts in the best interest of the consumer, where it is taboo for investment institutions to own financial advisory businesses.
Independence and transparency are the key objectives of this government decree. After this politically bold and decisive announcement (I told you it was dreamland), do you think the share values of the institutions would rise or fall?
Prior to answering this question, it’s worth mentioning that financial planning divisions, in their own right, are not great profit centres. After paying for staff, compliance, research, software, rent, professional indemnity insurance and other business expenses, most planning groups struggle to make ‘a cracker’.
Prima facie, you’d think excising the planning divisions would relieve the institutions of these poor performing business units that create a regulatory (and PR) nightmare.
If this analysis were correct, then your answer would be…share price to rise. Wrong!
In our dreamland scenario, the share prices would take a major hit. Why? Because without a guaranteed funds flow (and retention) into products, the value of the fund management businesses (the ones that clip the ticket for 1%+ per annum) would be adversely affected.
Without the front end (tied sales force) pushing investor money into the back end product (and keeping it there), the value of the investment business (worth billions of dollars) would be marked down to reflect this new reality.
The industry’s business model is called one of those u-beaut corporate terms — ‘vertical integration’.
According to Wikipedia, ‘‘In microeconomics and management, vertical integration is where the supply chain of a company is owned by that company.’
There, ladies and gentlemen, is the problem with the financial planning industry…‘the drug company’ owns the supply chain from beginning to end. With 80% of financial planners belonging to the vertically integrated business model, what hope do you have of receiving truly independent, professional advice?
The additional red tape, the independent reviews, the public registers, etc., etc. are all designed to put enough lipstick on the vertically integrated pig so that consumers don’t recognize that it’s still a pig.
Certain sections of the industry are squealing that the cost of adhering to the increasing level of compliance is making it too expensive for the average Australian to seek financial planning advice. Perhaps it is. But in my experience, the majority of people should follow a very simple financial planning model:
Focus on paying off their home (this is a 20+ year exercise)
Make additional superannuation contributions (where possible) into their employer super fund
Buy adequate life insurance (enough to pay out debts plus 10 times your salary) and income protection insurance. This can usually be done through your employer super fund.
If you have any additional savings, establish a monthly savings plan by buying the ASX 200 ETF via an online share broker
Make sure you have a current Will and an Enduring Power of Attorney.
This simple five point plan will cover a lot of working Australians. And from my experience, it’ll be a lot more than they already have. Simple. Low cost. Independent.
Obviously, there will be those seeking more specialist advice on SMSF, gearing strategies, social security entitlements, tax planning strategies, etc. My advice would be to seek out a truly independent planner (not aligned with any product provider) who charges on an hourly fee basis for the advice they offer. This type of planner is a rare breed because they have to generate an income based on their knowledge. It’s not a guarantee of success, but the odds of this approach are better than walking through the doors of a bank and seeing their in-house planner.
The only way to clean up the financial planning industry and create a true profession is for politicians to declare the financial services vertical integration model illegal.
If this proposal were ever seriously considered, the noise from the squealing pig would be deafening. All sorts of red herrings would be thrown up to explain why this would be an injustice to the public. Pigs a**e.
The squealing would be because the industry’s throat had been cut and no other reason. The institutions — Storm Financial, CBA, Macquarie, AMP — have demonstrated that the vertically integrated model is ruinous to both public wealth and health.
A financial sector with independent planners remunerated on an hourly fee basis (like accountants and solicitors) and investment institutions whose products were supported on merit rather than via a tied sales force would be a refreshing change. This would be a real step forward in restoring public confidence.
What’s stopping this happening? Self interest, not public interest. Self interested institutions desperate to maintain the percentage of funds under management fee model. Self interest planners employed by institutions who couldn’t make it in a world where they are remunerated for their knowledge. Self interested politicians who know only too well who butters their campaign funding bread.
In the real world, we are destined for more lipstick, mascara, concealer and whatever other war paint they can find to apply to the pig.
Therefore, dear reader, you need to act out of self interest and think very carefully before you hand over your hard earned to a deeply flawed system.
Seek out genuine, independent, fee based advice, and if you’re unsure or have a niggling doubt, obtain a second, independent, fee based opinion before committing to the plan. If you are still in doubt, opt out.
There are good planners out there. But because of the structure of the system, you’ll have to do your homework to find them.
Editor, Gowdie Family Wealth