Back-Story #1:
I’m at the MCG, in the members (15 years ago), watching the cricket. For the life of me, I can’t remember who Australia was playing. It doesn’t matter. During the lunch break, I somehow end up on a table with a couple of guys from the financial advice industry.
Over a beer, the conversation rolled from trivial to specifics about their advice services. Young and naive, I asked the question…
“What’s the best product to invest in right now?”
These two blokes looked at each other and smiled.
Their response?
The one that pays the highest commission. Here’s my card. Call me if you need anything.
Seriously!!!?
Back-Story #2:
5 years ago I walked into a financial planning firm, just as a test to see what they would say to someone in my position. I was totally transparent and disclosed my current financial situation.
At the time, my assets were 80% real estate and 20% cash.
Their advice?
I was dangerously overweighted in real estate and I should have a 70% equities portfolio, 20% real estate and 10% cash.
These guys went as far as to say that real estate is a terrible investment in comparison to equities and I should thank my lucky stars that I haven’t lost any money yet.
Lucky for me, I was never there to actually take their advice. I was just curious to see what they would say.
So today, I write to you about my opinion of the financial planning industry based on my experiences.
… I know I’m going to piss a few people off, I’m prepared for that. I’ve got the full metal jacket on.
Let’s begin…
Financial advisers have always been a dodgy lot, but new legislation is going to allow that dodginess to be taken to a whole new level.
The politicians know which side their bread is buttered on.
And once they get into power, they waste no time in fixing up their mates. It wouldn’t look right if they dilly dallied with stitching them up. No time for modesty or scruples about the poor public’s interest.
When the last Labor government came to power it wasted no time in abolishing the Australian Building and Construction Commission and removing laws that controlled union behaviour. There you go boys.
Now that the Coalition is back in power it’s swung that pendulum back round and launched another Royal Commission into union corruption.
That’s just what Coalition governments do. Launch Royal Commission torpedos at the unions.
On the face of it’s about helping out Aussie businesses of course. That it directly attacks the foundations of the Labor party, ties up union resources that might otherwise be spent campaigning for Labor.., well that just can’t be helped.
And I’m sure a lot’s changed in the world since the last Royal Commission. It’s bound to be money well spent.
(But don’t think defending unions here. It’s politicians on both sides that have got my back up today.)
And what’s got on my goat in particular, is that the Coalition government, in helping out its mates, is actually looking to unwind some legislation that was actually pretty useful.
And that’s the Future of Financial Advice (FoFA) legislation.
This was all about regulating the financial services industry, and wiping out the worst (and did someone say corrupt?) practices in financial services and financial advice.
These laws required financial advisers to invite clients to opt back in to their services every two years, produce detailed annual fee statements, and generally do their best to not rip their clients off.
And the heavy hitter in the legislation was removal of the conflicts of interest through the ban on volume-based commissions for all financial advice.
Because you see, when you go to see a financial adviser, you’re usually seeing someone employed by, or licensed to, a bank or other financial institution. And back in the old days, they were often rewarded with bonuses based on the volume of product they sold.
See the conflict of interest? Sure financial advisers are incentivized by performance fees, but volume-based commissions incentivize brokers to flog as much crap as they can and who cares if you need it or not?
Imagine if a plumber charged you an extra fee for performance if, after he came to fix the toilet, the toilet actually did what it was supposed to do. That’s extra.
And then you see he’s taken money out of your wallet and bought 20m of plumbing to pipe sewage into your bedroom, and then another 20m to pump it back again. All because he gets a commission from the plumbing supply store based on how many metres of tubing he sells.
Because that’s the other thing about financial advisers. Not only were they getting volume-based commissions, financial advisers don’t have to invoice you for their services. Not like, well pretty much every other profession – doctors, lawyers, accountants.
But not financial advisers. You give them your money and they simply take a little tiny bit of it each month and tell you later that they’ve done it – in deliberately confusing and misleading fee statements that require a NASA engineer and the Loretta stone to decipher.
The FoFA legislation tried to stop all this – to put an end to conflicted remuneration. To get financial advisers to actually start working in your best interests.
Is it ridiculous to anyone else that we need legislation for this? It’s like food standards that stop people from packaging poisonous crap and selling it to us as food. Seriously, we need a law to stop people doing that? I wonder about this planet sometimes…
And so if the FOFA legislation is unwound, it will be back to the bad old days. And in the bad old days, inside the industry, the banks were actually calling the financial advisers their ‘distribution arms’.
Can you imagine the uproar if drug companies were calling doctors their ‘distribution arms’?
Hey Doc, I think I’ve got a broken arm.
I’m going to prescribe some Viagra for you.
Via… Wait, what? Will that help heal my arm?
Um… yeah. Sure. It’s ah… good for bones.
(Actually this might be a little too close to the truth I’m afraid.)
So while FoFA had been trying to clean up this industry, the Coalitions proposed amendments will remove the requirement for clients to “opt-in” every two years, amend the “best interest duty” to allow scaled advice, “streamline” the annual fee statement, whatever that means, and exempt general advice from the ban on “conflicted remuneration”.
In other words, FoFA would be gutted, and it’s a free for all for financial advisers again.
It makes me sick.
Not that I really expect more from politicians. They’ll all look after their mates, and shamelessly pretend that they are the champions of honesty and integrity, protecting the honour of Australia from the corruption of unions.
And all the while helping entrench conflicts of interest and corruption in the industry so many Aussies trust to provide for their retirement.
And that’s what really stings. That so many people will think that they’ve got their money with someone they can trust, who’s got their best interests at heart…
… and they just couldn’t give a stuff.
It’s just another reason why I manage my own money.
Always have. Always will.
Signed with Success,
Jon Giaan
P.S. Of course not ALL financial planners are rotten. But the way the commission structure and incentives are laid out, they really don’t have much of a chance, do they?
Russ Hicks says
John
You should not be so generalist in your comments above, as there are a large number of Financial Planners who are not ‘Bank Distributors’. Take a count of independent Financial Service Licence holders…non aligned and very independent.
Your comments on FOFA are correct, of course, in that there is certainly a tightening of the regulations required, particularly for the Institutionally aligned Broker (Fin Planning) groups.
You are going to invite comment on the ‘Rip Off’ seminar industry with this article. You will be lumped in that category…. good luck.
Russ Hicks
Greg M. says
I wonder if your reference to the “Loretta Stone” (instead of Rosetta Stone) was deliberate just to push home the perception of being uneducated…
But otherwise, yes – I agree with your comments about the Fin Serv industry. It needs to be cleaned up, not watered down. I did once find a Fin Planner that was honest. He said “You have everything under control, I can’t help you”.
Goran says
Goran (Fin Planner)
This articular is spot on regarding Fin Industry however you cannot fit all planners in same box. There is planners (bank sales people) and there is planners. Planners should work for best interest of they clients. As a planner I’m big in direct investment i.e. shares and properties and my client are making really good money because of simple investment product and we are catting down on all those managed funds fees. I do charge a fees, I can see anything wrong with that. So far non of my clients haven’t complained.
Jenny Kennedy says
Jon,
Well said!
I agree with you. It’s fine to be told “there are honest financial advisers out there” but unless you have the time and knowledge to find one, how do you know who is good, who is not? Winding down the FoFA regulations only makes sense if you have time, money and expertise to find the right financial adviser. Not many people have that. As always, these actions by government (of any persuasion) are designed to help out their mates, not about helping out the ordinary person.
As always, very insightful!
Cheers
Jenny
gus says
Over the years and i must say quite a few, i have seen, heard, and known people and friends that have lost everything by letting other people look after their money.Today there is no excuse not knowing about your money. (where to put it and what to do with it). We have the internet, so go and learn for yourself.
ps. Great Post by the way.
Tony says
I always managed my own tax. I once made the mistake of asking an accountant to recommend a tax minimisation strategy for me for the first time in my life. The investment he recommended certainly did minimise my tax and at the same time looked really great because it was helping new businesses to get capital investment. But two years later ATO declared it a “bottom of the harbour” scheme and we all got heavily penalised for investing in it. My point is, there’s always bad behaviour and it’s always the investors who carry the can.
I also manage my own finances, but I am now working with a financial adviser for the first time in my life to plan for our retirement. It’s a scary proposition and I’m paying him $5000 a year supposedly to be unbiased and work in my interests, but at the end of the day he still works for my bank. If I was to go outside and try to find one of these supposedly independent and unbiased financial advisers, where would I start? Who should I trust more than my bank?
I don’t see the big dark cloud you see Jon, by the way. General advice should carry a lesser burden of liability for the adviser than specific advice. But the lifting of the ban on “conflicted remuneration” is a concern and I will be talking to my adviser about this.
Debbe says
I’m horrified by your blanketted ‘bashing’ of financial planners. I used to be one (I only left because the ‘butt-covering’ attitude/necessity conflicted with my views on providing the best service I could). I never met anyone in the industry that behaved this way, so I’d say it’s a minority. Most planners only want the best of their clients.
BTW, the same rant can be levelled at the ‘property investing industry’ – just change the occupation. We have been investing for several years now, and the number of shonks out there claiming all sorts of ridiculous successes, whilst really only flogging their own products and properties, and scamming huge kickbacks from developers at the same time – and you only find out if you’re suspicious and read the really really really fine print somewhere in the midst of all the words.
I hate generalisations and the innocent they hurt along the way.
The responsibity ALWAYS rests with the one seeking any form of advice – never take anything at face value, and check that it really does add up, and fits your investment plans.
Oh, another BTW, how do you think doctors get all those ‘free drugs’ they had out as samples?????
NO ONE can afford to be naive in this day and age.
John says
I agree pretty well with all of above, have NEVER trusted anyone other than a bank (I chose) to look after my funds & investments. I had no training other than what my Mum taught & (for shares) what we learned in Maths at age 14 @ public school & now live off a SMSF worth a few million with no help.To my amazment though I have learned that there is nothing now taught at school about financial survival! For God’s sake what useful things do the teachers now teach??
..Kids now only seem to care about their rights, privacy, freedom & entitlements. WHAT WENT WRONG?
Thisbe says
Jen
A well written article. Well said about the Financial Advisers.
99.99% of FA want your money invested in management funds, shares, cash, property trust etc, because they earn money from the entry fees, ongoing mgt fees, writing up your annual review financial report, commission from mgt fund company etc.
I have not yet met a honest FA who would encourage me to buy properties because the FA will not benefit any from my property investment. Conversely, the money they earn from you reduced, esp if their fees is charged on the amount of your investment.
FA from big firms like AMP, CBA to small ones all want to sell their products.
But the saddest point is most FA do not catch up with the latest tax ruling and changes in superannuation rules.
The ongoing government changes in taxation make the whole industry clouded with puzzles.
It becomes an impossible mission for average person to understand the whole pictures & make informed decision.
The FA industry must step up and incorporates property investment as part of a holistic investment strategy, put their profit motive in the lowest priority.
Fred says
You may not be aware of this but planners are not permitted to give advice on direct property. They can only recommend property trusts and products that are on their approved list. Therefore technically no planner working for a bank can ever give you independent advice as they can only flog their own bank’s products. The same holds true for mortgages. A bank can only offer you their own products. It is beyond me why so many people still go to their bank branch and accept poor products and advice when there are people out there (such as myself) who can actually help and care about their clients, not just their commissions. Planners will always flog insurance products and managed funds. I don’t ever expect direct property investment to get incorporated with that and that’s probably a good thing because most of them would probably give poor property advice.
Jules says
Jon may have generalized however i agree with him. First thing I ask any finical planner ” what are your assets?” Mostly they have none or next to none, its a job for them and they live from week to week and can’t even manage there own affairs. So how can they advise you to get ahead in life? Try asking a finical advisor if they are interested in taking a % of the profits instead of a fixed fee? If the person actually says yes and I will be surprised, ask them if they pay up for the same % on the losses? I thought so. All about there reward and not there responsibility!
I find MOST are in it for a quick buck or its just a job to them so not the type of person I would like to pay to improve my lot. A casino would look better as you may have fun trying!
Josh says
What is the Loretta Stone?
Tom says
The “Coal Miner’s Daughter” on GRASS!!!
RR says
Yes, there are bad apples in the industry, however those of us, Financial Advisors who try to do the right thing this sort of general bashing of the industry does not help. All that happens is that people who need advice are skeptical and do not engage with us, to everyones detriment.
Simon Roberts says
Trailing commissions should not exist. They are for lazy people who sell something they don’t produce and expect to continually gain from a one-off sale. They are the bane of financial equity in our system.