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.
The one that pays the highest commission. Here’s my card. Call me if you need anything.
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.
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.
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,
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?