Our financial planning system was always going to fall over eventually.
Everyone’s acting all surprised that the Banking Royal Commission has unearthed a graveyard of dodginess and financial abuse.
Probably not my readers since I’ve been banging on about it for years now. And the reason that I’m not surprised in the slightest is that the concept of financial planning, as it plays out in Australia is fatally flawed.
It’s a mess of misaligned interests that was always doomed to fail.
Let me explain.
The key confusion is around whether financial planners sell a product or a service.
Imagine you engage an interior designer. They offer you a service and that service is a interior design for your home. You expect them to be working with your home’s needs first. Maybe they then help you go out and get the individual elements, maybe not. But they’ve given you a service – a design.
Now imagine you walk into Ikea. They offer you a bunch of products. They will try and tune into what your needs are, find the right product for your circumstances, but at the end of the day, they’re trying to sell you something off the showroom floor. They’re not going to recommend you go down the road to the bespoke vintage homeware store, no matter how much your open plan entertaining area is calling out for it.
But that’s ok, because you know that. You’re going to them to have a look at the products they have on offer.
Now what does a financial planner do?
Well, if you look at their marketing, they’re a service. They’re there to design a bespoke financial strategy just for you.
But if you look at how they get paid, particularly by the banks, they get paid as if they’re a product showroom. They get commission based on how many units of certain financial products they sell.
When you look at the remuneration structure, the planners interests align with the banks’, not yours.
But of course, there’s some mechanism that brings those interests into alignment right.
Well, actually no. Not really. There’s codes of conduct and blah blah, but at the end of the day, the only protection you’ve got is your planners’ own ethical sensibilities.
And you know, most of the time, let’s be honest, that’s enough. Most people do the right thing.
But the law isn’t there to protect us from most people. It’s there to protect us from the worst of us.
And as the Banking Royal Commission has shown us, right now, the law is failing miserably.
So in my mind, the only way you can bring financial planning into alignment is to stop financial planners from also selling products.
Make them do what their marketing says they’ll do – design a strategy based on your unique circumstances.
Then we can have financial product showrooms – what the banks used to do. Somewhere you can go to get the right financial products for your needs, once you’ve nutted out what your strategy is.
But there needs to be a firewall between them.
Sure, financial planners can recommend particular products off that showroom floor, but as soon as they’re being paid based on how many units they sell, then there’s a misalignment of interests.
And at some point, somewhere, that’s going to break down.
And this is why financially planning, as it currently exists, is fatally flawed. It’s set up to fail.
But don’t expect to see change come from the financial planners or the banks. The system is set up to serve them. The fight needs to come from the customers.
You up for that?
Nah, me either. That’s why I walked away.