Want to pay for financial advice? Buyer beware.
27 May 2014
The problem facing those saving for their futures is how to get advice that is in their interests. This may seem something that every customer would normally expect, but because the industry is dominated by the dominant suppliers, the balance between supply and demand is skewed towards the suppliers.
In today's Age, John Addis of Intelligent Investor points out that the Financial Planning Association (FPA), which represents over 6,000 planners, has actually argued the case for more regulation. Australia's industry base, he notes, is extremely oligopolistic, and finance is especially so:
"This tendency is nowhere more in evidence than in the 'wealth management' arms of the major banks, which have run a relentless battle against the proposed Future of Financial of Advice reforms.
So why would the FPA, which is arguing for better educated planners, the separation of products from advice and an ASIC register, want more rather than less regulation?
Because it understands that without the public being able to trust those giving them advice, the industry is doomed. The banks, meanwhile, love the idea of tellers flogging us superannuation products whilst we're cashing cheques.
The FPA should be commended for its stance. Unfortunately, the proposed changes will only make the problem a little less dire.
The central issue is not legislation that attempts to mediate selling and advice but that these two roles are combined in the first place. It's a bit like eating tuna custard. Some things aren't meant to go together.
No one asks a drug company for medical advice because we understand that the vested interest is so great that any answer, even an honest one, can't be relied upon."
Adele Ferguson's Fairfax/4 Corners investigation into the behaviour of the Commonwealth Bank has shown how problematic the financial advice industry can become. The banks wish to dominate the super industry, as they dominate every other part of the financial system. It is an unhealthy supply and demand situation:
"The bank wanted to sell products; the adviser wanted the highest possible commission; and the customer wanted good advice (but was unable to tell good from bad, which was why they consulted an adviser in the first place). No prizes for guessing who won that little tussle.
The lobbying to repeal FoFA is all about preserving that culture at the expense of advice because it's impossible to do both well.
A visit to the planner at your local branch proves the point. Of the thousands of financial products on the market, from hundreds of different providers, you'll almost certainly be recommended products manufactured by the company that employs (or incentivises) the person doing the advising.
Happy coincidence? I don't think so."
The banks argue that there is no problem with them selling their own products. Addis comments that If you wander onto the forecourt of a Ford dealership you don't expect to drive away in a Holden. So why expect Commonwealth Bank to offer you anything but CBA products?
But he notes there is one key difference. The Ford rep isn't masquerading as an advisor. In financial planning, the planner knows he or she has to sell bank products but because it says 'adviser' on the business card, the customer thinks they're getting advice when in fact they're getting sold:
"Economists call this information asymmetry, which is a technical way of saying the major banks are profiting from the ignorance of their customers.
And all that compliance stuff? It may not seem like it but that's there to protect the banks, not you. In court, or, for instance, before a Senate inquiry, the compliance 'process' allows the bank to claim it acted legally, even though it cost you your nest egg.
There's only one way to start to fix this problem and that's to break one of Australia's leading oligopolies and force the banks to divest their wealth management arms. That's unlikely to happen.
But until the conflict between sales and advice is removed, good bank planners - and there are many – will struggle in a culture they abhor. And those behaving like used car salesman will thrive, at the expense of their clients."
What it adds up to is that super investors have to assume responsibility for what happens to their own money. There is good financial advice available, but there is also a lot of self interested advice being proffered. It is very much a case of "buyer beware". Users of financial advice would do well to get a second opinion.
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