As someone who has worked in financial advice across technical, advisory and executive roles for more than 20 years, I feel qualified to comment on the Royal Commission.
Whilst the outcome of this review will ultimately be positive, like any evolution, there is a long road ahead.
The big end of town deserve this spanking
It wasn’t until I worked in “vertically integrated” businesses (where the financial product provider owns & directs the advice business too) that I truly understood how conflicted and twisted advice could be. Some call it Dracula in charge of the blood bank. I liken it to a Doctor employed by a single pharmaceutical company.
In these businesses the advisers get told they are “distribution” and “sales”. The culture of selling product runs deep in all aspects of the business, be it compliance, education, research and support. Everything is set up to sell the parent company’s product.
I used to have conversations with clients where we joked it was “warm under the devil’s wing”. Clients tolerated this conflict in the belief they would be financially protected if anything particularly bad happened. Unfortunately this has been proved to be incorrect as the devil can afford better lawyers than clients.
The scary thing is that the senior executives of these businesses genuinely believe that customers approach advice businesses to buy a super fund or insurance policy. That’s like saying that a client of an architect seeks their advice on the type of brick or roofing; these are parts of the decision but the main game is designing the dream home.
Perhaps an even scarier fact is that the majority of new advisers in Australia have been taught by these executives. And just like children, people who are new to a profession are extremely impressionable and this new generation of advisers are now working for industry funds, super funds and a variety of other vertically integrated businesses.
The Royal commission will provide a much needed slap to the big end of town. We should celebrate if the focus of the commission is extended to all Super funds and insurers as well.
Policy and regulators are learning on the job, but getting there
The following is a brief, perhaps overly simplified version of reforms within financial advice in the past 20 years:
- Financial Services Reform – Improved the framework for financial advice through licensing (AFSLs), the Financial services Guide and Statement of advice.Key benefit for clients: Improved information.
- Future of Financial Advice reforms – Banned investment related commissions, hidden incentives, brought in Best interest duty for advice. Key benefits to clients: Reduced conflicts and enhanced reliability of advice
- Life Insurance reforms – created a level playing field for life insurance commissions. Key benefit to clients: Insurers cannot “buy” advisers by offering higher commissions.
- Financial Adviser Standards & Ethics Authority (FASEA) – Enhancement of educational requirements for the advice industry.Key benefit to clients: Confidence their adviser will be appropriately qualified
There is no denying that the above reforms are improvements. It is therefore reasonable to assume that the outcome of the Royal Commission will be positive.
The biggest problem for Australia is that all this regulation has made advice expensive. Technology is starting to improve this but there is still a long way to go.
The job of an adviser is changing
Like pretty much all parts of modern life, the reasons people engage advisers has morphed.
In days gone by (e.g. 80’s & 90’s) people used to see an adviser as they had access to financial products that were not freely available by other means (this seems to be where the existing mindset is stuck).
With the advent of the internet, the early 2000’s saw a change. People could access these opportunities but there was an explosion of choice. This was coupled by a more complicated regulatory environment with Superannuation, tax and estate planning environments changing. People started to rely on an advisers to help them navigate the landscape.
Being a client advocate is an important part of the adviser’s job today and it is something we can’t do properly if employed by the product provider. Good advisers regularly negotiate better fees, improved insurance arrangements, fix administrative errors and ensure the client gets the best possible outcome in a variety of other ways.
Today we are starting to see technology offer promising enhancements in financial management. If we look forward 5-10 years it is reasonable to expect technology to enhance things further.
With this in mind, the adviser of tomorrow needs to be someone who is collaborative, trustworthy, knowledgeable and sophisticated. They will sit beside a client like a rally car co-driver advising the client on how to navigate their financial path with impressive results.
On the subject of results, it is worth reflecting that clients of good financial advisers remain wealthier and more confident of their choices than those who are self advised or ill-advised. Successful wealth management requires emotional control that we humans can’t always get right. We need an objective partner to help us navigate. Vanguard’s adviser alpha study estimates the benefits of this partnership are about 3% pa (more than a 300% return on the fees paid).
How to judge whether you’re getting good advice
So, with our faith in the system shattered and suspicions running high, how can we ensure that we are getting what we need from our financial world?
There are 3 components:
- The advice – There should be clear benefits that outweigh the costs. You should expect to gain additional perspective on the problem at hand and the pros/cons of each option. Your adviser should be able to prove their solution is superior to others, reconciling it back to your personal goals (not theirs!).As a side note, it is important to recognise that only a fool employs themselves as an adviser. Don’t make the mistake of putting this in the too hard basket and withdrawing completely. There are always people worth listening to in life.
- Implementation – Advice without implementation is just a nice conversation. But it’s important to ensure that there are as few conflicts as possible and that those chosen for implementation are done so for their skill and not other reasons. In the event that there are conflicts (e.g. a referral payment or ownership in a related company) you should challenge your adviser to discuss alternatives. If they can’t do that adequately, seek further options.
- Risk management – identification of the risks and how to mitigate them is essential. This applies to the investment strategy, financial products, the relationship with the adviser…. everything. A good plan is always one that contemplates things going wrong and identifies a plan B.
Medicine rarely tastes good
Money is one of those subjects that everyone is funny about. Bearing all financially can feel like standing naked before a doctor and we have been taught it’s not polite to talk about money.
But there is no denying that good financial decisions and habits will contribute to an enriched life.
The Royal commission is therefore medicine that banks, executives, politicians, regulators, advisers and the public all need to take.
Unfortunately we can’t change the fact that money corrupts. We can however work together to create a platform on which society can operate for the good of the majority.
Scott Hammond CFP, Dip FP
Director & Financial Adviser