By Paul Radford
Improving Australia’s Financial System
“While consumers are responsible for the consequences of their financial decisions, they should be treated fairly. The financial services and products they purchase should perform in the way they are led to expect.
Recent history provides a number of examples of product and advice failures. While the circumstances of each case differ, problems have arisen when commercial incentives have overridden consumer interests.
We will do more to lift the standards of financial advisers, including by placing this activity on a professional footing for the first time.
Following extensive stakeholder consultation, we will introduce legislation to make the issuers and distributors of financial products accountable for their offerings. This will ensure a stronger customer focus in product design and marketing.
We will consult with stakeholders on the development of a new ASIC product intervention power that could be used to modify products, or if necessary, remove harmful products from the marketplace.”
This is an extract from the Federal Government’s response (entitled “Improving Australia’s Financial System”) to the findings of the Financial Services Inquiry it commissioned in 2013. It was released on 20 October 2015.
The terms of reference of the Inquiry included the current cost, quality, safety and availability of financial services, products and capital for users.
In late 2015 the Federal Government released draft legislation which requires that new financial planners will require a degree, undertake a professional year and pass examinations to be able to legally operate. Existing financial planners will be required to sign up to a code of ethics.
An independent, industry-established body will be created from 1 July 2016 and will set education standards for existing planners who will be given until 1 July 2019 to complete an appropriate degree equivalent, if they do not already hold one.
Why was there an Inquiry?
Simply, the financial system let consumers down so badly the Government was forced into doing something.
There was and still is a genuine need to properly regulate and control the bad elements of the system to protect consumers.
In recent years even the largest Banks in the land have settled claims from customers who have received bad advice after paying huge amounts in fees for that bad advice.
The Storm Financial debacle was certainly no storm in a tea-cup for the everyday people involved who were financially destroyed.
Rogue traders (fraudsters) operate in their own businesses and have also been employed by major financial institutions. They have literally robbed people of their retirement savings along the way. The shame of it all is that the bad element has sullied the name of the many vastly experienced professionals who work very hard in the best interests of their clients.
Then there are the fundamentally dodgy financial products that never should have made it to the market for sale.
Someone had to end the bloodbath and it was no surprise that the Government (after witnessing years of scandals, investigations and inquiries) commissioned the Inquiry.
Banks’ ownership of the industry and remuneration structures go to the root of many of the problems that have been encountered (and certainly put a lot of things in perspective).
Three bites of the cherry
“The acquisition by dishonest means and cunning,' said Levin, feeling that he was incapable of clearly defining the borderline between honesty and dishonesty. 'Like the profits made by Banks,' he went on. 'This is evil, I mean, the acquisition of enormous fortunes without work, as it used to be with the spirit monopolists. Only the form has changed. Le roi est mort, vive le roi! (The king is dead. Long live the king.) Hardly were the monopolies abolished before railways and Banks appeared: just another way of making money without work.” - Leo Tolstoy, Anna Karenina
It should come as no surprise that the major Banks (quite apart from normal banking activities):-
- have large financial planning divisions;
- own many financial planning businesses (branded independently) that advise consumers to buy investment products;
- own many investment institutions (branded independently) that sell investment products;
- own insurance companies and sell their own branded insurance products.
Here is a random selection:-
- ANZ own One Path;
- CBA own Colonial First State;
- HSBC & JP Morgan Chase own AMP;
- NAB own MLC;
- AMP own AXA;
- Westpac own BT Financial;
- CBA own CommInsure;
- Suncorp own AAMI, Asteron Life and GIO.
Banks make billions of dollars annually in profits for their shareholders. They are raking it in. If they do not, those in charge (the Board of Directors) are removed by their shareholders. The Board are on mega salaries and have very nice share incentive schemes in their Banks to boot. They do not want to lose their jobs and comfy lifestyle.
Australian Banks are amongst the most profitable in the world. There is a reason for that. Everything is squeezed (until there is no juice left in the orange).
Naturally enough, their primary aim is to make money for their shareholders. They make this money from you, the consumer.
Believe me, this is not a Bank bashing rant. Without them our economy would not function very well at all. You just need to be aware of the environment you are being asked to enter by investing in a financial product.
In this profit-driven environment, pressure comes from the top right down to the bottom. If you need to be convinced of this you should watch the recent ABC Four Corners programme on CommInsure (a Commonwealth Bank company) here.
It’s not just the Commonwealth Bank (whose share price rose from $26.00 in 1999 to reach $96.00 in 2015 - Yes, the figures are correct).
Nearly all of the major Banks have in recent years been embroiled in controversy and have been accused of not servicing their customers honestly and fairly. The official responses from some of the Banks can be found at these links as recent as 15 March 2016:-
All the Banks, in their own words, agree.
- take responsibility for their actions;
- acknowledge that they have made mistakes;
- are proactively dealing with situations and resolving them with clients who have been affected;
- are all committed to restoring the customer’s trust and confidence in their services.
So the moral of the story is, do your homework. If you are considering buying a financial product you should ask:-
- who ultimately owns the fantastic product you are being asked to invest your life savings in; and
- who (directly or indirectly) owns your advisor (in many cases one way or another a Bank will “own” your advisor).
Having established who the actual owners (of the product and the advisor) are check out the track record of both.
You may be lucky enough for a Bank-owned advisor to recommend that you buy a Bank-owned product and borrow money from the same Bank to buy the product. The borrowing bit is what is known as margin lending which I should record is a sensible strategy for some, but not, all. Ask any Storm customer.
So the Bank makes profit on the advice given, the product sold and the money lent.
This is what is known as getting three bites of the cherry.
It is also great business and nearly as ingenious as compound interest.
Just think you may be funding all of it.
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford
Ask yourself “Is a Toyota salesmen going to recommend that I buy a Volkswagen and vice versa?”
You know the answer. They are not because if they did (and you took their advice) they would not be paid.
If you were not already aware, you are entering an environment where your advisor will be recommending that you invest in something that they want to sell to you.
By and large advisors, brokers and planners recommend investments, mortgages, insurance and superannuation because they are remunerated for convincing you to buy a product from them.
They are salesman and not advisors in the true sense.
Traditionally, upfront and/or trailing commissions have been paid by the institutions business has been placed with. The obvious conclusion many made was that the products were better commission was being paid were more popular and therefore usually recommended.
From 1 July 2013 commissions were banned on new investments and superannuation products. Trailing commissions for selling life insurance remain.
Commissions for financial products purchased before 1 July 2013 may continue if the advisor continues to advise you on that product.
What does this all mean? It means the advisor may be reluctant to recommend that you leave a product you purchased before 1 July 2013 (and buy another one that is performing better now) as their trailing commission will stop.
They are conflicted. Self-interest will usually outperform all other interests.
The products of competitors (that may be perfect for your situation) will never even get mentioned.
A real estate agent will never advise you to buy shares or a financial product. Similarly, a planner will not normally advise you to invest in direct shares or that you set up a Self-Managed Super Fund to do so (which may be an important part of an investment strategy). They will certainly never advise you to invest in real estate which may be a very good idea and similarly part of a well thought out investment strategy.
It is also important to ascertain that your advisor can provide advice about the financial products you currently have. If your current super fund is not on their "approved product list" they may not be able to advise you about it and there may be other restrictions. In other words the advisor you choose should be free to recommend all financial products on the market that are available. Ask them about any restrictions they have.
“The truth is rarely pure and never simple.” Oscar Wilde, The Importance of being Earnest
As commissions are being phased out, upfront yearly fees are taking their place.
Financial planners now charge fees for services (and are paid commissions on life insurance and commissions on pre-July 2013 products).
Commonly an upfront fee for advice will be charged and then a continuing annual fee for sending you:-
- newsletters with generic information that every other client receives;
- reviewing your portfolio regularly;
- inviting you to seminars (with other clients usually with the added pleasure of enjoying a delicious pizza with them).
Planners must give you an annual fee disclosure statement (which may not include information about commissions). You should specifically ask your advisor about all disclosed and undisclosed commissions as ultimately you are paying them.
Reviewing your investments and investments strategy regularly is important. If you are paying for ongoing specific advice you should make sure you are getting that advice specific to your situation.
If the ongoing advice is the same as every other client receives then you may not be receiving value for money. This topic is beyond the scope of my confessions. However, you may find the information at these websites of use in helping you decide if you are receiving value for money:-
Anyway, back to the Banks.
“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” Robert Frost
The banks do not care about you. Ask any Storm customer.
They care about your money. They want you to be financially successful so that they can sell you something else and make even more money out of you.
It’s all about money.
Just like a Bank’s Board of Directors your Planner or Broker (whether employed directly or indirectly by a Bank) is under pressure to perform.
There are generous employer and employee commission and bonus schemes in place to encourage this performance. They are driven. Almost to places a time-share salesman is driven to. If they don’t hit budget they get to hit the road (on foot).
The smiling person sporting the nice smelling cologne and fancy clothes (showing you a multitude of upwardly moving graphs on large computer screens in a very fancy rented office) is under pressure.
Your advisor’s employer is under pressure to perform as well.
Everyone right up the food chain is under pressure. Every single person.
Pressure. All the way to the Bank that owns your advisor or the product that they want you to buy.
The most important thing is that you should not feel under any pressure to make any investment.
"Pressure pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets."
Queen, David Bowie
In making a decision to choose an advisor I hope this information puts everything in context and helps people properly decide what they should do.
Most only get one shot at it.
Who is really advising you?
To help you give the investment of your life savings your best shot I will discuss (in Part 3 of my confessions) the following topics:-
- getting to know who you are dealing with;
- finding out what your advisor is legally able to offer you;
- finding out what your advisor is qualified (through education training and relevant experience) to properly offer you;
- establishing that you have been fully apprised of all risks you have taken and are intending to take;
You should not think that by picking someone and taking their advice you have ticked all the boxes and your future happiness is assured. Wrong. It is an ongoing process.
Do not be lulled into thinking you never have to worry again. Slick advertising campaigns with brochures showing happy older people and their pure-bred happy dogs at the beach with their extremely well-behaved grandchildren, replete with promises of endless riches, arrows on graphs rocketing skywards and a joyful, worry-free retirement are meant to lure you into buying a financial product or choose a financial advisor.
They are designed to make you feel at ease. You should try to see through all of the fluff and get to what matters most.
To put things in perspective, I think it best to start with what your goals should be.
It's not rocket science
If you are reading this you have probably reached the time in your life when the eternal questions keep popping into your head: "Will we have enough to live on in our retirement? And what will happen to my spouse when I go. Will they have enough to survive on?"
I think it is fair to say that the starting point for anyone wanting to retire worry-free is as follows:-
- their health;
- a comfortable dwelling in a place they like near friends and doctors etc with no mortgage debt (with a minimal amount required for maintenance, rates, taxes and other expenses);
- a regular and sufficient income stream (with the maximum amount of social security benefits being paid to them if applicable) free of fees and taxes which allows them to live as they do now and travel etc (which is not affected greatly by fluctuations in the market or other external events);
- a rainy day account with enough to cover anything unforseen.
This, I think, is the minimum. It is also fairly obvious and something you should not have to pay a significant amount in fees to achieve.
By retirement age these days the average couple usually own their own home and vehicles etc, have some other investments perhaps as well as a reasonably-sized superannuation account balance.
Dwelling and cars and lifestyle assets like boats etc do not generate income.
Investments and superannuation therefore have to provide your income in retirement. If resources are insufficient, life insurance may be necessary to support loved ones if the main bread-winner dies.
To give yourself the best possible chance, I think it is prudent to find for yourself a suitably qualified:-
- Investment advisor (to advise you about maximising your wealth);
- Tax accountant (to advise you about minimising your taxes);
- Estate planning lawyer (to advise you how to manage your wealth and protect it from outsiders);
- Medical practitioner (to keep you around as long as possible so you can enjoy it all).
Find the very best Doctors in their fields, pay whatever they ask and do whatever they say (and remember that this is the best free advice you will ever receive). Your health far is more important than money.
Here are some facts:-
- Investments perform better than expected and worse than expected;
- Governments change tax laws when they want to collect more taxes;
- Lawyers win cases and they lose cases (and they can never guarantee that any estate plan or asset protection strategy is infallible);
- Medical practitioners are not going to stop you from dying (but they certainly can delay the inevitable and make things much more enjoyable along the way);
- Some people are just plain unlucky;
- One person cannot have that much knowledge and experience that they can properly advise you about everything (refer to Part I - the Estate Planning Conundrum).
- If you have independent advisors (by this I mean your advisors are not school/rugby/golf/boozy lunch/rotary or lions club buddies all bound at the hip) operating in their fields of expertise, you are more likely to be tapped on the shoulder by one of them if they think advice outside of their speciality is not right (or could be better). You have yourself a completely free reality check without even trying.
- Two heads are better than one. Couples should consider their goals and plans together and not leave it to one of them to do.
- There is less chance of Brad Pitt getting an Oscar for Best Actor and Angelina Jolie as one for Best Actress playing you and your spouse in a financial planning horror movie (Nightmare on Burramugga Crescent, Kirwan) if you have made wise choices in selecting your advisors.
Whilst things can still go completely wrong for you with the right advisors, you are certainly tempting fate with the wrong advisors.
Simply, it has to be good practice to have separate independent advisors advising you in their areas of specialty.
Once you have identified your goals, the next step is to assess your risks.
Risk and reward
As I mentioned in Part 1, there is nothing wrong in taking risks but it is only sensible that you should know you are taking them - on every front and at every level.
“What risks (financial and other) am I prepared to take in trying to achieve my goals?"
At one end of the spectrum is risking everything and at the other risking nothing.
Most of you will be stuck in the middle somewhere leaning to one side depending on your time in life and your personality.
You are nowhere if you do not know your risks.
Not knowing you are taking a risk is dangerous territory and something that is consistent in all of the financial planning horror stories that you hear about.
Only you can assess your own personal risk level.
In investing terms, usually the more risky an investment the higher the reward and the less risky, the lower the reward. In choosing the wrong advisors or products you are assuming risk with no chance of getting any reward.
That doesn’t make any sense at all as there is no upside for the risk assumed.
So if you get the process right you must be in a way better position (as you have ruled out one whole level of risk).
There are literally thousands of financial products and strategies on offer out there.
Some of them could be very very good for you. The trick is finding your way to them.
With the right people advising you, it is more likely you will meet up with them.
Part 3 will deal with what the various advisors can offer you.
If you have not read Part 1 of the Confessions of an Estate Planner series please click here.
These confessions are an attempt to provide a reality check and the right information on Enduring Powers of Attorney, Advance Health Directives, Estate Planning, Testamentary Trusts, Wills, Probate, Family Trusts, Family Law, protecting an Inheritance, Asset Protection, Estate Disputes, Estate Litigation, contesting Wills, Administration of Deceased Estates, Superannuation Death Benefits, SMSFs, Binding Death Benefit Directions & Nominations, Pensions, the Financial Planning Industry (including finding the right advisors) and the like.