The financial planning industry is riddled with conflicts of interest because of the kickbacks paid to advisers.
Sometimes things just fall in your lap.
This week I Tweeted – as in the social networking site, not budgerigar – to find someone who had recently been to a financial adviser, and interview them about their impressions of the process.
The first email that came through was from a guy I’ll call Bill, who we’ll meet in a moment.
His experience with a wayward financial planner is a perfect example of what the latest government gabfest, the Ripoll inquiry, was set up to sort out – that the financial planning industry is riddled with conflicts caused by kickback commissions paid to financial advisers.
Yet, after nine months of investigation, they somehow missed that elephant in the room and instead were “applauded” for recommending the Government propose a “fiduciary duty” on financial planners – which, to the average person, sounds like a move Hulk Hogan does in the ring.
“Fiduciary duty” basically means that financial advisers would have to work in their clients’ best interests, rather than their own.
That it would take a long, drawn-out investigation to come up with the idea that advisers should “do the right thing by their client” – and it was only a recommendation, rather than legislation – shows just how much the financial services industry needs an inquiry.
To get two sides to the story I not only caught up with my Twitter mate Bill but also an independent financial adviser called Matthew Ross.
Bill, 34, is a full-time student who went to see a financial adviser about investing a $123,000 inheritance. Bill is debt-free, having paid off his home, but is facing something even more serious than personal finance matters – he is suffering from cancer and is awaiting life-threatening surgery.
How did you find your planner?
“He was my parents’ financial adviser – not that they have much of an idea about investments and stuff.”
What fees do they charge?
“It was quite high, because two of the funds we invested in were geared funds (managed funds that borrow internally to ramp up the leverage), so I think the commissions were about 4 per cent.
“They put it on a platform with Colonial First State, and they also took out a $55,000 margin loan, which I was in two minds about.”
Did you understand the risks of margin lending?
“Yes I did – it’s like taking a double loan, really.”
Did you understand that your lender will be getting a double dip of fees – from both the money you borrow and the extra money you invest?
“I wasn’t aware of that.”
Did you understand the strategy they recommended, given that you are paying around $5600 a year in fees before you earn a cent?
“I understand what they are doing.
“I’ve been quite ill and I am undergoing major treatment, so I am only thinking of a five to seven-year plan, because I don’t think I will be around in 20 years. So I am looking at a plan to maximise my returns over that period.
“But when I saw the fees I was thinking about going to a stockbroker and investing directly in the market with some blue-chip shares.
“To be honest, the only reason I didn’t was that I felt some pressure – mainly from my family. And the planner had already written up the statement of advice, and done all this work – so I found it hard to get out of once we’d started that process.”
The financial planner
Matthew Ross is a fellow financial adviser who happens to agree with me that the industry is on the nose.
Why are financial planners not respected in the broader community?
“Because they cannot be trusted.
“Basically it boils down to this: We have asked for their trust, gained it, and then broken that trust. Most planners have pre-packaged solutions – I call them pre-baked cakes (“here’s one I prepared earlier”). And it’s only after the event that the client understands that the advice wasn’t aligned with their best interests.” What will the financial planning industry look like in 10 years?
“I hope the membership of the FPA (Financial Planning Association) drops to 20 per cent of what it is today, because 80 per cent of them shouldn’t call themselves financial planners. Instead they should be called what they really are: salespeople.”
Do clients understand how much money fees take?
“It comes down to trust with the client, because at the end of the day a client doesn’t have time to second guess their adviser – in much the same way as I don’t have enough time to check whether the mechanic is doing a good job on my car.
“Even the so-called fee-for-service advisers still charge asset-based fees, which is really just a commission by another name. The only way you can assure that you get independent advice is that you pay them a fee, so they have no other master – that’s where the conflicts come.”
Will the latest round of regulation prevent another Storm Financial?
“If ASIC (the Australian Securities and Investments Commission) gets their way, and bans all asset-based fees, they can – absolutely.
“Look, it’s a dog-eat-dog world. People rip people off. The Government needs to step in and stop this from happening.”
Speaking to Matthew was like talking to myself – well a much more coherent and understandable self anyway. I agreed with almost everything he said; it would be great if all financial planners did the right thing, and those who didn’t would feel the full force of the regulatory stick.
But there’s about as much chance of this happening as Malcolm Turnbull becoming the next prime minister.
The fact is that eight out of 10 financial advisers are employed by the banks and the insurers, and they get paid very well to flog average, fee-ridden products to their customers – despite there being better investment products out there.
No legislation is going to change that. Nor is ASIC ever going to be able to totally prevent spivs taking money from the gullible or the greedy.
Perhaps a more pragmatic solution was announced last week by the British Government, which is setting up a public agency that will give free financial advice to the public, funded from a levy on financial service firms – who can definitely afford it. Just ask Bill.
Here’s my own advice on how to manage your money.
Tread your own path!