Welcome to the Wild West

Welcome to Say What Wednesday

This week we’re going to answer some of the burning questions that have been on a lot of peoples’ minds around the banking royal commission…and rather than repeat everything you’ve been hearing in the media, we’re going to approach this from a different angle. In fact, beyond doing this podcast and teaching personal finance courses, I am one of these financial advisers all painted with the same stroke by ABC and other media outlets.

Banking Royal Commission

1. A formal public inquiry into misconduct in the Banking, Superannuation and Financial Services Industry, established on 14 December 2017 – it’s all anyone can talk about!
2. Three facets
   • Broking
   • Financial Services
   • Small and Medium enterprises

What are the allegations?

1. Fees for no service
2. Investment platform fees – lack of transparency (fees hiding in products)
3. Inappropriate advice – advice not in the clients’ best interest
4. Improper conduct by advisers – Sam Henderson and improper conduct

What is involved with advice?

1. Understand clients’ goals, and their current situation
2. Advice should focus on strategy first, and products last
3. Unfortunately, most of the issues are with institutions and companies that are product focused where it’s really just placing a client into a product. Advice becomes conflicted.

Their internally managed products create conflicted advice

AMP, Westpac/BT Financial/Colonial First State, CBA/CommInsure, ANZ, NAB

• They own the platform – and collect fees
• They own the investments – and collect fees
• They own insurance products – and collect premiums
• They own loan products – and collect commissions
• They have advisers – who are salesmen placing clients into products, to collect fees and are incentivised with volume-based bonuses.

Welcome to the Wild West

1. Prior to current times, where an SOA (Statement of Advice) is required in order to outline financial advice recommendations, you only needed to be RG146 compliant – and you could get it this certificate done in 2 days before technically being allowed to provide advice
   • The legacy of this is a lingering culture and mindset whereby advisers don’t truly want people to know what is going on as they have never had to disclose information of be transparent
   • All products were commission based and clients paid little to nothing for advice…but you get what you pay for. Advisers are incentivised to push the products that paid them the highest commissions.
2. Future of Financial Advice (FOFA) –
   • They got rid of commission-based incentives and raised the costs and time it took for practices to provide advice
     • This is, essentially, a great thing, but there were unintended consequences.
     • The incentive was not removed for banks and industry funds to only recommend their own products. They just changed their KPI structure to incentivise their advisers to increase volumes of clients being put into their products.
     • It pushed out independent advisers that weren’t aligned with the banks as costs went up (government regulation costs), and the only ones who could cover these costs were the big end of town who were still making plenty of money through all their own products.
3. Best Interest Duty (BID) – “Safe harbour conditions”
   • No.1 – Identify the objectives, financial situation and needs of the client that were identified through their instructions
   • No 2 – Identify the subject matter of the advice sought by the client
   • No 7 – Take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances. – This is a catch-all that can catch out inappropriate advice every time
     • This is a bit heavy handed though because, in effect it doesn’t look after the clients, it just forces advisers to spend more time and effort covering their butts.

Who are the winners and the losers?

1. The advisers who are with institutions are still winning! Industry funds, banks, anyone with a product from which the company collects a clip.
2. Adviser insight study – $2,500-$3,000 actual cost vs $700 cost clients would expect to pay.
3. Independent advisers – The costs are high. PI is about $10k p.a. Costs that need to be passed onto clients in order for a company to remain in business.

What will the end result be?

Greater inequality – as the cost of advice goes up

1. Cost of operating increases
2. Needs to be passed onto the consumers
3. Independent fee-for-service gets more expensive
4. The options you have as an individual
   • Go to bank/industry fund (product owners) – Cheap advice for the same situation
   • Pay more – you might get good advice. You have to pay more for now to see benefits later, but when you receive the advice you should be able to understand how the advice will benefit you
5. Creates inequality
   • Those that need advice – those will little financial resources – can’t afford it
   • Those that have a lot of money – do they need advice? Yes, but they pay for better advice and continue to improve their situation and perpetuate inequality.
6. Incentives for advisers is to cover your butt, not give advice – spend more time on compliance now than on actual advice and improving skills
   • Example – FAESEA education requirements coming out next year… I am not educated enough to give advice. I have BCom and BEcon from UQ, Finance and International Finance and Trade. I have the DFP, did the CFP which is sort of like the accountants CA, I have Diplomas of SMSF, Margin lending and gearing, Certificate 4 in Mortgage broking, am an accredited listed product adviser with the ASX
   • BUTTTT …if I had done just a BCom from Griffith I would be fine? UQ 3 (94), G 14 (499)
7. The cost to tax payers – Royal commission will cost tax payers an estimated $75m – $100m, banks estimated to spend $100m on lawyers and protection for themselves as well. That is the level of what people have apparently been compensated…

The players and outcomes – $220m of compensation

• AMP – not actually the worst here, only reason is mis-leading ASIC $4.5m
• Westpac/BT Financial/Colonial First State
• CBA/CommInsure – worst offender, $118m
• ANZ
• NAB

The real truth is, I feel like the people leading the charge on this are just making more of a problem

1. You cannot regulate greed, incompetence and laziness, which is really all that this has stemmed from.
2. I’m afraid that nothing will change, except those rogues will just go further underground and continue business as usual.
3. One thing I agree with media – CULTURE – The culture is ingrained from the older adviser who do have little incentive to change. I know first-hand, which is why I went to start an independent practice, avoiding all of this BS.

If you have an opinion, feedback or a question on this topic, or anything else for that matter…hit us up!