The banking royal commission has exposed the very worst of the financial planning industry and, after what’s hit the fan, any self-respecting adviser is left dreading being tarred by the same reputational brush. Penalties handed out to those found responsible need to be severe and entrenched structures in the industry will have to change.
I’ve written about this only a few months ago, but the revelations over the past couple of weeks are making the bell ring louder to call time on the vertical integration model of financial services because it incentivizes people, from the boardroom down, in all the wrong ways.
Some twenty-odd years ago the banks hit on a new strategy to get their hands on Australia’s pool of superannuation that enjoys(?) government-mandated growth. They already had a bird’s eye view of what their customers’ finances look like, and they bought or built financial planning and funds management businesses together with the ‘platforms’ that connect the two, and constructed their own massive, money making eco-systems.
It’s a ticket-clipping machine: a bank sees you have a healthy credit balance in your account so suggests you talk to one of their friendly financial planners, who charges (cha-ching) for a financial plan that recommends you set up a wrap account (cha-ching) so you can invest in a bunch of managed funds that happen to be owned by the bank (cha-ching) and protect yourself with the bank’s insurance policies (cha-ching).
The advisers might be paid a base salary but almost invariably they’ll get a bonus based on revenues from product flogging, and what’s worse, the bonus will be bigger if they flog the bank’s own products. Not all the products are necessarily bad, but when incentives are as skewed as that you can see how it’s odds on that a client will not end up with the best available. Economics is largely a study of incentives, and that structure was always a disaster waiting to happen.
Something to make clear though, while it takes dodgy advisers to flog those products, the royal commission has made it abundantly clear the managers who were supposed to be overseeing them were as much to blame. Turning a blind eye to egregious behavior might not be the same as actively endorsing it, but it’s a long way from actively stopping it too. As for having policies that promote charging clients for nothing and interfering with what are supposed to be independent reviews, as the saying goes, the fish rots from the head.
Something else that may need to be part of the debate is how the banks are under relentless pressure to increase earnings every year. That kind of pressure always rolls down hill and pressure can make people do things they otherwise wouldn’t. It’s little comfort to the customers that suffer poor or conflicted advice that it’s likely their super fund will benefit from higher bank earnings.
An obvious way to change things that’s already been acknowledged by Commissioner Hayne is changing the remuneration incentive from maximizing revenue to maximizing compliance and customer satisfaction. Exactly how you do that though is quite another thing.
Already politicians are promising tougher penalties and it’s clear they need to be nasty enough to do serious potential harm: fines need to be big enough not to be written off as a cost of doing business. The ACCC’s Greg Sims is talking about being able to fine a company 10% of its revenue – in 2017 CBA earned $26 billion in revenue, now that’s a disincentive! The other thing that needs to happen is for managers or executives guilty of the worst behavior to go to jail; don’t slap a fine on the company that shareholders end up paying, the risk of spending time in the big house could see some serious changes to compliance!
On the other side, you’re never going to get a Royal Commission or media exposé to look at the good things an industry does. There remain thousands of ethical, hard working financial planners who genuinely prioritise their clients’ best interests and there are thousands upon thousands of stories of clients whose lives have been transformed through getting good financial advice. 80% of Australian baby boomers who work with a financial planner believe they are better prepared for retirement, and in the US out of 1,287 millionaires surveyed by Fidelity in 2016 the 56% who had an up to date financial plan felt 20 times more optimistic about the future.
The fastest growing area of financial planning is self-licensed advisers, or IFAs (Independent Financial Adviser). If your business isn’t answerable to a third party owner that’s pressing for growth at all costs you can make decisions that are only for the good of a client. There’s no doubt our industry has a lot of work to do, because at a time when saving for retirement is complex but critical, clients need to be able to know it’s their interests that are being served.
