Fi­nan­cial ad­vice: Su­san Hely How to pro­tect your­self

The ad­vice model is se­ri­ously flawed so take care when you’re look­ing for fi­nan­cial guid­ance

Money Magazine Australia - - CONTENTS - STORY SU­SAN HELY

‘You need to see a plan­ner” is one of the mantras of the fi­nan­cial ser­vices in­dus­try. We are led to be­lieve that plan­ners can help us reach our fi­nan­cial goals and make us money.

Some 2.3 mil­lion Aus­tralians vis­ited a fi­nan­cial plan­ner in 2016. They sought ad­vice about re­tire­ment (about 35%), loans and in­vest­ments (25%), a self-man­aged su­per fund (20%), tax (10%) and es­tate plan­ning (10%).

But rather than build­ing wealth, too many Aus­tralians have had their wealth gouged by poor fi­nan­cial plan­ner prac­tices. The Hayne royal com­mis­sion into mis­con­duct in fi­nan­cial ser­vices un­cov­ered jaw-drop­ping ev­i­dence that go­ing to a fi­nan­cial plan­ner hasn’t helped peo­ple; in­stead it has been to the detri­ment of hun­dreds of thou­sands of Aus­tralians.

It re­vealed that peo­ple were over­charged, re­ceived poor ad­vice, paid for ad­vice they never re­ceived and were pushed into prod­ucts that hurt their abil­ity to reach their goals. Plan­ners were re­luc­tant to change un­der­per­form­ing in­vest­ments be­cause that would in­ter­fere with their “grand­fa­thered” trail­ing com­mis­sions. In some cases peo­ple were fi­nan­cially dev­as­tated.

What went so wrong? The prob­lem has been with the “ver­ti­cal in­te­gra­tion” model of the big fi­nan­cial in­sti­tu­tions – the big four banks and AMP. They have run their own in­vest­ments and in­sur­ance as well as own­ing the prod­uct dis­tri­bu­tion through fi­nan­cial plan­ners. These five own the bulk of all fi­nan­cial plan­ning busi­nesses in Aus­tralia al­though this sit­u­a­tion is set to change. Of­ten con­sumers don’t even know that their fi­nan­cial plan­ner is tied to a big bank or AMP as there are lots of con­fus­ing brands.

Fi­nan­cial plan­ners are obliged by law to give ad­vice that is in their client’s best in­ter­ests. But these big busi­nesses of­ten give in­cen­tives to plan­ners to sell their in-house prod­ucts whether they are ap­pro­pri­ate or not. Of­ten the in-house prod­ucts were clearly rated as “ex­pen­sive” and “poor per­form­ing” but the sales-driven plan­ners tar­get­ing re­wards chose poor prod­ucts for their un­sus­pect­ing clients.

In many cases the fi­nan­cial plan­ning in­dus­try has gone to elab­o­rate lengths to ap­pear to do the right thing but, ac­cord­ing to the royal com­mis­sion, it has largely been smoke and mir­rors. Take the list of ap­proved prod­ucts (APLs) that many fi­nan­cial plan­ners work off. Mar­keted as care­fully re­searched in­vest­ments, they are in fact the ones that pay a hefty “shelf space” fee to be on the list and are not nec­es­sar­ily the best. Also in the case of AMP, most of the funds se­lected by its plan­ners were in-house prod­ucts.

One of the rea­sons plan­ners rec­om­mend in-house in­vest­ments, as re­vealed by the royal com­mis­sion, is that the par­ent com­pany de­mands a sales hur­dle for buy­ing back the busi­ness from a re­tir­ing plan­ner.

And the dilemma of how to find a good ad­viser has got even more dif­fi­cult. Of­ten in­de­pen­dent fi­nan­cial ad­vis­ers – or those that aren’t un­der pres­sure to sell any com­pany’s in­vest­ments – have al­ways looked more straight­for­ward and promis­ing. But it turns out that some in­de­pen­dents also run their own funds and prod­ucts and are putting their clients into those, re­gard­less of whether it is in the client’s best in­ter­ests. Or they have links with prop­erty de­vel­op­ers and buyer’s agents who pay them a fee.

In­creas­ingly in­de­pen­dent fi­nan­cial plan­ners are run­ning their own in­vest­ments and man­aged ac­counts, of­ten called sep­a­rately man­aged ac­counts. They were orig­i­nally shares and some man­aged funds. Some in­clude ex­change traded funds. Why do they do this? Clients have been led to be­lieve that the plan­ners’ in­vest­ments and prod­ucts are su­pe­rior and bet­ter priced. But are they? Do fi­nan­cial plan­ning firms have the in­vest­ment ex­per­tise to build a share port­fo­lio?

Ian Knox, chair­man of fi­nan­cial plan­ning group Paragem, says it is im­por­tant to check whether plan­ners re­view al­ter­na­tive op­tions to their own so­lu­tions and demon­strate that they are not suit­able.

Rep­u­ta­tions smeared

The royal com­mis­sion sparked com­men­tary about how the ver­ti­cal in­te­gra­tion model is bro­ken: the banks and other in­de­pen­dent groups that man­u­fac­ture their own prod­ucts are not the best ones to give ad­vice to con­sumers. The hear­ings raised the prob­a­bil­ity that big in­sti­tu­tions have bro­ken the law, with pos­si­ble pros­e­cu­tions of se­nior ex­ec­u­tives.

Not sur­pris­ingly, the big banks don’t want to be as­so­ci­ated with these scan­dal-rid­den prac­tices. Client trust has been bro­ken. ANZ and NAB have an­nounced plans to off­load their wealth and su­per­an­nu­a­tion di­vi­sions. Com­mon­wealth Bank is sev­er­ing ties with its wealth man­age­ment arm, Colo­nial First State, not via a pub­licly listed com­pany as first planned but a com­plete de­merger.

There is a big ques­tion mark over the fu­ture of fi­nan­cial plan­ning in Aus­tralia. The royal com­mis­sion will hand down its fi­nal re­port in Fe­bru­ary next year. In the mean­time, if you need a good fi­nan­cial plan­ner, how do you find one?

Fi­nan­cial ad­vis­ers who have been do­ing the right thing by their clients and do not run their own

in­vest­ments are find­ing their rep­u­ta­tions smeared by the bad prac­tices ex­posed by the royal com­mis­sion.

“Noth­ing pisses me off more than hear­ing about poor, un­sus­pect­ing peo­ple get­ting ripped off by a greedy fi­nan­cial ad­viser,” says Stu­art We­myss, a char­tered ac­coun­tant and fi­nan­cial plan­ner who runs his own plan­ning busi­ness, ProSo­lu­tion Pri­vate Clients.

“A com­mis­sion-based in­dus­try at­tracts self-serv­ing in­di­vid­u­als – not ev­ery one but some – so it needs tighter con­trols. Over the past 30 years, the in­dus­try could have been a lot more proac­tive to im­prove things and avoid peo­ple get­ting ripped off. Over­all, I have a pretty neg­a­tive view of the in­dus­try and be­lieve that ‘good’ fi­nan­cial ad­vis­ers are in the mi­nor­ity.”

Con­flicts of in­ter­est

We­myss has been in­spired to write three books, the lat­est called In­vestopoly. He says the only thing to do to avoid hav­ing a bad ex­pe­ri­ence with a fi­nan­cial plan­ner is to avoid those with any con­flicts of in­ter­est. “You should never, ever take fi­nan­cial ad­vice from some­one who has a con­flict of in­ter­est. Do­ing so would ex­pose you to sig­nif­i­cant risk – and it’s just not worth it.”

Just as you wouldn’t feel com­fort­able if your doc­tor was em­ployed by a phar­ma­ceu­ti­cal com­pany, you shouldn’t go to a plan­ner who is owned by a big fi­nan­cial in­sti­tu­tion, says We­myss. Laws in Aus­tralia pre­vent phar­ma­ceu­ti­cal com­pa­nies from own­ing and op­er­at­ing med­i­cal prac­tices but not fi­nan­cial in­sti­tu­tions from own­ing plan­ners.

Ja­son Petersen, a fi­nan­cial plan­ner and head of ad­vice wealth man­age­ment at in­de­pen­dent plan­ners 5 Fi­nan­cial, says that by not be­ing aligned with a bank or fi­nan­cial in­sti­tu­tion his busi­ness is free to look broadly in the mar­ket place for fi­nan­cial prod­ucts that serve the best in­ter­ests of his clients.

We­myss be­lieves that fi­nan­cial plan­ners who are owned by banks and big in­sti­tu­tions such as AMP should be re­named fi­nan­cial bro­kers and only truly in­de­pen­dent fi­nan­cial plan­ners should be called plan­ners. He es­ti­mates that only 10% of plan­ners are truly in­de­pen­dent so that of the 25,400 or so in Aus­tralia only 2500 would be called “fi­nan­cial plan­ners”.

Chris Brycki, founder and CEO of Stockspot, the on­line in­vest­ing plat­form, says fi­nan­cial ad­vis­ers need bet­ter train­ing so they can rely on their own knowl­edge, re­search and ex­pe­ri­ence when pro­vid­ing ad­vice rather than blindly be­liev­ing the mar­ket­ing spin from prod­uct man­u­fac­tur­ers. “The cur­rent min­i­mum stan­dard, a two-week course, only teaches prod­uct sales, not anal­y­sis.”

He says that when ad­vis­ers are bet­ter versed in how fi­nan­cial mar­kets and prod­ucts work, there’s less chance they will be duped into sell­ing the poor prod­ucts con­stantly be­ing pushed on them.

Of­ten in­de­pen­dent ad­vis­ers run quite small op­er­a­tions and re­strict client num­bers to a cer­tain level, says We­myss. You can ex­pect to pay around $3000 to $5000 a year for fi­nan­cial ad­vice. “Qual­ity, hon­est and in­de­pen­dent ad­vice is not cheap to de­liver. In fact, it’s ex­pen­sive,” he says.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.