Financial advice: Susan Hely How to protect yourself
The advice model is seriously flawed so take care when you’re looking for financial guidance
‘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.
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.