If Treasurer Josh Frydenberg wants to set himself a challenge this year, he should have a crack at setting up a new framework for the country’s financial planning industry – one in which consumers can access affordable, quality advice, and industry players can earn a satisfactory return.
All through summer we’ve seen a steady stream of reports of financial planners being barred from the industry through the summer months. But that shouldn’t make us complacent that misconduct in the financial advice industry is anywhere close to being eradicated.
Particularly since the alleged misconduct of the banned financial advisors is depressingly similar to the misbehaviour that caused such outrage when it was aired at the Hayne royal commission.
This week alone, the Australian Securities and Investment Commission (ASIC) has banned two financial advisers from providing financial services.
The first was a Perth-based financial adviser who, ASIC says, recommended that his clients set up self-managed super funds (SMSFs) with low balances, and that they use an SMSF administration service which he owned, and that they invest in a fund which he managed.
The corporate regulator said that the adviser – Ballast Financial Services director Wayne Blazejczyk – had failed to prioritise the interests of his clients above his own, and banned him from providing financial services for five years.
The alleged misbehaviour is eerily reminiscent of one of the more memorable case studies of the Hayne royal commission: that of high-flying financial planner, Sam Henderson of Henderson Maxwell, who also funnelled clients into an investment platform in which he had a financial interest.
The Hayne royal commission had heard that he had advised one client to transfer her superannuation savings into an SMSF. Had she followed the advice, the client would have immediately forfeited $500,000.
Mr Henderson quit the industry after his appearance at the royal commission. In July last year, ASIC banned him from providing financial advice for three years after its investigation found that he’d failed to act in the best interests of his clients.
The second financial adviser to be targeted by ASIC this week was based in Northern NSW, and had worked for years as a representative of National Australia Bank and AMP financial planning licencees.
ASIC banned David O’Brien from providing financial advice for four years after finding that he failed to provide advice based on his clients’ personal circumstances.
But ASIC’s attention isn’t confined to individuals. The corporate regulator is also taking a look at listed wealth manager Evans Dixon over the advice provided to some of its clients.
Although ASIC is to be congratulated for its efforts to police the industry, the process of investigating all the complaints that it receives about financial planners is extremely laborious, expensive and time-consuming.
Where are the customers’ yachts?
And the dispiriting reality is that for every scalp ASIC parades in public, there are plenty more financial planners who are failing to take the trouble to properly investigate the actual financial position of their clients, and the financial products that they already own. Or who are providing financial advice from which they stand to benefit more than their hapless clients.
Indeed, the whole problem of ASIC’s approach to financial planning is that it’s completely focussed on weeding out the worst behaviour.
Neither the corporate regulator, or Canberra, is grappling with the dilemma of how to set up a consumer-focussed financial advisory industry.
Indeed, it is a national disgrace that a country which has managed to force its citizens to set aside close to $3 trillion in superannuation savings has failed to ensure that there’s an adequate system in place for ensuring that people can access good quality advice on how to invest their money when they reach retirement age.
In this respect, the observation of AMP boss, Francesco de Ferrari is apt. “Australia hasn’t really seen a true wealth industry”, he told a conference last October. “Everyone has just been focussed on selling products.”
For financial advice to be a viable industry, however, it not only needs to provide a high-quality product for consumers. It also has to ensure a sufficient return for industry players to provide that skilled advice.
Now, highly-regarded financial planners estimate that it takes around 25 hours to put together a comprehensive financial statement for individuals, which sets out recommended investment options.
Given that most top planners charge around $200 an hour, that means it will set you back some $5,000 for a top quality, personalised investment plan for your superannuation savings.
ASIC’s task of policing the financial planning industry has been made more difficult by the exodus of the big four banks from the sector.
Not surprisingly, it’s mostly only wealthier individuals who see the value in spending such a sum. The vast majority of people seek far cheaper solutions, with more than half opting for no financial advice whatsoever.
And that leaves retirees – many of whom are financially unsophisticated – at risk of using lower cost financial advisers who might be tempted to cut corners when it comes to establishing their clients’ financial position, or who might try to boost their financial advisory fees by encouraging clients to buy risky listed investment companies, from which they reap lucrative commissions.
Failure to appreciate change
What’s more, ASIC’s task of policing the financial planning industry has been made much more difficult by the exodus of the big four banks from the sector.
Starting in 2000, the big four banks, lured by the hope of becoming giant financial supermarkets, made a determined push into wealth management and financial planning.
But the banks failed to come to grips with the sales and commission-driven culture of financial planning, and to appreciate the huge damage their corporate reputations would sustain from widespread revelations that their financial planners – were putting their own and the banks’ interests ahead of their customers.
In the wake of the Hayne royal commission, the big four banks have all pulled back from the wealth management business. They’ve decided that the returns they’re likely to generate from staying in financial planning simply aren’t high enough to cover the cost of upgrading their compliance systems, particularly given the reputational risk posed by rogue advisers.
That leaves only AMP and IOOF as the only two big listed companies in the financial advice business, along with a multitude of independent advisers.
But the jury is still out as to whether AMP and IOOF will be able to develop a sustainable business model that allows them to earn decent returns from providing high-quality, affordable financial advice.
One option, of course, is for them to try to use technology to drive down the cost of financial advice, without compromising the quality.
But companies won’t invest in such technology unless they expect to earn a return that exceeds their cost of capital.
And they certainly won’t invest if they’re concerned that technology won’t be of much benefit in terms of reducing costs, because regulations still require financial planners to spend considerable time investigating their clients’ present financial circumstances.
Unable to follow, try again