My media mate Alan Kohler has called for more legislation to fix up what he sees is wrong with financial planning. The big question is, what that legislation should be?
The legal reform which is most needed is one that gives advice a greater chance of getting through to the wider population. At present, about 70 percent of the population are flying blind with their wealth-building decisions. And they’re crashing into the likes of Westpoint and Bridgecorp. Lawmakers, rather than ASIC, are accessories before the fact.
Anyone who has worked in this very important game of determining the future of so many people’s material lives realises that there are lots of problems stopping good service; one is the calibre of legislation dominating financial planning.
Kohler wants to outlaw the cosy relationships – where biased and tied relationships between advisers and financial institutions results in a myriad of conflicts of interest – that work against the best interests of the client.
This was the precise reason why I set up Switzer Financial Services on a true fee-for-service basis. We charge by the hour for the thing we are selling: advice, not product. And while I would prefer a perfect world, where financial planners weren’t giving financial incentives to be blinkered in their advice, it doesn’t mean that clients get bad advice, they simply don’t get the best advice. It also means that many, but not all, are overcharged.
Even fee-for-service advisers have to admit that they have many cases where the tasks for the $500K client are little different to the $800K client, yet on a one percent charge basis one client pays $5000 while the other cops an $8000 bill. I operate off this question: “Would I be happy if my wife or children were victims of excessively overcharged financial advice?” I have seen two plans from a well-known group where they have tried to charge two different women with net assets less than $2 million over $60K for their financial plans. This borders on the criminal.
However, excessively-priced advice still can be good and the products flogged, especially over the past four years, can prove to be pretty rewarding. That said, financial advisers who ignore industry super funds are letting some of their clients down. As advisers we all know that these funds have generally outperformed most financial institution’s funds and are cheaper.
A bigger concern is excessive regulation. I had a client come in wanting just an hour’s worth of advice. He wanted me to pick between two super funds and both were great performers. I had reservations about one fund but explained that, by law, I would have to understand his circumstances, goals and appetite for risk before I could give advice– which would take a number of hours. So he left. The law stopped me from giving advice. Sure, the law makes us go the ‘nth degree for the best advice but the current cost of advice is hurting the battlers out there.
I wonder how many people there are who have lost their retirement nest eggs, punting on the likes of Westpoint and Australian Capital Reserve, because they feared the stock market and thought six percent fixed deposits at a bank were too stingy?
If people could access advice by the hour, without the excessive amount of work currently being required, then even biased, product-loving advisers could have given some decent advice that might have saved people from the misery they have been through. And if people knew that funds offering nine percent could go broke while banks will be here in the long run, they could have been saved from big losses.
At the end of the day, I would rather my relatives be in an overcharged product from a financial institution than in some of these fixed interest products that are flogged on radio and in newspapers in an advice-free zone. This is an urgent problem to be fixed for a future federal Government.
Peter Switzer is the founder of Switzer Financial Services, a financial planning, accounting and coaching business.