I love humanity, but I hate people." That quote is attributed to someone called Edna St Vincent Millay (1892-1950), and I know what she means.
For financial planning and me it’s the other way around. I love (most) financial planners, but I hate their industry. Well, to be more specific, I love the ubiquity of financial advice these days because most people need it, but I hate the way it is usually provided.
I am often accused of having it in for financial planners and their industry, and while I can understand how that characterisation might arise, it’s wrong.
With surprisingly few exceptions, every financial planner I have met is someone who cares about their clients and wants to do the right thing. What’s more, I not only think financial planning is worthwhile, I think the industry has been made an essential service by the way in which investing for a retirement income has been privatised, and by how the market risks involved have been shifted from corporations and governments to individuals.
It is a disgrace that governments have initiated this wholesale transfer of financial risk without paying proper attention to the support system in place to deal with it. The Hawke Labor Government set up the industry super fund movement in the idealistic, but idiotic, belief that that’d be all everyone would need.
Bob Hawke and Paul Keating thought that as long as the unions were involved in distributing the funds, then that would be fine and everyone would be caught in the net. In fact, as we know, unions were in the process of dying and couldn’t even distribute themselves, once John Howard came to power.
The rest of us were left with the retail funds management industry and its distribution arm – financial planning – which happily fed the majority of Australians into the mincer of high fees and poor performance, in return for a small trail, of course.
In those halcyon early days, financial planners did very nicely indeed out of the fund commissions, and then platforms came along and reduced their costs so they did even better. The wailing from industry funds belatedly convinced the Howard Government to do something about the conflicts of interest inherent in trailing and upfront commissions and, on the stern advice of the retail investment industry, it confined the reforms to disclosure. And so Financial Services Reform legislation created massive documents for clients to read, which of course meant even less effective disclosure because no one read them.
These days there is gradual change being driven partly by consumers’ demands for an absence of conflicts and partly by the guilty feelings of financial planners themselves. There is an astonishing number of planners who don’t like the way their industry works and have set up as fee-for-service only advisers so they can sleep at night.
Next question: what is fee for service? I reckon it’s the way lawyers and accountants charge, which is by the hour, but the lure of the basis points is too great for most financial planners – even the most honest – and so fee for service usually means a percentage skim of the client’s account. In my view this is almost, but not quite, as bad as a trailing commission – at least it is paid by the client for advisory services rendered, rather than by the fund manager for distribution services rendered.
On its website, the Financial Planning Association of Australia has the following words: “The FPA and its members strive to improve the financial well-being of all Australians.” I’m sure they believe that, but really it’s just spin. They are actually striving to sell financial products because that’s how most of them make a living. And to hark back to my quote at the start, the problem is not the planners themselves but the dealer groups that employ them and the institutions that either own or employ the dealer groups.
Alan Kohler has been a financial journalist for 37 years and is currently the publisher of Eureka Report, an online independent publication for investors, and Business Spectator, a new 24-hour-a-day business news and commentary website.