I have sometimes been accused of not giving financial planners any credit for delivering value. That is not true – I readily acknowledge that there is a significant number of individuals in the financial planning industry whose skill and experience is invaluable to their clients.
Looking at the industry as a whole, however, produces a scorecard of very mixed results. Let me list here a few of the key tenets of good investment advice, together with a comment on how the financial planning community measures up.
1. Asset class selection and diversification. Matching of a client’s objectives to investment profile has generally been well promoted by the industry. The financial planning industry has been important in giving mum and dad investors the confidence to enter equity markets and to tolerate volatility in pursuit of better long-term returns.
2. Product knowledge. Investment products develop out of an interplay between financial service providers, regulators and tax authorities. The combination of ingenuity and politics ensures considerable complexity. The financial planning community has responded well on this score, which is one of the reasons why superannuation has grown so rapidly, both in absolute terms and as a percentage of the total investment market.
3. Asset diversification. In general terms I think it is fair to say that planners represent a big improvement over stockbrokers on this score. Planners seldom recommend individual stocks, usually promote professional funds management and tend to favour diversified superannuation portfolios. On the other hand, the trend in recent years for some planning firms to act as selling agents for particular property developers is usually bad for diversification, and often destructive of wealth.
4. Manager selection. Again here the scorecard is mixed. It is true that as a whole the planning industry generally contributes to a shift away from the poorest performing funds over time. However this trend can often be muted or delayed by inappropriate loyalties, usually secured by commissions or soft dollars. What is an absolutely appalling blight on the value of advice is the complete failure of the planning industry as a whole to identify the best performing super funds over the last 10, seven, five, three or one years.
A recent media release by SuperRatings says: “a $100,000 (balanced) super investment five years ago would show a return of $205,813 in the leading fund and $153,932 in the bottom fund. The median would be up around $177,417”. None of the top 10 funds were promoted broadly by the planning industry.
Garry Weaven is Chair of Industry Funds Management, an investment service provider to the superannuation industry, a director of Members Equity Bank, which is owned by 40 superannuation funds, and a director of Pacific Hydro.