It is vastly disappointing that the new Labor Government is energetically bringing big changes to a variety of things, except for retail financial services. There has been an apology to the stolen generations, signing of the Kyoto protocol on climate change, pushing ahead with broadband for all, a start to de-politicising the public service and a major review of innovation policies.
But tackling the conflicts of interest in financial advice? Too hard. The minister Senator Nick Sherry is sticking with the status quo. The problem is that nobody powerful is calling for change. The power all lies with the vested interests who like things the way they are, and who insist there is no crisis that needs to be addressed.
Yes, a lot of financial planning clients lost money in Westpoint, but that was a long time ago. And Fincorp only lost the money of people who didn’t use financial planners. Who can blame the industry for not wanting change? The owners of investment platforms in particular are making a very good living doing not very much, and the sucker fish who are living off the Great Platform Skim – fund managers and financial advisers – are perfectly happy too.
Their customers, the clients who are overpaying for an often inadequate and conflicted service, are mostly blissfully unaware there is a problem. In other words, there is no squeaky wheel to be oiled in retail financial services – with the trifling exceptions of your correspondent, Eureka Report, and this magazine – and therefore no need for Senator Sherry to get out the oil can.
Recently, a friend passed on to me a statement of advice received by his mother from a very reputable financial adviser – famously reputable in fact – for my opinion on it. It all looked pretty good, in fact the advice was extremely sound: set up a self-managed super fund for the tax advantages, put the money ($500,000) into a bank term deposit, sit back and collect the interest as a tax-free pension. And then I saw the fee: $8,330 per annum. A mere 1.67 per cent, and roughly in line with what everyone else is charging for financial advice. Except that it’s $694 per month, ongoing, to set up a super fund and put the money in the bank.
I asked the son what else his mother pays nearly $700 a month for (absolutely nothing, he said), and what he or she would expect to get for that sort of monthly bill. A lot more than the once-off setting-up of a tax structure and the administration of a bank account, that’s for sure. They were shocked when this was pointed out to them.
And this wasn’t even the 2 or 3 per cent in commissions that many Australians are having skimmed from their savings by investment platforms so that the money can be bunged into the sharemarket by fund managers and invested until it’s all gone.
I had a most pleasant lunch the other day with the managing director of one of the nation’s largest financial services companies, and the conversation eventually turned to the question of financial planning commissions, as it does.
I trotted out the arguments with which I have been boring people like him for seven years – that commissions tilt advice towards managed funds when that isn’t always appropriate, and skims far too much off people’s accounts. He trotted out the usual defence – that individuals need financial advice and if it wasn’t buried in commissions and taken out of their accounts they wouldn’t get advice at all. We then got back to talking about the cricket. What’s the point? His company’s profit depends on the system staying as it is.
Yes, there are tentative moves by some big firms towards “fee-for-service”, but the adviser in the example of my friend and his mother was a fee-for-service planner. He rebates commissions. Then he slugs you.
Alan Kohler has been a financial journalist for 37 years and is currently the publisher of The Eureka Report, an online, independent publication for investors.
