There was a seminal moment during the first session of an Australian Securities and Investments Commission (ASIC) conference they call the “Summer School". The chief executive of the Australian Consumers’ Association, Peter Kell, was engaged in a discussion/debate on stage about the regulation of advice for do-it-yourself (DIY) super funds, when he remarked: “It seems to me the elephant in the room here is that superannuation is compulsory in this country – it’s not optional.”
There was a brief, slightly stunned, silence in the Sofitel ballroom, before the debate resumed. I thought at the time: “That’s right! It’s not as if Australians have an alternative to saving privately for their retirement and putting ourselves at the mercy of markets and the various intermediaries who help us get access to those markets.”
It certainly steeled me for my own session, next up on the programme – a discussion around the subject: “Taking advice to the next level – is it technology, professionalism or fiduciary duties? All three or more? Is advice really that important or are better products and disclosure the answer? How do we make advice more available and affordable?”
As you can imagine it was a subject I was happy to get my teeth into, and to pick up some of the themes Kell had raised during the first session of the day. “Financial advice can be important,” I said. “But too often is just a fig leaf for the financial services industry’s sales effort.” A ripple went through the audience of members of the financial services industry. I continued: “There is nothing wrong with sales. What’s wrong is dressing it up as advice, and then browbeating the regulators with the reasonable-sounding assertion that advice is necessary. So it is. So is selling. But they should not be combined.”
I reminded the audience that I last addressed an ASIC Summer School two years ago, just after the collapse of Westpoint. My message then was the same as it was this year: the disclosure-based regulatory regime has failed and something more interventionist is now required. Specifically, the provision of advice needs to be separated from sales.
At this point my audience started to lose interest. “There goes Kohler again,” they were thinking. But the deputy chairman of ASIC, Jeremy Cooper, had given me a bit of a gift earlier in the day. He revealed that a new survey had shown that 46 per cent of Australians did not have the educational standard required to understand financial disclosure documents – even if they read them. So naturally the challenge I put to ASIC during my address was: “So, what are you going to do about that piece of news? Spend 50 years raising the educational standards of Australians, or come up with an alternative to disclosure to deal with conflicts of interest and actually get rid of the conflicts?”
The other part of my session was about the quality of the products, and whether better products are part of the answer. I pointed out that according to figures from Mercer Australia, the median fund manager return over the past five years was 19.8 per cent a year before fees, compared to 18.7 per cent a year from the market index. Fees would have been greater than the 1.1 per cent difference between them – probably twice as much.
Over the three months of the bear market that started on November 1, 2007, the median loss was 14.2 per cent, also before fees, versus the index benchmark of -15.7 per cent. “So for the privilege of making or losing about as much as the market, the retail financial services industry charges someone with a million dollars about $2000 a month,” I told the conference. “Someone with $500,000 is charged around $1000 a month.” “Investment management is by far the most expensive utility. For many people it is more expensive than power, gas, water and phones put together.”
Which gets us back to Peter Kell’s remarks. Those other utilities are essentials of life and therefore their prices and provision are tightly regulated. Financial intermediation may not be essential, but it is mandatory.
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.