A recent post in this publication featured a paper by Gail Pearson, Professor of Business Law at the University of Sydney Business School.
The otherwise well-balanced document was somewhat misleading in its title, “Spotlight on planners ignores dodgy financial products”.
While it didn’t expand greatly on the premise, the title creates the impression that many of the problems experienced by recipients of financial advice were due to these “dodgy” products.
Undeniable as it may be that there have been some instances of products that should, arguably, have never been in the marketplace, this conclusion is usually drawn with the benefit of hindsight. The failure of a business venture, for whatever reason, does not, in and of itself, mean that the business constituted a “dodgy” investment at the time that the decision to invest in it was made.
The paper makes reference to the regulatory control of financial products lacking substance when compared to that applicable to “tangible” products. The factual basis for such an assertion is questionable, at best.
Empirical evidence
Empirical evidence suggests that product in the Australian financial landscape is more strictly and efficiently regulated than anywhere else in the world.
The inherent danger in focussing on products as the cause of the problems is that it moves the focus away from where it rightly belongs – the quality and appropriateness of the advice being provided.
Highly-geared, illiquid and volatile investments have their place on the financial landscape, just as do term deposits. All financial products, while they may represent the perfect solution for some clients in some circumstances, may be totally inappropriate in others.
In the example of the collapsed business outlined earlier, the decision to invest in that business may or may not have been appropriate for the investor at the time the decision was made.
What needs to be said, though, is that the subsequent demise of the business, while both undesired and unfortunate for all concerned, does not mean that any advice to invest in that business was either poor advice or a “bad” investment decision.
Another assertion often proffered is that the adviser remuneration component of a financial product automatically consigns that business to the “dodgy” category.
Consigned to history
While such practices have now, albeit very recently, been consigned to history, it was not the presence of high commissions, in isolation, that caused the failure of these businesses, but a number of factors, of which these commissions may or may not have been a component. There are a number of successful businesses today that previously operated under similar terms.
As with other aspects of life, investment decisions involve risk. The factors that amount to risk have to be weighed against the circumstances of the person making the decision to determine whether or not that risk is appropriate. Of the many factors in determining whether the investment itself, or the advice to direct funds to it, was “dodgy”, wisdom after the event is not one of them.
Yes, we need a rigorous regime to regulate the creation and dispensation of both financial advice AND product. But, in the administration of that regime, we cannot use client outcomes alone as a means of determining the suitability of a product or the recommendation to use it.
After all, none of us possesses a crystal ball!
