Though well intended, government regulation of investment advice over the last twenty years created supervision and compliance that suffocates financial service delivery.
Political appetite for higher governance and control has driven the following:
- Financial Services Reform (FSR) Act of 2001,
- 2009 Ripoll inquiry,
- 2010 Cooper Review,
- 2012 FOFA Legislation,
- 2014 Murray inquiry,
- 2015 Trowbridge Report; and last year’s
- Royal Commission into Financial Misconduct.
Post-election, the Treasurer’s comments suggest enthusiasm for tight control won’t subside soon. But has all this intervention really addressed the perceived problem or just added significant investor cost? Indeed, what is that perceived problem? Does regulation aim for:
- Fairer return from compulsory super contributions for all wage-earners?
- Better financial outcomes in retirement?
- Boosting retirement savings to reduce future Centrelink spending by government?
- Creating a pool of funds to support infrastructure needed to keep Australia globally competitive, attractive, safe and clean?
- Curbing excesses of those who work with other people’s money?
Misplaced compliance effort?
Perhaps heavy handed compliance intervention has been misplaced, making it part of the problem rather than protecting investors? Managing to the lowest common denominator of firms with conflicts of interest, most regulation has imposed greater reporting and documentation without addressing the elephant in the room. That ‘elephant’ was always large institutions being allowed to sell product under the guise of professional advice.
Our previous blog “Misconduct Amid Poor Governance” covered some of this last year.
Extra regulatory burden is paid for by ordinary Australian investors who just want to provide for their future. The regulatory imposed cost is paid as taxes, fees and in lost opportunity costs forced on an industry that’s striving to mature into a profession.
Australian investors just want a better life with their money. But the imposed drivers behind most financial decisions often weaken those decisions, leading to poorer outcomes and missed opportunities. One example is misused negative gearing by property spruikers – we’ve seen many examples of poor return for minimal tax advantage by people craving property but misled by under-regulated property sales-folk.
Another example is the marketing battle between Industry super funds and the rest. The Industry super fund campaign pleads their low-cost base due to fortuitously being the default fund for many Australians. What is not explained is the absence of service and advice, nor are their significant investment management fees. Consequently, many Australians make poor decisions, while saving on advice fees. There are many other examples. The solution is smarter regulation – see below… but first, consider value.
What about value?
Vanguard Research has studied the value of advice in Australia and the US for many years – they estimate it adds an average of 3% p.a. That value arises from more than just comparing returns against benchmarks. Valuable advisers act as a wealth manager, financial planner and behavioural coach – not just investment selectors. A good adviser’s experience and stewardship adds value in asset allocation, rebalancing, tax efficient strategies, managing cash flow and sometimes just encouraging no change.
Left to themselves, investors can tend to chase performance, making choices that harm their returns and long-term objectives. History shows investors can pour money into the stock market after a run-up, only to sell their holdings when a downturn is well under way. Prudent advisers establish asset allocations to match their clients’ goals, then periodically rebalance those allocations. A good advice relationship can minimise the emotional element that individual investors find difficult to overcome. An adviser’s value is best judged against what an investor might do without professional advice.
So, let’s not overload advisers with even more supervision and controls. Apart from more random audit, the best regulatory solution lies in clearly separating advice payment from any incentive related to a product they may need to help people achieve better outcomes.
Why didn’t the 2018 Hayne Royal Commission require financial advice to be separated from financial product? Our large financial institutions spend heavily on greater supervision and control, having lost senior executives and board members believed to be responsible. Around the world it is hard to find a reliable model on separating advice from product for Australia’s now fourth-largest global pension fund system.
Opposing the enormous inertia of our large financial institutions requires huge courage. But ‘separating advice from product’ is what Australia needs…, so please “burn for us” with smarter regulation, Prime Minister. It will take courage and possibly even defiance of your electoral base, but it could be the right thing to do. The market’s already made its decision – ‘old world’ advice businesses owned by banks to distribute product now sell for peanuts… one CBA advice firm they bought for $373 million 8 years ago, is now selling for $2.5m.
Who to turn to?
Where do you start if you’re not sure what specific product or service you need to fulfil your financial dreams? Financial products just help you achieve a lifestyle outcome you value but how do you identify the best path for you? The most valuable assistance often comes from personal support when a skilled financial adviser listens to you, rather than any specialist technical skill.
Technical needs are all progressively being automated, including accounting, tax, debt, law, investment and superannuation. The last hurdle for automation is likely to be human interaction. So technology creates ever more options but if you value a trusted financial relationship, perhaps seek an adviser founded on transparency and trust. Where trust is required, independence does matter – blended with skill and experience, it’s a powerful ‘value’ proposition.
If you would like to discuss your investment options with one of our wealth management professionals, get in touch with Wotherspoon today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.