Shame, Shame, Shame… as Derryn Hinch would put it. There’s no other way to describe the behaviour of a few rotten apples in the financial planning industry than to say ‘shame’. Shame on them for bringing disrepute not only upon themselves but on everyone that has been doing the right thing. It’s a disgrace and has destroyed the faith and integrity of an entire industry. The truth is the vast majority of planners do abide by the law and do put the customer first. We’re not all dishonest Hendersons. The rotten apples need to be thrown out. The bad culture needs to change.
For those that have missed the drama, the Royal Banking Commission unearthed damning evidence that confirmed the unthinkable. A number of wealth management firms were caught out conducting business in a misleading, deceptive and fraudulent way. Not only in banking but in superannuation and financial services. After two weeks of testimony and complaints, the stories and hardship suffered by customers caused by these dodgy planners was all on show for everyone to see. The sheer volume of scandals was overwhelming. Starting from the big banks, it went all the way through to boutique financial planners. Here’s a quick summary of the main scandals of the Hayne Commission:
- CBA were the first to grab media headlines for charging customers for financial advice. The problem was these clients were already deceased. In some cases they had been dead for over a decade and were still paying fees. What a joke. CBA easily scored the prize for the rotten apple award. Roughly $118m in services were not provided but charged. Some 30,000 customers were not provided annual reviews.
- NAB was next. Staff at NAB took cash bribes to smash targets. They accepted white envelopes full of cash to facilitate loans they knew were based on fake and forged documents in order to hit targets and collect bonuses. NAB had so far identified 1,360 customers who may have been affected by misconduct by up to 60 bankers.
- AMP was nabbed for deliberately charging clients for advice they never received. AMP then presented an independent report, put together by Clayton Utz, to ASIC as a follow up to the activity. The problem was the report was doctored and revised to remove the dirty deeds and deceptions at AMP. CEO Craig Meller’s name was deleted from the report to avoid unnecessary attention. The end result; AMP lied to and misled ASIC about a scandal at least 20 times.
- Media celebrity and financial planner Sam Henderson was the high profile trophy case. The TV show superstar was torn apart by Senior Counsel Ms Rowena Orr when she exposed him for giving disastrous financial advice to his clients. This advice would have lost one client $500k had they followed through. He also instructed staff to impersonate a client in phone calls to their super fund to obtain private information. Henderson has now been dumped by most media publications.
- The Financial Planning Association (FPA) was then put to the test. CEO Dante de Gori was interrogated as to why a complaint against Sam Henderson wasn’t resolved. It claims to have a strict disciplinary process yet it seems the FPA was more intent on conserving Mr.Henderson’s high profile than exposing him.
- The head of Dover Financial Terry McMaster was next. Unfortunately it was all too much and he collapsed while giving evidence. Dover has been dubbed the home of dodgy planners and has several planners that are under the spotlight for misconduct.
These are just a few of the stories and admissions heard at the Commission.
So what have we learnt?
In all of these stories what we found was a common theme that was prevalent in every complaint. It was the casual nature of the misconduct and deceit. It’s the bad culture at the banks where financial planners flog bank products to earn bigger bonuses. Not by servicing their client’s needs. Imagine if a GP (doctor) was paid a bonus on certain medical products sold. You’d get an industry riddled with corrupt doctors selling the highest paying medicines, regardless of the client’s illness or whether the medicine was appropriate. This is why doctors prescribe medicine and don’t sell. Financial planners at banks are GP’s of the finance world. At the moment Australian’s don’t trust them to prescribe the right medicine. To regain this trust, planners need to clearly separate product from advice. Financial products are merely tools that planners use to solve a client’s needs.
The financial planning industry is at fault and needs drastic change. A report in 2015 shows that only 24% of Australians trust financial planners. That’s the lowest ever rating for very high ethics and honesty profession. Politicians come in at 14% and Real Estate Agents at 9%. Drastic change is what’s required either through further education to bring about higher standards or through disciplinary action for bad behaviour. There needs to be accountability and responsibility by the adviser for their actions. If there is a breach then perhaps criminal proceedings should follow. Financial products need to be separated from advice. It’s time for the industry to get its act together or it risks losing the trust of an entire nation. It risks being disrupted.
At Wattle Partners, we put the customer first. Always. We operate on a fee for service basis and we tailor our advice to always solve the client’s needs, first. We prescribe medicine. We don’t sell it. We are independent and have no affiliations with any providers.
Below article is an article written by Wattle Partner Drew Meredith in light of growing publicity about poor advice received from financial planners.
- How much do you spend on research each year?
Most investors would not be aware, but the majority of financial advisers spend as little as $5,000 to $10,000 each year on investment research. This investment research is what forms the basis and sometimes the actual recommendations that you receive for the investment of your life savings. There are only a limited number of research providers that operate in Australia, with Morningstar, Lonsec and Zenith Investments being the majors. Each of these companies receives a fee for providing a review of an underlying managed fund or investment. Why is this a problem? The problem with this rating for fee structure is that it the ‘independent’ research companies carry an inherent conflict of interest by being paid by a product issuer to provide a recommendation, hopefully favourable, for their product. During the Global Financial Crisis, it became evident to us that the ‘independent’ research providers were not acting in the interest of the underlying investors, and that they were losing out as a result. Our concerns were the fact that the majority of our competitors were relying blindly on the recommendations of a research provider, not undertaking their own due diligence and had very little conviction for the investments they recommended. Once such example was the Centro Properties Group debacle, during which advisers solely blamed the inaccurate research from those they outsource to rather than taking any responsibility for providing the recommendation themselves. The issue with the majority of financial advisers relying upon similar if not identical research, is that the choice of financial adviser can become irrelevant as the investments they recommended will not differ greatly and result in similar, index like returns. For instance, a recent Investment Trends Survey indicated that 48% of advisers are using research providers for the purpose of selecting individual investment funds for client portfolio i.e. outsourcing their investment recommendations completely. We believe the financial advice industry carries three major issues, addressing which have formed the foundation of our philosophy; they are as follows:
- A lack of conviction behind investments recommended, and an inability to clearly demonstrate the thinking, the research and the processes supporting recommendations.
- Continuously following the strategic asset allocation approach, despite the clear failure to protect from loss of capital resulting from this methodology.
- A resistance to investing in independence of thought. The inability of many wealth management firms to generate their own unbiased and well researched views, independent of shareholder pressure and any other activities which may be conflicting or impacting on the views espoused; and
We believe that the industry lacks both the desire and interest in improving the level of insight, research and value addition that they provide but hope our investment into this, the most important facet of managing investor portfolios, will push our competitors to strive to do the same.
- Do you receive income from clients you do not actively service?
In theory, this question does not make any sense? Why would a financial adviser or any other professional for that matter, be receiving an income from a client that they do not provide any service to. Investors may not be aware, but if you have ever seen a financial adviser; if your employer has placed your superannuation account into a corporate policy; or if your superannuation account is held through a platform or ‘Wrap’; someone is receiving fees or a ‘trailing commission’ from your retirement savings. The widely touted Future of Financial Advice Reforms, which commenced on 1 July 2013, were initially aimed at removing this type of commission altogether, however, strong lobbying over the last 18 months from certain sections of the finance industry saw ‘grandfathering’ provisions included in the legislation. What is ‘grandfathering’ you ask? Grandfathering is the process whereby any commissions or fee arrangements which existed at the time of the FOFA legislation coming into place are excluded from the legislation going forward. This means that any commission arrangements in place before 1 July 2013 will not be impacted by the legislation and will continue to be paid to financial advisers around Australia. This situation, in our view, is not sustainable, nor is it in the best interests of investors. The heavy lobbying to ensure a ‘grandfathering’ exemption was included in the legislation is evidence of the power that large financial institutions have over the regulation of the industry. Unfortunately, this exemption reflects the fact that some sections of the financial advisory industry refuse to ‘give up’ the easy money they are used to and move to becoming true professional’s to whom are remunerated based on the value they provide to clients rather than the products they recommend. In our view, this arrangement reflects poorly onthe entire financial advisory industry and brings into question the ability of the majority of financial advisory firms to remain impartial and to provide unbiased advice. Unfortunately it does not appear that this issue will be fixed any time soon. Many large financial institutions, including the Big Four Banks, insurance companies and dealer groups, rely upon the income and commissions receiving from unknowing clients in order to simply turn a profit. In the Ripoll Report, published in 2008, only 16% of total financial adviser revenue was estimated to come from fee-for-service charges, i.e. those agreed with a client, meaning over 80% was sourced from commissions and ongoing fees of some nature. If you do not know who ‘sponsors’ your superannuation fund and is receiving fees from your retirement capital, we suggest you contact your provider as a matter of urgency, as the fees can total anywhere up to 5-6% of your savings each year. Simply switching to a similar product of your own accord has the ability to save you a great deal of money in the years to come.
- Do you hold your own financial services license?
According to the Ripoll Report released in 2009, there are over 18,000 financial advisers operating in Australia working for 749 advisory groups in 8,000 different financial services practices. These advisory groups include those that are owned by investment product providers, such as AMP and Westpac; those licensed by investment product providers such as Charter Financial Planning (AMP); and those who have their own licenses. The research conducted in preparing the Ripoll Report indicated that at least 85% of all financial advisers are associated with a product manufacturer. This means that nearly 9 out of 10 financial planners are either paid by directly by the company whose products they recommend or have their license to provide financial advice ‘sponsored’ by these groups. A summary of the top 10 financial planning groups by Funds under Management is provided in the table:
- So what is the problem with this? This relationship between financial advisers and the companies which manufacture or design the products they recommend carries inherent conflicts of interest. Advisers employed by product providers have no option but to recommend the products of their employer, regardless of the performance, competitiveness of fees associated. This is the same for authorised representatives, whom may have a wider investment selection, but are typically subject to the same approved product lists or investment menus.
- Why is this a problem for investors? This relationship brings into question the advisers ability to act in the best interests of their client and to provide advice that is objective and free of any bias. This also brings into question the advisers ability to recommend a strategy that is not in the best interest of his employer; for instance, paying down a mortgage rather than contributing to their superannuation fund. If an adviser has no option but to recommend the products manufactured their employer, how are they able to be confident that this is indeed: a) appropriate for the client; b) the most suitable option available; and c) a competitive product in terms of fees and performance. Plain and simple, they cannot.
- What to look out for? Many financial advisers claim to be independent, via their ownership structure, by are actually licensed and in effect controlled by the large financial institutions and product providers. The best way to ensure you are speaking with an adviser who has the flexibility to recommend both the strategies and investments that are appropriate for you is to ask the following questions: ‘
- Do you have an Approved Product List and can I see a copy? Investors should look for an extensive selection of investment options, not solely those provided by the same issuer.
- Who owns the licence under which you provide financial advice? Do you use direct equity investments for clients? The use of direct equity investments is typically restricted to independently licensed advisers who have the freedom to select from a broader range of investment types. Do you recommend the use of investment platforms, if so, which ones? The platform you are recommended is a direct link to the advisers licensee; MLC is owned by the NAB, Colonial First State by CBA, ING by ANZ and BT by Westpac.