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Financial Services Industry

Photo Credit: thehareandparsnip Flickr via Compfight cc

If you read newspapers, you’re aware that the financial advice industry struggles to manage conflicts caused by ownership, targets and remuneration. Accountants, as a profession, have generally managed to avoid these conflicts by not providing financial advice to their clients. Instead, accountants refer clients to specialist advisers and mortgage brokers.

It seems like a good strategy. Is it really?

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Photo Credit: caseygoodness via Compfight cc

Photo Credit: caseygoodness

There are biases that affect the quality of advice we get every day of our lives. And not just financial advice.

When a real estate agent shows you houses for sale, they are working for the seller, not you. This affects which properties you are shown and your ability to negotiate the best price.

(This is why buyer’s advocates have become popular. As you are paying them to find your ideal property, your advocate’s interests are aligned with yours.)

In assessing the quality of any advice, it’s worth considering which party the seller is working for: you or the owner of the product.

There are other more subtle influences on the advice we get. While the medical profession manages potential conflicts by operating under a professional code of conduct, your GP may be influenced to prescribe some brands over others, due to a relationship with the pharmaceutical company (this could be done unconsciously…see below).

 

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Photo: James Alcock (http://www.smh.com.au/business/cba-chief-ian-narev-on-notice-over-compensation)

Photo: James Alcock (http://www.smh.com.au/business/cba-chief-ian-narev-on-notice-over-compensation)

On 3 July 2014, Ian Narev, the Chief Executive Officer for Commonwealth Bank, addressed a press conference to respond to the Senate Inquiry’s report on CBA financial planning scandal.  The scathing report was issued on 26 June 2014 after months of investigation and relentless coverage so the fact that it took a week for CBA to respond is, in itself, telling.

Click here to access the Senate report. And for a high level review of the more interesting aspectsread “Wading in the shallows: Advice, ASIC and Accountability”.

Mr Narev provided a superficial and perhaps unconvincing response to the report and at the heart of the CBA’s considered response was his proposal to commence a CBA-run review of all financial advice provided by CFP and Financial Wisdom over a 10-year period.

The public and media response to this proposal has been other than what Mr Narev might have anticipated. Industry insiders and affected clients remain skeptical of CBAs ability to properly review their own advice.

And for good reason.

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Photo Credit: smiscandlon

Have you ever thought about how much you’re really paying for the advice you got from your financial planner? The direct costs are one part – and I think you should look at those closely to ensure you’re getting value – but take a look at the indirect costs.

Keeping costs down are a key to wealth – high costs put your future at risk.

Some of the most significant costs are hidden in your portfolio and are caused by product selection and your advisor’s bias towards actively managed funds.

Although most financial advisors recommend actively managed funds, in reality, the net return of active funds are consistently below most passive investments or index funds.

But apart from the underperformance and additional cost of active funds, there is another cost, which is often overlooked when investors compare active and passive (index) fund portfolios – a cost I’ll cover later in this post.

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Photo Credit: Auntie P

Photo Credit: Auntie P

To many people, commission is a dirty word.  It is synonymous with a back hander or under-the-table payment.

And for good reason.

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enate Inquiry into ASIC

Update, 26 June 2014:  Today the Senate’s Economic References Committee released its report on the performance of ASIC and referred to two of my suggestions when making their recommendations.

An effective financial services regulator means you get better advice.

Over the last few months, two Fairfax journalists, Adele Ferguson and Chris Vedalago, exposed some of the inherent problems within the bank-owned financial planning groups.  Their expose uncovered some terrible advice given by CBA and brought into question the ability of ASIC to regulate the industry effectively. Their efforts not only won them a well deserved Walkley Award nomination, but resulted in a Senate Inquiry into the Australian Securities and Investments Commission.

Submissions are welcome from the public or anyone in the industry who wants to have their say.  Sadly, despite criticism from around the industry for ASIC’s handling of such issues, there have been no submissions from the banks, industry associations or lobby groups.  And hardly a practical or constructive submission from any individual working in financial services who might have some insight into why ASIC has failed to deal with issues such as those at CBA.

If people don’t speak up publicly and provide thoughts on how ASIC might become more effective, nothing will change and you remain in danger of getting bad advice.

With that in mind, this week I made the following submission to the Inquiry.

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Photo Credit: Eric Flexyourhead via Compfight cc

Photo Credit: Eric Flexyourhead

Update (June 2016):

Over 11,000 people have read this article, after searching for information on financial advice fees. If you’re like them, and think you’re overpaying for financial advice (or about to), call me on 1300 369 045 or email contact@justinbrand.com.au – and get a second opinion. 

At some point over the next year, you may receive a Fee Disclosure Statement from your financial planner.  If you know what to look for, this statement will help you work out if your financial adviser is worth their money.

As a part of Future of Financial Advice (FOFA) reforms, all financial planners who charge an ongoing fee for their service must give their clients a Fee Disclosure Statement (let’s call it an FDS).  That’s for any advice fee your planner charges you on an ongoing basis, beyond 12 months.

This law is supposed to ensure you are told what you’ve paid for ongoing services and list what services you actually received.

But, the Fee Disclosure Statement is very basic.  You need to ask additional questions to ensure you are not wasting your hard earned money on support that doesn’t benefit you, doesn’t suit your needs or is simply overpriced.

The FDS will give you key information for the preceding 12 months:

  •    Fees you have paid for ongoing service
  •    Ongoing service you should have received
  •    Ongoing service you did receive

So lets look at each section.

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