December 2021 Newsletter
Completing 2021 and review
of Financial Advice and the Royal Commission
Thank you for being with us for another year. It has been a big year for everyone one way or another and everybody has a story to tell.
As always we will be here and available EVERY day throughout the holiday season so feel absolutely free to ring us on: 1800 332 225 or email firstname.lastname@example.org at any time with any questions or if you need anything.
Many advisers are leaving the industry at the moment. The number of practising financial advisers has gone from 29,000 a few years ago to 15,500 active plus 1,000 on probation at present with the numbers leaving continuing to grow.
We are going against that trend, love our job, are here forever and have grown significantly this year. Please feel free to refer anyone you know who might need a great adviser to In Your Interest Financial Planning. We have clients Australia wide, plenty of capacity for more, and a great expert team to service and support them.
A little history about Financial Advice and what is going on
Did you know that surgeons were originally barbers and surgery was considered a trade? Also, in England, solicitors in the 16th and 17th century were considered tradespeople and were relatively cheap to hire. Since then, both activities have become respected professions with extensive education.
With the rise of superannuation and of actuarial mathematics, allowing the general availability of life and disability insurance, a new industry came into being: Financial Advisers.
There had always been private bankers for the very wealthy but it was a new phenomenon that there were many people with substantial wealth and that it had become technically possible to calculate most people’s chance of making a death or disability claim in the future.
The people who became financial advisers in the 1970s and 1980s up to that moment mostly worked as insurance salespeople, paid by a one-off commission for every sale they made or, as one of them put it, “I was unemployed every Monday morning with no promise of receiving a single dollar without making further sales.”
These same people then added various superannuation and investment products to their arsenal which were sold in essentially the same way.
However, life and disability insurance and investments are a long term proposition and what was really needed was something called “professional financial advice” which, in essence, is having somebody work with you whom you can trust to look after you when it comes to money or, more specifically, investing your money, growing your money and protecting your future earnings (life, disability and income protection insurance).
However, only the wealthy would pay good money to a trusted adviser to look after them. Most other people would look at the cost and go to the person next door whose sign also said “financial adviser” and who would work for free. Free wasn’t free, of course, as the adviser and their employer received money in various indirect ways from your investments and many were tempted to abuse this arrangement.
Every once in a while there was then a big scandal and the government did something by creating lots of new laws and rules.
This process reached a crescendo in the 2018 Hayne Royal Commission where the Royal Commission asked the large firms that employ financial advisers to put their worst foot forward by disclosing all transgressions and mistakes the firms had made in recent times and then putting all that material in front of a large audience.
That was useful and well overdue, and the Royal Commission had some brilliant lawyers who could make colourful and stinging catchphrases, such as: “charging dead people” and “fee for no service”.
What was lost in the process were important practical details, with one example being that dead people are not charged (how could they be?) but their investments now need a lot of work to make the transition to the inheritors as smooth as possible. The upshot in this case is that the financial adviser is cut off from providing services from the moment of death and that often has unfortunate consequences. However it is a win for logical purity. There are numerous examples such as the above with many being much worse.
The Royal Commission paid lip service to the fact that existing laws were sufficient, they were just not enforced properly, as the big companies (the big four banks and AMP) had a lot of sway. The Royal Commission subsequently followed that lip service up with 76 recommendations for additional laws, rules, and regulations, of which perhaps a third were useful, a third neither harmed nor benefitted and a third have been very bad ideas indeed. Hayne may be a good diagnostician but, knowing what is wrong is not enough to know how to fix it. The number of people who know when something is wrong with a car is much larger than the number who can fix it.
Following the Royal Commission, the banks spent billions to be able to get out of financial advice as it had become a big smear on their reputation, much bigger than the contribution of financial advice was to their bottom line. An extreme example is CBA paying $373 million for a firm of financial advisers (Count Financial) in 2011 and selling the same firm for $2.5 million (yes, really) in 2019 and on top of that indemnifying the buyer for a further $200 million in remediation costs which is about $500,000 per adviser in the sold firm. These are astronomical numbers but worth paying for the big banks as their reputation was in serious danger.
Most of the wrongdoing covered in the Royal Commission was by the large licensees. As background the big four banks and AMP and other companies license financial advisers whom they either employ or have a contractual relationship with. A financial adviser can only operate when being licensed by a licensee and the adviser him or herself cannot be a licensee. We have our own license through a company we own.
The big four banks are now, perhaps temporarily, out of financial advice except for small private banking operations but the extra, new, restrictive recommendations from the Royal Commission, almost all of which were put into law with no modification, remain. Imagine a lawyer would make 76 recommendations (some of which are technically impossible to comply with) on how to repair cars and the government of the day decided to implement them all (except one or two). That is what has happened in financial advice.
The consequences? The number of practising financial advisers has gone from 29,000 a few years ago to 15,500 active who have passed a recent exam and a further 1,000 who will have to leave by October 1st, 2022 if they don’t succeed in their last chance to pass a competency exam.
The result is that a lot of people have lost their financial adviser, either because the person left the business or because a lot of advisers are reducing the number of clients while simultaneously increasing prices because the amount of red tape has become truly inordinate. If you are an investment client of a financial adviser, have you noticed how much paperwork there is now to do? That is expensive as it has to be done absolutely correctly.
Recently people have noticed that there is a growing shortage of reasonably priced advice and there has been a lot of lip service that the costs of advice need to be reduced. The great hope is robo advice, “advice” that is given by machines, something that is probably laughable outside specific niches but we will see.
There is, however, a benefit in the current situation: It is now obvious that there is a shortage of good advice whereas a few years ago we had these large firms provide product (investments and life insurance) sales under the guise of “financial advice”, hiding the fact that there was always a serious shortage of competent, trustworthy financial advice. That sales activity disguised as financial advice has been substantially reduced and there is now a chance for financial advisers to become a profession.
The process for barbers to become surgeons took centuries and for “pettyfoggers and vipers of the commonwealth” to become solicitors took about one century. I hope that the process for financial advisers, which has been going on since the 1970s, or for half a century, will not take more than another decade or two and we could become a respectable profession which serves its clients well.
This has been a difficult year for most of us, having to negotiate constant restrictions and changes in rules and it is not over yet. However, for the moment we can enjoy the loosened state of affairs and may everyone have a really enjoyable Christmas, New Year, and Holiday Season.
Christoph, Nicola, Marian, Clare, Deryk and Lynne
Financial Adviser and Life Insurance Specialist
AFP LRS GradDipFinPlan
Life Risk Specialist | SMSF Specialist Advisor
MBiostats | GStat Graduate Statistician
Accredited Aged Care Professional
Accredited Estate Planning Professional
Authorised Representative 308223