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New investment suitability rules must flow from Royal Commission

Australians are ball-tampering convicts to many people in London, from where I’ve viewed the Royal Commission. Unfortunately, the evidence seems to support that opinion.

No-one is surprised by the details, because Australia’s got Bradman-like form in bad financial advice. Previously, I’ve needed to explain how scandals like Storm Financial, Opes Prime, Westpoint, Trio, Fincorp and Bridgecorp happened under our regulators watchful eyes.

To be fair, I explain that it’s not just a regulatory failure: the problem is the far deeper issue of ‘unsuitable advice’. Even when all rules and regulations are 100% complied with, institutions are still capable of giving unsuitable advice that damages the financial lives of their clients.

You know unsuitable advice when you see it

It is a 75-year-old pensioner advised to mortgage her home to invest in high-risk leveraged funds. It is a ‘low-risk’ investor being sold high equity exposure. It is every client walking away with the same portfolios and products regardless of their circumstances. It is when the conflicted products are given precedence over the most suitable products.

We’ve known about the unsuitable advice problem for a long, long time. Consumer group Choice identified it in a shadow shopping programme in 1990 and again in 1995. And again in 1998. And again in 2003. The Storm Financial scandal laid bare a step-by-step guide on how to put the interests of the customer last. Low income, vulnerable investors lost $880 million in 2009 while the Storm founders were, just last month, fined $70,000 each and banned from running a business for seven years.

But the ‘quality of advice’ is a problem that this Royal Commission does not have time to explore.

The Commission has hit the areas tantamount to street-crime, where the Corporations Act was flagrantly breached, or a fee was charged for a service that was never delivered. This is deserving work that has provoked outrage from the public.

Royal Commission is missing the main problem

The Commission is not going deep enough to see the main game. The real money-for-jam is made by pushing customers through advice systems that ignore who they are, so that the sale of a standardised product can be closed quickly and cheaply. No thought is attached to what impact that product might have on the client’s life.

So what does ‘suitable’ advice look like? To be suitable, the advice must properly take into account their goals, current financial situation and financial risk tolerance. Investors need financial advice and products that suit their circumstances, needs and personalities.

Put another way, the question is this: ‘Where are you now, where do you want to get to and how do you feel about the financial risk you’ll need to take on to possibly get you there?’ These are tough questions that can take time to answer. Unfortunately, to institutions, that time is a cost to their bottom line, so these critical questions are frequently dealt with superficially, or not at all.

I’ve spent almost five decades in financial services, with the past 25 years helping advisers and institutions to give better financial advice, based around suitability, particularly the risk tolerance part. I have clients in more than 20 countries, with our tools used in over one million financial plans.

But, in Australia, when I would say, ‘I can help you give advice that is tailored to the client sitting in front of you’ the responses would often range from blank stares through to explanations that ‘clients wouldn't want that and it would take too long’. For most, the passion was around quickly closing more sales, rather than giving good advice that would suit the customer’s needs, situation and personality.

I want to believe that the Royal Commission will change things, but I’m far from convinced.

It is worth recalling that almost everything that came out in evidence was self-reported by the institutions. But can we really have confidence that they would own up to giving unsuitable advice, when they are so reluctant to even cop to blatant breaches of the law?

The pushback against the Royal Commission has already begun. Submissions are arguing over the semantics of their breaches. For example, AMP admits it lied to ASIC seven times, but takes offence that it is alleged to have lied 20 times. Westpac admits that one of its advisers engaged in misconduct when he advised a couple to sell their family home to establish an SMSF, accepting he may have breached the Corporations Act. But the bank submits to the Commission that:

“While the advice was plainly inadequate, there is no basis to conclude that it involved either deliberate misconduct or dishonest conduct.”

That, in a nutshell, is the problem. The advice was inadequate so, by definition, the client has suffered. To the public whether that suffering stems from incompetence, dishonesty or failure to follow process is irrelevant. A bank did someone harm and seems tone-deaf to that harm.

Regulation not only inevitable but necessary

It’s not surprising that people don’t trust the industry because it is unworthy of being trusted. It gives bad advice. It refuses to accept responsibility for its actions. Left alone it will sacrifice clients to its own self-interests.

So the answer is not to leave it alone. Tie up its hands in regulations that force it to act responsibly. Give the job of oversight and prosecution to a regulator who is not afraid to do it. And impose harsh financial penalties at both the corporate and personal levels.

That’s what the UK did. For decades the Brits were doing just as bad as us, or even worse. When these mis-selling scandals finally blew up, justice was delivered to customers who got tens of billions of pounds in compensation. Some industry players did not survive to endure tough new rules that mandate that only ‘suitable’ financial products can be sold. The suitability criteria are specific and strict. Non-compliance can see a UK business fined 10% of its turnover, while individuals can be fined up to 5 million euros.

It’s not just advisers who are on the hook. Fund managers and financial product providers are to be held equally culpable for mis-selling. Product providers must now design products for specific market segments, know who is buying the product and have methods to ensure it is, indeed, suitable for that specific buyer. This can’t be done by proxy through an adviser. The product issuer and customer must now have direct, independent relationships.

And this could all soon be coming to Australia!

The Australian Treasury circulated a draft of regulations similar to the UK’s, which are modelled from the European Union rules. If the political will was there (always a questionable assumption) these new rules could be in place quickly, hopefully enforced by an inspired regulator.


Paul Resnik is the founder of a number of financial services business, and has created tools to help give better financial advice in more than 20 countries and to one million financial advice clients. Find out more on risk profiling here.

May 17, 2018

Regardless of 'qualifications' (or lack of), it is blatantly obvious that the major problem is the attitude of those giving advice. How is that problem to be eradicated?

Hilda Benmore
May 17, 2018

Virtually every large scandal in finance which has destroyed people's wealth and lives can be attributed to shonky products which were sold with the explicit approval of ASIC. ASIC is responsible for most of the bad stuff that happens in financial planning because it hands out the equivalent of 5c parking fines to the CEOs of the big organizations who have been involved in EVERY large scale customer ripoff and is focused on the naive belief that educating financial planners will ensure honesty - judas priest! what are they smoking? This is like blaming the common Waffen SS soldier for invading Poland in 1939 - who gives the orders for these rip-off - the planners?

May 17, 2018

One of the most significant contributors of "unsuitable" advice over the past decade has been the widespread adoption by financial planners of so-called "risk-profiling" tools that treat "tolerance" and "capacity" as inputs, instead of outputs. These tools have contributed more long-term financial damage to the financial health and retirement outcomes of consumers than all of the scandals put together.

May 17, 2018

I agree with most of this, I've argued that Investment Advice as a subset or separate to Financial Planning, should require a specialization requirement, like Estate Planning or SMSF for example, and should require higher qualification hurdles such as Masters or CFA etc. This is based on the view that a lot of the damage is done, consumer trust lost etc, at the investment advice level.


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