Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 254

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.

4 Comments
Francizek
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?

Scott
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.

Phil
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.

 

Leave a Comment:

     

RELATED ARTICLES

SMSFs have major role but not for everyone

Royal Commission 1: How the tone was set

The great fee debate: resetting manager and investor expectations

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates

Superannuation

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?

Interviews

Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.

Superannuation

Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.