There’s a delicious game going on in the regulation of financial advisors. ‘Financial advising’ grew out of insurance salesmanship. That was simple. Insurers paid good money to salespeople who could sell insurance. They got large quantities of the policies they wrote with the (often very depleted) residual cash going into the life policies they wrote.
Of course it suited their salesmanship to sell more than one brand of insurance. It also makes economic sense because these salespeople then become more like supermarkets. No problem at least in principle if they were paid higher commissions by some companies than others because everyone knew they were sales people.
(In fact even this relatively transparent situation wasn’t all that good, because many people are just bamboozled by finance and certainly the intricacies of life insurance – for instance the sharing of risk between the insurer and the insured – is not an easy thing to get one’s head around properly. So people look for someone to trust and sadly a lot of them trust the first person who walks in the door.
I guess once I might have felt that they’d learn if ripped off enough. Undoubtedly some would. But ‘behavioural finance’ makes you think that it’s hard work pushing against some of these tendencies of human beings – that they’re pretty close to being hardwired. And that as a consequence a substantial portion of the population will never learn what others regard as a healthy amount of skepticism about those better educated (or who appear to be better educated) than themselves.
Anyway, we decided to encrust financial advisors in a web of regulation which has already seen many small advisors close down as they are unable to meet the hefty compliance burden. But the one thing the regulation didn’t do of course was to undercut the business model which was selling investment products on commission. So now people can run round the place doing mandated ‘risk analyses’ for clients and calling themselves ‘licenced investment advisors’ as they sell their products.
The regulation has in this sense legitimated the earlier practice of disguising salespeople as fiduciary ‘advisors’. But that’s just one half of the story . . . The other half is that the regulators have an instinctive hostility to the industry and so feel comfortable piling one obligation after another onto the salespeople.
Imagine you were a fridge salesman in David Jones. Someone comes into your showroom and says that they’re thinking of buying a Fridge as they think it will be better than what they’ve got. You know nothing of what they’ve got, but you take them through the strengths and weaknesses of the fridges you have on display.
The analogous practice in investment advice is now illegal. If you go to an investment advisor and say “I’m in Big Al’s super, but I’d like your advice on super” you can’t give them any advice unless you’ve done due dilligence on Big Al’s super. Now that sounds fair enough – otherwise how are you basing the recommendation to move to the brand you’re recommending? But the fact is that there are thousands of super options around, and in many cases the advisor will not be able to economically brief themselves to the standard required on the super that you’re in.
So right now, as I undestand it from discussions in the industry, regulation prevents them from making a recommendation to you or (depending on how strictly you interpret the regulations) from suggesting that you review it – since they have no fair grounds for doing so. As this article reporting an industry round table says:
The financial planners pointed out that advisers, particularly those working in smaller firms, lacked the resources to fully investigate superannuation funds, with the result that many simply declined to undertake such an exercise for clients.
Laura Menschik of WLM Financial Services said that if a client came looking for information on a relatively unknown fund, it was often not worth the time and money involved in undertaking the relevant research.
“All of a sudden you are charging them one, two or three extra hours of your time just to try and get the figures and the comparison, and it might not be worth it for the amount that is involved,” she said.
Menschik said her firm had made the decision to say that it could not give a comparison unless the client is willing to carry the cost.
The new chief executive at Count Financial, Marianne Perkovic, agreed with the analysis that the time and costs involved in carrying out the research necessary to sustain superannuation switching advice was often unaffordable.
“The classic example we have is that someone will come in with $2,000 in a fund and there’s no research [on that superannuation fund], so the amount of time for the adviser to get that research for $2,000 is just not worth it,” she said.
When I took some money to a private investment manager what was the first thing they did? Sell the stocks in the portfolio that they didn’t know anything about and bought stocks that they did know something about and thought would outperform. And they have! They wouldn’t have been permitted to recommend such a course of action, but they were permitted to take it.
In the meantime, it is a pity that regulators of what is probably our most important market – the capital market – aren’t busting a gut trying to make it more efficient rather than turn it into a morality play.