Monday, April 16, 2018

Today by Paddy Manning

A scandal-proof industry
The banks refuse to bring their financial planners under control


A new round of hearings of the Financial Services Royal Commission began in Melbourne today, and notwithstanding the headlines, it is hard to see how anything meaningful will come of it. Financial planners remain an open sore for Australia’s banking industry, despite more than a decade of attempted reform – so much so, they might be described as regulation-proof. The banks own most of the fund managers and need the financial planners to find the new clients who will send the superannuation and investment money their way, and so they continue to pay them commissions and tolerate scandal after scandal.

New Australian Securities and Investments Commission data revealed [$] at the Financial Services Royal Commission this morning shows financial advisers giving advice about self-managed super funds failed to consider the best interests of their clients in an astounding nine out of 10 cases! Moreover, today we heard that only a third of financial planners have a relevant tertiary qualification, and that ASIC reviews have found [$] that 75 per cent of financial advice did not comply with the duty to provide advice that was in the best interests of their clients.

Nobody knows the problems of the financial planning sector better than the ASIC deputy chair, Peter Kell, who appeared today. Kell had a stint running consumer advocate CHOICE, and in that capacity took on the financial planners after the collapse of Westpoint more than a decade ago. In the Westpoint scam, investors who were looking for a secure place to put their life savings were convinced by so-called advisers earning up-front commissions of 10 per cent or more to put their money into risky debentures, which they were told were “triple guaranteed”. In reality, they were lending their money to finance highly speculative property developments, and many of them lost the lot. The tragedy of Westpoint, Kell acknowledged at the time, was that the investors were not trying to get rich quick. The banks weren’t involved in Westpoint, and the advisers involved weren’t associated with the main peak body, the Financial Planning Association, but it was a perfect illustration of the conflict of interest that riddles the industry: the adviser is meant to act in the best interests of the client, but is actually maximising their own personal income by recommending the financial product that pays them the highest commission.

Twenty years ago, my first proper journalism job was writing for a financial advice magazine, called Investor’s Advisor (they used the American spelling). Investigating one cold-calling boiler shop, I remember the shock of reading emails sent between two advisers, talking to each other about the joy of going to the ATM and finding that the “sweet, sweet nectar of a Tower Life trail” had once again been deposited into his account – in this case, years since the adviser had stopped seeing the clients. What on earth were these “trails”? It turned out that these “trailing commissions”, paid by the fund manager, meant that an adviser would not only receive an up-front payment for selling a particular fund to a particular client, but would also receive a percentage of the amount invested each year, for life. Some clients knew about the commissions, most didn’t, but hardly anybody understood how they added up. In the AFR in 2008, I wrote [$]: “critics point out the problem with trail fees is people do not necessarily understand how those percentage payments grow over the years. This has led to the extraordinary outcome where planners who may not even be servicing a client are, years later, getting squirted with larger and larger fees from the growing savings pots of former clients.” It remains staggering that somebody might happily live by charging a fee to a client they haven’t seen. At the time, the thrust of regulators was to make sure that advisers disclosed their fees. Peter Kell said “The definition of insanity is doing the same thing over and over again while expecting a different result. Fresh thinking is desperately needed.”

Fast-forward a decade, through the financial crisis, the Future of Financial Advice reforms, and a list of scandals as long as your arm, and we are hearing again about the fee-for-no-service scandal. Even the very pro-business AFR is hoping [$] that the royal commission may finally do something to stop the financial planning industry’s most “egregious rip-off”. I wouldn’t hold my breath.

since this morning

Fairfax Media reports that AMP, National Australia Bank and Westpac have all made payments that breached a 2013 ban on banks and wealth management businesses from paying kickbacks to advisers, but failed to tell the royal commission about the full extent of this misconduct earlier this year.

The prime minister, Malcolm Turnbull, has named Lieutenant-General Angus Campbell as the new Chief of the Defence Force. Campbell became the face of the secretive asylum-seeker boat interception and turn-around operation in waters north of Australia in 2013.

in case you missed it

The ABC’s business editor Ian Verrender writes that the Trans-Pacific Partnership was designed to limit China’s power within the Asian region, and that a Donald Trump U-turn would put Australia’s relationship with China under spotlight.

The Australian reports [$] that the Turnbull government’s latest attempt to protect whistleblowers who disclose wrongdoing to journalists has been denounced as “so far, unworkable” by the nation’s leading authority on whistleblower laws, and dismissed as “almost useless” by the journalists’ union.

A Housing Industry Association analysis claims [$] that Labor’s policy to increase tax on capital gains, including the sale of investment properties, would increase rents, reduce economic growth, and sap state government coffers by $1 billion a year – more than twice the extra tax raised at the federal level.

The tissue-destroying Buruli ulcer is at epidemic proportions in parts of Victoria, particularly the Bellarine and Mornington peninsulas.

One in every five Australian children has gone hungry in the past 12 months, with some even resorting to chewing paper to try to feel full, according to a new survey of 1000 parents commissioned by Foodbank.

by Mungo MacCallum
The Commonwealth Games: inspired integration
The level of inclusion on the Gold Coast has been a breakthrough

by Tim Winton
The C word
Some thoughts about class in Australia

Paddy Manning

Paddy Manning is contributing editor (politics) at The Monthly and has worked for the ABC, Fairfax, Crikey and The Australian. He is also the author of three books, including a recently updated unauthorised biography of Malcolm Turnbull, Born To Rule?


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