Fear and Greed: What should the Financial Planning industry do?

[Sir Osisofliver]

In my view what the financial planning industry needs to do is make these risk assessments mandatory and have standardised 'risk levels' (e.g. minimum risk, low risk, medium risk, high risk, kamikaze) with an accepted, industry wide description of what each risk level means. They then should get both the adviser and client to sign the risk assessment with the adviser incidating that they acknowledge the clients desired risk level and the client acknowledging they've accepted that risk level. It should be a standard form in large bold font - a bit like some of the documents used in real estate - and include an independent witness signing it.

That way regardless of any 'rhetoric' they spout about everything being safe - when the cr*p hits the fan the client will have a document to fall back on. Alternately if the client comes in hungry to bet it all on red but then turns around and complains about the risks they were put into the adviser also has a document to fall back on.

Above is a quote from Cuttlefish from the Storm Financial Thread. I was going to make a response in that thread and then thought that perhaps it deserved a thread of it's own because what I'm talking about is fear and greed.

Every time the market has a big drop, there are the cowboys, the ponzi scheme operators, the incompetents, the dodgy brothers operations that all seem to fall out of the woodwork. Inevitably there are people that are hurt from this. Retiree's who will now struggle to make ends meet, people who lose their life savings, their houses, forced into bankruptcy etc, etc.

Inevitably what then seems to happen is a bit of a witch-hunt, we want someone to blame for the loss, those dodgy operators MUST PAY, and we crucify people like Alan Bond, Christopher Skase, Eddy Groves, Phil Green, Emanuel Cassimatis etc etc.

For all these people, they were lauded when the sun was shining, when it rains they are despised. In a similar vein Financial Planners cop some of the same emotions.

When things are good Planners and Brokers get asked questions like...

A mate of mine was getting 60% last year - how come I didn't?
ABC Learning Centres went from $2.00 to $8.00 - how come I don't have any of that?
Babcock and Brown floated at $8.00 and went to $30.00 - why do I have NAB/CBA/WBC/ANZ when I could have bought that one?
What's this Margin Lending I keep hearing about?
I went to this seminar on options and want to know why you don't use them to get me 3000% per annum?
But I don't want to sell my RIO at $150.00 I'll pay too much capital gain won't I?
(In January) Is this a good time to be buying more on margin?

When things are bad they get asked questions like...

Why didn't you predict that things would get this bad?
Why didn't you convince me not to buy BNB, CNP, ABS....?
How could you let me get so much margin lending?
Why do I pay you fee's if you can't tell what is going to happen before it does happen?


ETC ETC

What then ends up happening after a drop is that the Government then steps forwards in the best traditions of the nanny state saying that it must protect people and makes further draconion legislation, that the brokers and planners must respond to.

20 years ago, there was no such thing as a statement of advice in it's current format.

10 years ago you'd have been lucky to get 30 pages from a planner or a broker.

5 years ago, when the legislation started coming in some SOA's blew out to +100 pages, professional indemnity insurance started to increase dramatically and a lot of quality old school planners and brokers said things along the lines of... Screw this, the amount of paperwork needed means that I'll spend 15 hours at the office instead of 10 - and a lot of talent left the industry.

I expect that cuttlefish will get his desire when the government next steps up with legislative changes, and make changes that will entitle clients to have my left nut in a vice with their hand on the lever.

What would I like to see?

Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....

I'm not holding my breath though.

Sir O

 

[prawn_86]

Re: Fear and Greed what should the Financial Planning industry do?

What would I like to see?

Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....

I totally agree and i have raised this point before in a couple different threads. I would be interested in an empirical study on the positive effects that this would have ie increased GDP per capita, increased savings, lower debt etc etc. even if it was only implemented in 1 school and then you followed those students throughout the rest of their life

For the fin lanning industry i personally think the scourge is the commissions that planners can recieve. The only way i could live with myself as a FP is if i worked for a firm that charged per hr rather than made their cash from commissions, as that way there is no conflict of interest, and they become a paid advisor rather than a salesman.

 

[Bushman]

What would I like to see?

Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....

I'm not holding my breath though.

Sir O

You wouldn't need a financial planning industry then.

End of the day, FP is a volume-commission driven business and some FP's will push products in the good time to generate fees. As you say, greed and fear. FP's are no different.

Performance-based pay? I'd like to see that.

 

[Sir Osisofliver]

Re: Fear and Greed what should the Financial Planning industry do?

I totally agree and i have raised this point before in a couple different threads. I would be interested in an empirical study on the positive effects that this would have ie increased GDP per capita, increased savings, lower debt etc etc. even if it was only implemented in 1 school and then you followed those students throughout the rest of their life

For the fin lanning industry i personally think the scourge is the commissions that planners can recieve. The only way i could live with myself as a FP is if i worked for a firm that charged per hr rather than made their cash from commissions, as that way there is no conflict of interest, and they become a paid advisor rather than a salesman.

I've also commented about the commission structure in other threads Prawn, but it works like this.

Client Numbnuts (Who didn't go to that school that teaches finance subjects from grade 8) approaches two planners,

Planner A who says - Sure I'll do a plan for you, pay me a $500 deposit to get started, and your plan is going to cost between $3,000 and $5,000.

and

Planner B who says. - What!!! Planner A was going to charge you $5,000 to do a plan? What a cheek! Look I'll do the plan for nothing and just take a commission trail from the product provider ok?

Guess which one Numbnuts uses?

Guess which one costs Numbnuts the most?

Guess which approach gets used by almost all planners so they don't go out of business?

Depressing isn't it?

Sir O

 

[Sir Osisofliver]

You wouldn't need a financial planning industry then.

End of the day, FP is a volume-commission driven business and some FP's will push products in the good time to generate fees. As you say, greed and fear. FP's are no different.

Performance-based pay? I'd like to see that.

Yeah you would. How much of what you learnt at school stayed the same? Legislation changes all the freaking time. Second time I was at uni and did tax law subject in my first year, by the time I finished my degree it was all obsolete.

As for performance based pays..... So what should I take as a performance fee? Lets say 1% a year of your portfolio - (only if it makes a profit right?)

Take a guess how much that would work out to cost you when you take the negative compounding effects into consideration? You may as well let me take a trail - It'll cost you less.

Sir O

 

[prawn_86]

Re: Fear and Greed what should the Financial Planning industry do?

Depressing isn't it?

Sure is. And i agree with all you have said so far.

Perhaps gov legislation to abolish commissions to planners is the answer. It's a blatant conflict of interest.

But then you would have the problem of a lot of people not being able to access planners as they cannot afford the money up front.

I know one firm that advertises that they dont take comissions (which is stretching the truth), but essentially they take an MER of all the money the client holds with them, so it doesnt matter what fund the money is in (even if its just in cash), they will still get their MER and the client doesnt have high upfront costs. Perhaps that would work for Mr Numnuts....

 

[Bushman]

Re: Fear and Greed what should the Financial Planning industry do?

But then you would have the problem of a lot of people not being able to access planners as they cannot afford the money up front.

but essentially they take an MER of all the money the client holds with them, ....

Isn't it better for these retail investors to stay in cash rather than having their life savings placed in a fund that is riskier than they envisaged (say a debenture product)? As for MER, the incentive is still there to generate FUM growth? Not an easy problem. End of the day, FP's need a fee-based model to attract talented people. I would like some sort of incentive not to set a pensioner up in Westpoint and the like though; if it costs more, it costs more.

And Sir O, I do agree with you. It is the same with brokers; when the market is up, everyone is a financial genius, when it is down, it is the brokers fault.

Human nature - fear, greed, acceptance of praise (ego enhancing), divergence of blame (ego enhancing).

 

[cuttlefish]

Sir O - good idea to start another thread as it was off topic from the other one.

Just to add a bit more info from the other thread - below is a response from a Financial Adviser to my post in that thread (and my response below that).

The regulations already exist to cover this with the exception of the witness and, sorry for the length of post, but hopefully this example may shed some light.

Sadly the industry already has too much regulation. Don’t believe me?

I am a qualified Financial Adviser (please hold the boos until the end) – In the 3rd week of September 2007 I moved my entire superannuation balance to cash (from a highly geared 100% equity position) and unwound my non-super gearing.

The best I could do for my retired clients was to advise them to hold 2 years income in cash and a back up of 2 years income in a capital stable fund (approximately 30% exposure to growth assets)within their account based (allocated) pensions, which I did (mind you not all of them took that advice).

For those still working all I could do was re-visit their risk profile and recommend the minimum exposure to growth assets that their risk profile suggested was appropriate.

If I had recommended that they moved 100% of their investments to cash I would have: 1) failed my next compliance audit; 2) faced the very real risk of being dismissed by my dealer group; 3) faced being reported to ASIC and 4) potentially been banned by ASIC from giving advice.

The reason behind the 3 points above is that according to ASIC I must have a reasonable basis for my advice. To do this I must have a fully completed (and current) “fact find” including a Risk Profile questionnaire for each client. If, in that questionnaire you are determined to be a “balanced” investor I have to recommend a portfolio that fits within my dealer groups definition of “balanced”.

Please don’t get me wrong, I am not (and will not) defending the Storm model (I have clients who fled in terror from the Storm proposal to borrow heavily just prior to retirement) and I feel for every Storm client who has been caught in this mess (I understand that around 20% of the total Storm client base was ‘Stormified”) and I detest underhanded, deceptive and misleading behaviour regardless of the industry in which it occurs, but the financial advice industry is already one of the most heavily regulated industries we have and no amount of regulation will ever prevent the “sharpies” from finding a new angle.

Hopefully the solicitors now circling will find a way to recoup some money for the most affected.

Cheers for the insight.

Interestingly now that you mention it I was actually quite scared of putting everything into cash at the commencement of 2008 - even though it was a logical time to go to cash from a market cycle perspective - because I did not trust that the banks were not going to be hit by serious problems with the risk of associated bank runs. (this was before the US government started bailing out institutions and banks left right and centre, and before the Australian government decided to guarantee funds in banks).

Had I heard of a financial adviser at that time recommending people sell everything and putting it all in cash I probably would have considered this irresponsible as well.

You've made your point well - I can see that having this sort of bureaucracy can actually severely hamper a good financial advisers ability to help their clients make adjustments based on market conditions.

One of the biggest issues for the Storm clients was probably not so much that they had their money in the wrong place - but that they were put into so much leverage. (they had their money in the wrong place as well, but the leverage amplified the losses to the levels that cause them to wipe out completely).

Does the financial planning industry have specific guidelines/regulations in relation to the amount of leverage that clients should take on?

 

[Temjin]

Damn, I was writing a rather long reply post and the stupid laptop crashed on me!! So I'm not going over everything again.

A short summary

- Yes, I agreed with the fixed fee structure only. It's more professional and would essentially eliminate most conflict of interests. Of course, it would take time for the industry to change, but more and more dealer/bountique firms are taking advantage of this type of fee structure to attract clients who are less "dumbnuts" when it comes to minimising their cost. I know a friend who works in a firm that not only charge a fixed fee but has a policy of rebating back all commissions earnt (including insurances) or have them donated to charity if it is not possible to return them. People just need to look for them.

- A lot of misunderstanding about the role of a financial planner. It's not just about investment planning and CERTAINLY not about market timing or helping a client to speculate their money to financial freedom. It's more about building a strategy suitable for the client and involve areas like budgeting, debt management, superannuation, pension, risk management (insurances), tax planning and estate planning. Rules for superannuation and pension changes fairly often and it's hard for an ordinary person to keep update with it and try to get the best out of it. Financial planners are there to help you to save money by utilising the best strategies that has NO RELATION to investment returns.

- FPs are NOT ABOUT predicting market turning points. It's impossible and no one has ever done it with a 100% accuracy. Successful traders have their own strict risk management and position sizing strategies and seldom achieve a win rate of over 50% over the long term. Even Jim Rogers, who worth billions, have claimed he is the worst short term market predictor in the world. So how can people expect their FPs to tell them to cash out before the crash? What if they are wrong?

 

[Sir Osisofliver]

Sir O - good idea to start another thread as it was off topic from the other one.

Had I heard of a financial adviser at that time recommending people sell everything and putting it all in cash I probably would have considered this irresponsible as well.

You've made your point well - I can see that having this sort of bureaucracy can actually severely hamper a good financial advisers ability to help their clients make adjustments based on market conditions.

One of the biggest issues for the Storm clients was probably not so much that they had their money in the wrong place - but that they were put into so much leverage. (they had their money in the wrong place as well, but the leverage amplified the losses to the levels that cause them to wipe out completely).

Does the financial planning industry have specific guidelines/regulations in relation to the amount of leverage that clients should take on?

Cuttlefish - Short answer to your question above about leverage is...no.

Each Dealer group will have different attitudes towards the various forms of leverage and their application. Example.

Storm model - Leverage, leverage, leverage - re value, leverage again. Obviously we are talking about a high risk strategy right? Maybe even an Extremely high risk strategy.... now add hedging and recurring put option protection against the portfolio and what happens to the risk exposure?

Storm's model is going to give all those financial planners and brokers that do the same thing as Storm (utilising equity contained within the home), but safely a really bad name. A bad apple spoiling the batch as it were.

I myself frequently use that strategy - (not for retiree's though, I generally also positively gear the stategy, and add ample reserves in place) - so people asking me about Storm now, tend to get me ranting at them about the safe use of leverage rather than the cowboy approach.

Sir O

 

[Temjin]

You've made your point well - I can see that having this sort of bureaucracy can actually severely hamper a good financial advisers ability to help their clients make adjustments based on market conditions.

Exactly right. There are simply too much restrictions on what advices financial planners can provide. With product limitations placed on them by the firm/dealer they work with, it makes the job even harder. It's not like some of the FPs don't want to recommend alternative investments or precious metals to diversity their client's portfolio further, they just can't do it and would probably get sued or fired before he/she have a chance.

Does the financial planning industry have specific guidelines/regulations in relation to the amount of leverage that clients should take on?

I don't think so too.

Hedge funds may use computer models to stress test their strategies to see if they are not at risk of ruin if the model fails or the market drop. (until a black swan event gets them ;D) But I doubt financial planner firms have that sort of capability, or maybe the guides are fairly informal and highly dependant on the individual planners.

 

[cuttlefish]

I myself frequently use that strategy - (not for retiree's though, I generally also positively gear the stategy, and add ample reserves in place) - so people asking me about Storm now, tend to get me ranting at them about the safe use of leverage rather than the cowboy approach.

Sir O

Actually this is a good point as well - levaraging into positively geared investments at the right time in the cycle is relatively low risk. I've used considerable leverage to buy amply positively geared property in flat property markets and not thought of it as risky. I do recall though at that time that it wasn't as easy to get finance from the banks for those properties, but they were happy to lend me money to buy low yielding off the plan apartments in overheated areas. Quite ironic.

 

[trading_rookie]

I know one firm that advertises that they dont take comissions (which is stretching the truth), but essentially they take an MER of all the money the client holds with them, so it doesnt matter what fund the money is in (even if its just in cash), they will still get their MER and the client doesnt have high upfront costs.

But isn't the MER an upfront cost? That is, the managed fund takes an MER from your account balance before any investing is done? That's how I understood it when reading the PDS of my superfund.

As for fee's I can't see why fee's aren't proportional to the return, as opposed to a good or bad return and we're still increasing the fee's - be it MER, Asset Management fees, Management fees, Other Management fees - which all sound complicated to the average investor and are more or less the same thing.

 

[Sir Osisofliver]

But isn't the MER an upfront cost? That is, the managed fund takes an MER from your account balance before any investing is done? That's how I understood it when reading the PDS of my superfund.

Hi Rookie,

You'd have normally stimulated my usual rant about managed funds and the rip-off merchant tactics they use with MER's.

What I think Prawn is getting at is a discretionary portfolio management style of account, where the fee for service is calculated as a percentage of the portfolio on a regular basis. These types of fee's are generally paid for in arrears. Very different to a managed fund, but most brokers who offer this style of sevice generally reuire you to have enough dough to make it worth their while.

As for fee's I can't see why fee's aren't proportional to the return, as opposed to a good or bad return and we're still increasing the fee's - be it MER, Asset Management fees, Management fees, Other Management fees - which all sound complicated to the average investor and are more or less the same thing.

You've been with Macquarie haven't you? You forgot the "What'choo lookin' at pal?" fee. *insert cracking knuckle sounds*

Fee's aren't propotional because, return is something that happens in the future. I'd like my money now please so I can eat this month, rather than at some nebulous point in the future with Numbnuts saying, "No sorry I'm not happy with my return of 15%, Bob down the road got 17.5% so I'm not paying your fee.

Reminds me when I rang up a guy to ask him to sell a stock I'd placed him into at 60 cents and which was now worth over $5.00 and he cheerfully said. "No I sold those already through Commsec, they only charged me $30.00!! So what should I put the money into?"
Well what you do is bend over......

Sir O

 

[Stan 101]

How about a bit more responsibility on the customer? Let's say a permit is required for different levels of trading.

The customer, before employing a FP must pass a test of basic and fundamental financial terms. Reasonable scenarios of outcomes from gearing should be outlined in a basic way.

If one wishes to trade on the ASX as a personal trader / investor one must display mastery of basic share trading concepts before the ability to purchase shares is granted.

Extend this concept to warrants and options and on and on.

It is terribly concerning that the government will allow people to gamble, yes GAMBLE with their life savings when they don't have a clue on what they are doing. It is equally disturbing that people are willing to put their life savings (plus money they don't have) in the hands of people they do not know, without understanding what it is they are actually getting into and simply trust what they are saying.

Playing with your financial future is not a simple game. People here on this forum who have more than just a basic understanding of fundamentals and technicals have been burnt in the last 18 months. How do you reckon Joe Average who got the hot tip on Zinc from the local cab driver in May 2008 is going?

There was a sob story in December 2008 in the Townsville Bulletin about some local "celebrity" who had been burnt by Storm Financial. After reading the item it was apparent she was very happy to be geared to the max in the preceding "good times" of the stockmarket and reaping the dividends and capital growth. Suddenly it was all Storm's fault when she was hit with a call.
She was a moron, plain and simple. Clearly she did not understand the ramifications of margin loan she signed for. The above test would have weeded out this woman and saved nest egg from her own personal greed.

Put the responsibility back onto the individual.

cheers,

 

[Sir Osisofliver]

How about a bit more responsibility on the customer? Let's say a permit is required for different levels of trading.

The customer, before employing a FP must pass a test of basic and fundamental financial terms. Reasonable scenarios of outcomes from gearing should be outlined in a basic way.

If one wishes to trade on the ASX as a personal trader / investor one must display mastery of basic share trading concepts before the ability to purchase shares is granted.

Extend this concept to warrants and options and on and on.

It is terribly concerning that the government will allow people to gamble, yes GAMBLE with their life savings when they don't have a clue on what they are doing. It is equally disturbing that people are willing to put their life savings (plus money they don't have) in the hands of people they do not know, without understanding what it is they are actually getting into and simply trust what they are saying.

Put the responsibility back onto the individual.

cheers,

Permits? Mastery of basic concepts? Governments allow people to gamble with their life savings?

Ok Stan 101 just look to the left and cough for me will you? I'm just installing your bad decision making finance inhibitor. It'll activate every time you make a wrong decision in regards to your personal finances, and squeeze your testicles in mind numbing agony until you stop thinking about it. Mind you we still haven't figured out how to stop it working retro-actively so you'd better hope the market doesn't crash or you won't be having sex every again.

Rather than more control over the morons and idiots Stan 101, wouldn't some education so they aren't so idiotic or moronic be better?

I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.

Sir O

 

[Jifromoz]

Maybe there should be a compulsory course that all invetsors go to prior to them being able to take their hard earned and getting taken to the cleaners. I would suggest local TAFE or High schools in the evening with an overview of the main risks and scams. Financial Planners would not be able to talk to these people until they had their certificates of completion.

I know you can't teach everyone but it could reduce the numbers of uninformed.

A couple of Basic Lessons would be :

- Read ALL documentation closely. If you don't understand....Ask someone. Don't just sign something because the advisor says it's OK.
- Remember the rule - High return generally means high risk
- If you're at retirement age - Be conservative. No high risks

Cheers

 

[cuttlefish]

I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.

Sir O

I agree with this and with the suggestions to include basic finance education in schools.

 

[Stan 101]

I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.

Sir O

To show mastery in basic concepts, wouldn't one need some education in the field?

I certainly agree education is the key, whether it be self education or formalised. I never denied that. So starting in year 8 and assuming curriculum could be organised for next year's school start would have kids entering the financial markets in about a decade give or take. What about the mean time?

Holding on to my testicles could well be something you'd enjoy but it does seem a little extreme compared to simply having the customer prove they understand the terms of the contracts they are entering.

To stop someone handing over all their money and more, being given a financial plan they do not understand, sign a document stating they understand the previous documents they don't understand may help make a nanny state, but for once I'd be happy to live in one.

 

[Sir Osisofliver]

Still think permits are a bad idea... What about blind bertha, or stupid sam, or immigrant isolese - they don't get to invest because of their mental illness/ disability /color /race /religion

And then of course more of our hard earned dollars will go towards the government department that, monitors, enforces and otherwise probes us financial planners to ensure we are doing the right thing.

It just opens up a can o' worms the size of skyscrapers don't you think?

Me I think I'd prefer to use my tax dollars on teaching kids something that would actually be useful. I would applaud it in fact.

I've done a couple of talks at my daughters school (to a bunch of ten year olds) and had parents and even teachers go "Wow I never knew that" - it's not like I was trying to explain exotic option strategies to them, this was BASIC stuff that ten year olds could understand.

Sir O