Financial Planners Brought To Account

[Sir Osisofliver]

OK I think I'll weigh in...

Insert disclaimer here, you all know I'm a licensee representative, don't make me break out the legalese.

So most of you know I'm in the industry....it's been my experience that the vast majority of people who get into the financial services industry are not soulless parasites....many actually enter the industry from an honest desire to help people, desire to learn more themselves, and a variety of reasons. Very few enter with a dodgy attitude of "I will screw everyone to get ahead"... Of course they exist, they fill the newspaper headlines, but overall my experience is that is not the motivation behind entering the industry.

So why do we end up with this perception that the evil financial planners/advisors are out to get you?

It breaks down to the licensee. Having an AFSL, is not a cheap process to apply, nor is easy to maintain. I'm with a boutique firm (DON"T PM ME ABOUT THIS), who has their own AFSL, and we would spend probably about 200-250k a year in doing the things that are required under the license. (CPD, Compliance, system changes, Audits etc) A bank or other institution that has significantly more Licensee staff and you could probably add a couple of zero's to that number. Our AFSL license is also limited in terms of scope in comparison to say a bank. So for this investment in time and resources, (not to mention all the other expenditure in running a business) shouldn't the company be expected to make a profit? After all that is why we get into any business isn't it, so that a profit can be made and a return on our investment is generated for the shareholders. If we can achieve this in an ethical manner that gives us warm fuzzies even better, but at the end of the day, profit is KING.

As many of you have indicated, most often the requirements of the role of FP/FA is to sell product or meet sales targets...but this is a fundamental part of any business. Without sales and revenue, businesses die. If BHP stopped employing salespeople, BDM's, client service officers etc etc what would you expect to happen? The problem with the industry is the vertical integration, have AFSL and product's produced by AFSL holder....natural fit. I personally knew a FP in mid 2007 who started to liquidate clients portfolio's and transfer to cash....which was absolutely the right thing to do for his clients...who was "let go" by the licensee for not meeting revenue targets and not using the APL. This speaks volumes about corporate responsibility and the industry rather than the individual FP/FA.

So lets say you are lucky enough to work for my company... (From Basilo's link on the first page)

1 Are you a certified financial planner? Why yes the Responsible Manager and Senior Planner are both CFP's. They are responsible for oversight of more junior and less qualified staff.

2 Have you ever recommended a managed agricultural scheme? No we have not. In fact our business model is and has always been a fee for service model and we rebate commissions received from Product issuers back to clients.

3 Do you put your clients into your own firm's funds and products? Yes we do. There's that low cost vertical integration model, however...the product in question is non-discretionary in nature. It's an issue around control, and ensuring that the client has the control, not the advisor or fund manager. Our job and what we are paid for is to advise and by doing so we align the interests of the FP/FA and the client...mutual success. Clients are also not locked into any service contract...they can leave at any time...with no exit fee's.

4 Can you show me your investment portfolio? My investment portfolio is none of your business...however I am very happy to show you how our services have enhanced the lives of other clients in very similar situations as you, over a short and long term time frame.

5 Do you offer flat fee-for-service pricing? Indeed we do, as I said, we even rebate all product commission paid to us back to our clients. You'll also find that being a client of our firm entitles you to rates on certain types of financial products that cannot be achieved elsewhere (because we don't take commissions) and even that the size of the discounted rate in many circumstances is larger than the fee's we charge.

6 Can you show me a sample statement of advice? Sure, but I'd really prefer it if you did our educational courses that we run for clients. Many clients understand the financial plans we produce significantly better once they have gone through the training.

A statement of advice should cover

• budgeting,
• cash flow projections,
• a comparison of multiple strategies and
• a discussion about what you can realistically fund in retirement.

Yup does all that....and more.

So with all of those wonderful points in it's favour why hasn't the firm taken over the financial services industry in Australia? In fact chances are you probably haven't heard about the company that I work for. It is because the way the business model works is to service a small number of people with large investments, not a large number of people with small investments. Below a certain figure, we cannot help you, and trying to do so will cost the firm money.

Final words...

• Make all the legislation you want....a fool and his money is soon parted..true then, true today. Educate yourself.
• If an advisor wants to be dodgy, new legislation won't change their motivation.
• Greed...of the clients...and the AFSL holder...acts to work against the client best interests.
• Every time there is new legislation that increases our costs...the fee's to our clients go up...and the minimum sized client we will accept also increases.

Cheers

Sir O

 

[basilio]

I just came across an idea that could go to the heart of many of the problems surrounding financial advisors and the financial services industry.Worth a thought.

Elegant, breathtaking simple and most likely to stop probably 80% of the dodgiest schemes in their tracks.

(Clearly an idea that will never get any industry support..)

A part of the problem that neither FoFA nor Murray addresses is the role of financial product manufacturers. The ASIC stamp does not mean the product has been vetted and as it turns out you can produce just about any bit of financial rubbish with minimal responsibility, unlike the manufacturers of other goods.

If your car is seriously faulty and blows up, the manufacturer and not just the person who sold it to you has responsibilities.

That's not the way it works with financial products. As Ms Ferguson also has reported, there are plenty of dud products manufactured by big names that have escaped censure or pain for failure.

The Association of Independently Owned Financial Planners – those who have escaped vertical integration – would like that changed.

And they also want to change the current highly questionable system of product manufacturers paying for research ratings. There are unkind souls who have ventured the opinion that product manufacturers buy their research ratings.

Timbercorp and Great Southern are disasters that still managed to get research rating ticks.

AIOFP president Peter Johnston suggests a solution would be for every adviser to pay a $1,000 annual 'research fee' which would fund a panel of independent research houses to rate all new products.

Financial advisers remain reliant on research houses. It's impossible for the individual planner to be across the myriad financial products being churned out. Yet as long as research reports are prey to "tweaking" or simply buried if they're unfavourable, there will be doubts about their value.

Read more: http://www.smh.com.au/business/bank...nvestments-20141124-11smk1.html#ixzz3JxEGr8Ji

 

[basilio]

Great post Sir Osis... It reminds one of how an ethical and properly motivated financial service business should work.

Unfortunately it also highlights the problems of the rest of the industry. It seems to be very hard to be ethical and prosper in this line of work.

 

[Julia]

OK I think I'll weigh in...

And you make all the salient points.

But, as you point out, you cater for hnw individuals. Would the same model necessarily be workable for the everyday vanilla service to bank customer who has around $100K to invest, and really just cannot justify several thousand dollars of SOA, detailed plan etc.
This is where I have reservations about fee for service only model.

Knobby, in an earlier post you suggested financial markets are much more complicated now than when I was young. Yes, that's true. But the same basic maxims hold true, eg "if something looks too good to be true, then it probably is".

There have always been scammers ready to take advantage of the gullible.

It's up to individuals to educate themselves at least to the point where they can recognise what is valid advice.
It just ain't that hard. Using Storm as an example again, for any of those people to claim that they thought the plan to (in retirement) borrow 90% of the value of their home to get into the share market, then to take out a margin loan to further leverage into that ever-risky environment, was a SAFE STRATEGY is ridiculous.

We all have to take responsibility for our own decisions and stop blaming governments for allowing us to lose money.

 

[Knobby22]

So Sir O. Thanks for weighing in.
What is your attitude to the changes in the law? Both the recent original and the new ones proposed. Or do you think there is a third way?

 

[Hodgie]

And you make all the salient points.
But, as you point out, you cater for hnw individuals. Would the same model necessarily be workable for the everyday vanilla service to bank customer who has around $100K to invest, and really just cannot justify several thousand dollars of SOA, detailed plan etc.
This is where I have reservations about fee for service only model.

That's spot on, as Sir O stated, with his fee model they cannot make money out of the average client, it would actually cost the business money to take on clients under a certain amount. If every Financial Planner used this model then the average 'mum and dad' investor wouldn't have anywhere to do to get advice.

 

[Sir Osisofliver]

So Sir O. Thanks for weighing in.
What is your attitude to the changes in the law? Both the recent original and the new ones proposed. Or do you think there is a third way?

Oh Wow don't get me started...too late..

tl;dr
1) Improve/create tax concessions in fixed interest products
2) Standardised equity based remuneration
3) Broaden legislation to cover non-traditional financial products

Long version

Red tape does not equal business efficiency. The industry however has an ethical duty of care for clients, which is not reflected by the majority of firms that service the smaller clients. What really bugs me is the managed fund environment. It's evolved since Hawke/Keating "jobs for the boys" days (when every fund was an industry super fund), but it is still designed to funnel money according to an imperfect mathematical model that does not accommodate "fat tail" events and market corrections. The only way the business of managed funds works is if there is money in the system. Therefore the only way a fund and the company running that fund will survive is if the majority of clients keep their money in the system and feel the damage done by the correction.

I'd like to see standardised remuneration based on client equity regardless of product, and products to include a broader range to break the single-minded correlation we see with the Australian Share Market. IE Someone brings me $10,000. Has little to no understanding of the market dynamics and investment. Someone like this (based on risk profile - this is not advice) might be ideally suited to an ETF or Index fund. HUGE BUT If it's not the right time though, sometimes the best advice is "do nothing" or keep the cash, but "Do nothing" earns no dollars. This is why some kind of tax advantage needs to occur in the fixed interest product space...otherwise real rates of return make it a mugs game. If however it is tax effective, firms will be able to charge a higher fee without causing a negative real rate of return. It then becomes a viable strategy to switch that client from an ETF to Fixed Interest product because the remuneration is based upon the equity. By managing client equity effectively we can create financial security over time. Would be nice if it was included under one piece of legislation. (IE property falls under different legislation). The only way I can service that $10k client effectively is if I can spend a relatively short period of time and effort in doing so...otherwise that clients cost the firm money.

Funnily enough the easiest way to run such as the above is a model based on scaled advice (which is a big nono under the new legislation). But it is scaled advice based on performance. IE A firm would charge a basic administration fee...which is calculated to cover the costs of doing business. Depending on the model, this might mean a 0.5 - 0.75 depending upon the complexity of the model being used.

They would then charge a retrospective performance fee minus the admin fee (which would need to be a healthy amount - because this after all is the firms profit and there is significant risk for the shareholders if their advisers are unable to perform in different market types) based upon increases in client equity (IE you don't get a higher performance fee for using leveraged products unless this translates to an increase in client equity). If client equity moves backwards the firms only make the admin fee. (Financial regulators would have to ensure this doesn't creep).

It's a far easier system to work under for an ethical product provider, but is wide open for an unethical adviser to abuse the **** out of.

Cheers

Sir O

 

[Sir Osisofliver]

And you make all the salient points.

But, as you point out, you cater for hnw individuals. Would the same model necessarily be workable for the everyday vanilla service to bank customer who has around $100K to invest, and really just cannot justify several thousand dollars of SOA, detailed plan etc.
This is where I have reservations about fee for service only model.

Um...it's possible, but it squeezes our margins. Someone would have to do what we do, under a high volume/low margin basis...but trying to get that from the banks when they've got 85% of the market locked away? Don't think so.

Cheers

Sir O

 

[Julia]

All of which just reinforces my belief that we should educate ourselves and manage our own money.

But for people unwilling to do this, then I don't see too much wrong with the old commission-based managed fund model if they have only a very small amount to invest.

Totally against charges on a FUM basis. I have a friend who thinks his financial adviser is wonderful, simply because once a year he drives four hours up here from Brisbane (charging the client for the time and associated expenses, of course) to just say hello. He has around $1M invested, about 70% in cash (why on earth couldn't he just place this himself) and the rest in a couple of managed funds. For this he pays 5% of FUM. The FA has advised that the low return is unavoidable in present market conditions. He happily accepts this.

I expect there are many people like him. They don't know what they don't know and if they believe they are getting good service they are happy. A bit like taking a placebo from a doctor.

 

[Junior]

Fantastic post Sir O. Agree with most of what you have said there.

I've been in the industry for around 10 years and worked primarily for 'independent' FP practices (non-bank aligned). The groups I've worked with generally haven't been in the HNW space, but rather the more typical 'mum and dad' investors. I'm yet to work for a practice which has been able to consistently turn a profit without relying on upfront commissions. Even the ones who try to move to a full fee for service model, have found they need to supplement this revenue with insurance sales (and take the full 110% upfront commission) just to break even. This is not such a bad thing as long as one can avoid the temptation to over-insure clients. A significant temptation when under pressure to meet sales quotas.

This has meant that ever since the abolition of upfront commissions on investment products, many FP practices have become increasingly reliant on insurance sales. Now of course there's issues with 'churning' (flipping clients across into new insurance policies regularly to earn upfronts) which will now lead to major insurers being forced to increase their premiums to support commissions. Also an issue with replacing industry fund cover with retail cover, which resets the 13 month suicide clause and can cause complications with pre-existing medical issues and non-disclosure.

Maybe this will be the way going forward, but I still feel the industry needs to find a better model. Pulling apart the bank's 85% share & vertical integration set-up and increasing minimum education standards are a start.

Lower net worth individuals may just need to go to their Industry Fund planners for advice (or self-educate!!). I don't have much experience in this area so can't comment on the quality of advice, although it must also be conflicted. i.e. an adviser with Australian Super for example, is ONLY going to recommend Australian Super investment/super products and insurances, with little regard for what is happening in the non-super environment for that client.

As far as the FOFA changes which will now come into force, I don't believe they will significantly increase the cost of doing business. One issue I could see is the potential for increased litigation arising from the Best Interests Duty. It's already a nightmare getting PI cover, and if that BID means clients will be even more successful suing their FPs when something goes wrong that may make it even harder for boutique practices to stay in business.

 

[Knobby22]

Thanks, its good to hear from people in practice.

It seems to me that it would be better for the boutique practices if they didn't have to deal with the elephant in the room, the banks.
I agree with your idea Junior that the banks vertical integration model should be pulled apart.

If the less well off do not want to go through their Superannuation then they should be able to act directly, as many do on this site, and seek help a needed. For instance you can buy managed trusts directly. If you need help with your tax set up the you can seek help for a fee. My credit union doesn't charge large fees to provide advice albeit it would not be on the same standard as I would expect from Sir O and Junior but then again its for people with only a reasonable amount of money.

As people's super increases, the use of unbiased advice from people such as yourself will become more realisable as the sums increase. it is unfortunate however that people will often approach the banks or AMP unwittingly and be slaughtered instead. A Royal Commission or at least a white paper has been requested by many but it is not going to happen.

The sales model with large percentage commissions should remain banned and I am very happy to see that it will.
In the case of Julia' example, if her friend was handing over $6500 in cold hard cash every year then he/she might be a bit more sanguine about getting value for money.

Last point about what you said Sir O. I know they are trying to set up an Industry organisation with regard to ethics and performance. if that works it might ameliorate some of the issues you mentioned.

 

[tech/a]

Some great and thoughtful information from the "Inside"
Thanks for taking the time Sir O.

But I'm with Julia on this one.

Your posts reinforce my experiences with F/A's/F/P's

Don't get me wrong you need to run a business.
Just like I wont be involved in 70% of the low end
market---nor can you.

But for the life of me I cant see why high end net worth individuals
would need an F/A in the first place. They have managed to get
there by themselves in the first place and sure as the sun rising
no F/A is going to magically do better than they have.

The top end of the market is made up of 2-5% of people who will
self fund their retirement. Many like me wont just stop and will have
continual income flows---which they have already set up and know
intimately. They can set up an annuity if they wish very simply.
You don't need a Masters in Finance for that!

Julia's friend is an A +++ client! but these days 1 mill at retirement returning
5-8% P/A under management isn't really high end.

To be honest I think most F/A's in this end of the market are striving to stretch
the dollar further---(1) To ensure the client has sufficient funds ($2.5 + Million will do
fine regardless of what he does with it---bar splurging!) for on going 30+ year retirement.
(2) Keeping an A ++ client who really only needs to see no erosion of capital year
in year out --- and continues to live the dream and continues to supply an income
stream to the F/A. More about people management than money management at
this level!

The majority of the market are way way under the HNWI they want something
completely different. They want their F/A's to turn them into HNWI.. A totally different
demographic.
They aren't in the position of those with millions to do what they can do!
Money makes money---it really does.
But when your an F/A and a low net worth individual is facing you across the desk
you cant even cover your fees---and really a 20% growth ---even if you could achieve
it on $200K is nothing close to the same on 10 x that!

So Im back with Julia.
There is no magic bullet from ANYONE other than YOU the client to secure your
financial future. The earlier you start the more successful you are likely to be.
The broader the range of financial growth areas you can explore and take advantage of.
Expecting a third party to take control of your funds and do much more than spread them
out over time is in my view un realistic and a pipe dream---to the Masses---I've not seen
delivered--not once!

F/A and F/P is a cow of an industry from my view. I know 3 advisers all of them have
spent hrs at dinners--lunches and over a billiard table picking my brains on Property
Development. Ill guarantee you its NOT for the benefit of their clients!!!
Every one of them have offered ( over the years ) to be involved in a J/V.(Joint Venture) on the next project.

Why would I want to do that??

 

[tech/a]

Footnote.

One thing I have noticed over the years.
I'm pretty widely read on the GFC/Credit Default swaps and Q/E
They now know that. But at the time all 3 when questioned as
part of general conversation to get their point of view---and I expected
a learned and qualified opinion---very quickly showed ignorance to the
biggest thing to hit their industry in their lifetime!

NOW we NEVER talk Macro Economics and I know why---babbling is
embarrassing when around a larger group of friends. Its
shut down with --don't want to talk house when out socially---yeh right.

 

[Hodgie]

But for the life of me I cant see why high end net worth individuals
would need an F/A in the first place. They have managed to get
there by themselves in the first place and sure as the sun rising
no F/A is going to magically do better than they have.

The top end of the market is made up of 2-5% of people who will
self fund their retirement. Many like me wont just stop and will have
continual income flows---which they have already set up and know
intimately. They can set up an annuity if they wish very simply.
You don't need a Masters in Finance for that!

Just because someone is a HNW client doesn't mean they know anything about financial markets.

I'll give you an example of a client I have seen that needs help managing his money, he is a surgeon. Works ridiculous amounts of hours every week and earns 500k+ p.a.

He pays extremely large amounts in tax and owns a couple of properties but he isn't happy with the returns he is getting on the property because he is by no means an expert in the area, he just didn't know what else to do with the massive amounts of cash he was getting. Also because these properties are completely unencumbered they are adding more income to him personally which adds to the enormous tax he is paying.

He has a large super balance, not really sure how its invested or the performance compared to the market.

He does not want to take the time to learn about financial products because he already works to much and in his mind he can make more money from working and building his private practice than he can by learning about the financial markets. That is how he ends up in the financial planner's office.

This is a man who has the potential to earn bucket loads of money over his working life but could end up in a complete mess financially. This is a client that needs help and it is mutually beneficial for him to get help.

There are many clients in similar situations to the above.

 

[Junior]

I was about to say the same as Hodgie. Many HNW individuals are too busy working and earning their high income to have any interest using their precious spare time to learn about managing their personal financial situation. So it makes sense to outsource this to a financial planner.

They typically pay way more tax than they need to, and can end up leaving a financial mess for their family if something should happen to them. Along the way they'll have accountants setting up trusts for asset protection purposes, outdated wills, and no idea what's happening with their super.

Sir O would be better qualified to talk about this than I.

 

[tech/a]

What's wrong with a CPA?

As for what to do with the money I default to.

To be honest I think most F/A's in this end of the market are striving to stretch
the dollar further---(1) To ensure the client has sufficient funds ($2.5 + Million will do
fine regardless of what he does with it---bar splurging!) for on going 30+ year retirement.
(2) Keeping an A ++ client who really only needs to see no erosion of capital year
in year out --- and continues to live the dream and continues to supply an income
stream to the F/A. More about people management than money management at
this level!

My friend and dentist who's wife is one of Adelaide's leading liver surgeons are similar to your example.

They make that much between them that their mind set is vastly different to Mr and Mrs average.
The don't need to increase their income---they do that with ease themselves. They just need to park
it somewhere. These are the type of clients Sir O would walk on glass for. They don't need to have a
clue how to make money on investment. Just how to stick it in a safe place.
To them Property all over the world. Singapore-Malaysia-Hawaii and Adelaide is one option--return isn't
foremost on their mind.

Another has a world wide patent an a graffiti remover used all around the world. His day is getting up and checking what his agents have sold world wide---he makes $7.25 a litre on EVERY litre sold.
All of Australia--New York/London/L/A Chicago---to name a few. I can assure you he doesn't crave for an F/P or F/A. Doesn't have to!


To be honest he seems bored to me!

 

[Hodgie]

What's wrong with a CPA?

As for what to do with the money I default to.



My friend and dentist who's wife is one of Adelaide's leading liver surgeons are similar to your example.

They make that much between them that their mind set is vastly different to Mr and Mrs average.
The don't need to increase their income---they do that with ease themselves. They just need to park
it somewhere. These are the type of clients Sir O would walk on glass for. They don't need to have a
clue how to make money on investment. Just how to stick it in a safe place.
To them Property all over the world. Singapore-Malaysia-Hawaii and Adelaide is one option--return isn't
foremost on their mind.

Another has a world wide patent an a graffiti remover used all around the world. His day is getting up and checking what his agents have sold world wide---he makes $7.25 a litre on EVERY litre sold.
All of Australia--New York/London/L/A Chicago---to name a few. I can assure you he doesn't crave for an F/P or F/A. Doesn't have to!


To be honest he seems bored to me!

There's nothing wrong with capital preservation at all if your comfortable with what you have.

But people have different goals. Some people always want more, some of the richest people in the world still work the hardest out of anyone and are always looking for new opportunities.

If the financial planner can help them diversify into areas the client knows nothing about and help build their empire then I see that as a mutually beneficial arrangement. We can't say what is 'enough' for everyone because everyone will be different.

I have seen clients with 24mil+ in net assets come in to look at possible investment opportunities. It makes no sense to turn them away if you believe that you can help them.

Call it greed or whatever you want to call it, the fact is there is a demand in the market for the financial planner which is simply being filled, just like any other service in life.

It's kind of like saying people don't 'need' to get plastic surgery such as breast implants or a nose job. But if they want it then who are we to stop them, if they want to pay for that service it's fine.

 

[tech/a]

There's nothing wrong with capital preservation at all if your comfortable with what you have.

But people have different goals. Some people always want more, some of the richest people in the world still work the hardest out of anyone and are always looking for new opportunities.

If the financial planner can help them diversify into areas the client knows nothing about and help build their empire then I see that as a mutually beneficial arrangement. We can't say what is 'enough' for everyone because everyone will be different.

I have seen clients with 24mil+ in net assets come in to look at possible investment opportunities. It makes no sense to turn them away if you believe that you can help them.

Call it greed or whatever you want to call it, the fact is there is a demand in the market for the financial planner which is simply being filled, just like any other service in life.

It's kind of like saying people don't 'need' to get plastic surgery such as breast implants or a nose job. But if they want it then who are we to stop them, if they want to pay for that service it's fine.

I don't disagree with you.

The point is that they are a far different client than Joe Average.
and only make up a small % of people out there.
A $24 million NWI is going to be a far better business proposition to a planner than a $240K individual.

Why would a $24 million individual go to a stock standard F/P or F/A surely he would have in house accountants!
He'd certainly know a few and plenty would want to know him.
He wouldn't be goggling his closest F/P

 

[Hodgie]

I don't disagree with you.

The point is that they are a far different client than Joe Average.
and only make up a small % of people out there.
A $24 million NWI is going to be a far better business proposition to a planner than a $240K individual.

Why would a $24 million individual go to a stock standard F/P or F/A surely he would have in house accountants!
He'd certainly know a few and plenty would want to know him.
He wouldn't be goggling his closest F/P

Yeah I get your point, fair enough.

 

[Julia]

All valid points about wealthy people not wanting to DIY. They are not really the people this whole conundrum should be focusing on.

The people who we are supposed to be worrying about are the sort of retirees etc, with moderate savings, who somehow get caught up in messes like Storm.

No amount of legislation is ever going to completely stop this.

The issue is well covered in this article from the SMH:
http://www.smh.com.au/business/bank...1.html?promote_channel=edmail&mbnr=MzkzNDcxNA

extract:




foFA: That four-letter F word was thrown around a lot in Canberra last week, often with a great deal of heat and energy.

But like the other F word, it mostly doesn't mean what it literally means.

If FoFA really is the Future of Financial Advice, financial advice doesn't have much of a future.

Undoing the Coalition's undoing of the previous government's reforms doesn't automatically clean up the financial advice industry and restore public faith in financial planners.

Indeed, the FoFA changes saga, culminating in the Cirque de Senate blowing up Arthur Sinodinos' reforms in Mathias Cormann's face, arguably perpetuated some of the harm being done to financial planning.