The Financial Advice Nightmare

The Banking Royal Commission has focused attention on problems that have existed for a long time in the financial advice and planning industry.

When you walk into a financial advisor’s office too often the experience is something like this. A smiling twenty five year-old in a new blue suit shakes your hand and sits you down in front of his computer. After some small talk he asks for your vital statistics, your income, your assets and so forth. He intimates that your current investments, superannuation, and insurance are clearly inadequate but he will get back to you soon with a plan. After you leave the computer spits out a plan for you to maximize your income over the next few years by borrowing and investing in certain managed funds whose brilliant returns are indicated by the cheery upward sloping lines in the glossy brochures stacked on his desk. Of course, as a prudent person you want to insure your new bright future against any threats, using the policies whose brilliance is elaborated in the other pile of glossy brochures on the advisers desk. Another meeting and you are signed up and on your way to your new wealthy future.

There are several problems with this. The first is that the low status of financial advice, somewhere just above gossip columnists, means that our twenty five year old is likely not to be at the top end of the ability or character distribution. The ease of making money from financial advice in recent years means success is no indication of ability.

Secondly, training of financial advisors is completely inadequate. This has been widely recognized, including in the recent parliamentary inquiries and legislative changes, including  mandating a relevant degree. The main professional body, The Financial Planning Association, has now taken a lead on upgrading training requirements.

A third problem is the incentive structure in the industry. As well as plausibly looking like it will maximize your income, the experience sketched above  maximizes commissions for the advisor  ,  both by churning you onto the adviser’s favoured products, and by gearing you up to maximise the investment base on which the advisor earns commissions. Even where commissions are not involved in the promotion prospects of the advisor, they are closely linked to the revenue they bring in. This problem too has been widely recognized but there is less agreement about how to fix it. The large financial institutions plead that restricting commissions would mean fewer Australians get financial advice, if I have to pay upfront for it. I think they mean fewer Australians getting fleeced by them. Solutions could include keeping some commissions but have more transparency and link commissions to the performance of the investments the advisor recommends. Perhaps advisors could even share in losses. There’s nothing like having your own money on the line to focus the mind; far more immediate and powerful even than the threat of prosecution for extreme failures.

However the biggest problem of all is that the financial advice takes no account of what is most important to people. Maximizing income is seldom the main game for Australians.  Even among my professional economist colleagues, recent empirical research on the link between income and happiness is showing how tenuous the link is. Relationships, meaningful work, health, and a framework to make sense of life are just as important.   Few of us want to accept the life priorities of the computer on the 25-year-old’s desk.  The background and training of financial advisers leaves few of them with the sensitivity and skills to go beyond the computer program and tease out of what is most important to us, and then to align the financial plan with this. Alphacrucis College is part of the Pentecostal movement in Australia and many of our people want an advisor who has theological training as well as sensitivity and counselling skills so that they can align their financial plan with their Christian commitments. Voluntary work and giving need to be part of the discussion as well as investments and insurance.

Moreover people tend to see financial advisors at turning points or stressful times of their lives, such as divorce, death of a loved one, or business failure. We need advisors who will not take advantage of vulnerable people at these times. Also, advisors who have the sensitivity and skills to help the client go beneath the emotional storm to work out what their deepest concerns are and compose a plan on this basis. I’m not suggesting that financial advisors become the clients therapist, but enough counselling skills to recognise how the conversation about finances is affected by the current distress, and the skill to recognise when they need to be encouraged to seek other help would be very good.

We need new degrees for financial advisors that include significant ethics and theology, and counselling alongside solid technical financial training for advisors.  This sort of training, alongside the other initiatives under discussion in the industry, is needed to fix the deeper shortcomings of the financial advice Australians receive.

 

Paul Oslington is Professor Of Economics and Dean of Business at Alphacrucis College, Parramatta.  He is Vice President (NSW) of the Economic Society of Australia.    

Email  paul.oslington@ac.edu.au.    Web  http://ac.edu.au/faculty-and-staff/paul-oslington