I spotted this piece whilst travelling and wasn’t really going to comment as I thought it was just another attempt to defend an industry that is largely indefensible by way of its incompetence and lack of morality. the piece itself is merely a sides dig at robo advising. For those who are unfamiliar with the subject matter robo advisors or very powerful computer programs are now making their way into the field of financial planning. These algorithm allow investors to input a series of metrics and the program will generate a portfolio for them and the assume. this morning whilst cleaning out my evernote folder I had another glance and there was one passage that irked me in particular.
The point in question was this –
Only so much can be achieved with a computer algorithm. Humans are deeply influenced by body language and facial expressions and the trust factor.
A good adviser will also be able to “read” the consumer; their level of sophistication and so on.
They should be able to talk the people who come to see them out of making silly decisions.
The real sticking point for me is the use of the word trust. The assumption implicit within this statement is that there is something special about human financial planners and their desire to act honestly. To put human financial planners into context the following points are worth remembering.
1. The financial planning industry fought against a best interests test. As a moral principle they did not believe that the interests of the client came first. This is a staggering admission as to the culture of an industry and what it believes to be important.
2. They fought against the notion of removing trailing commissions or being paid for annual reviews that they did not undertake. Being paid for doing nothing and not telling the client you were doing nothing appears to be standard practice within the industry.
3. CBA, NAB, ANZ and Macquarie have all been implicated in scandals where they deliberately misled and in some cases stole from clients in an orchestrated manner. They then sought to cover up this malfeasance.
4. Auditing of financial planners by ASIC found that only 3% of plans were good for clients –
“Retirement-related advice has produced disappointingly high levels of poor quality advice,” said ASIC commissioner Peter Kell.
So why did the industry rate poorly?
Mr Kell said planners failed to paint their clients a realistic picture of how supportive their retirement savings would be to their lifestyle.
Whilst 61% of the reviewed plans were deemed ‘adequate’, Mr Kell said that much of the advice given was too generic for clients.
Additionally, conflicts of interests continued to be an issue for the industry. “Often a client will go to see an adviser wanting to know when they can retire and instead leave with a new accumulation product,” Mr Kell said.
In the public hearing, Mr Kell also added that 35% of retirement-related advice was poor.
This problem of poor advice is not a new one, the Australian Consumers Association and ASIC found exactly the same thing in 2003 –
Out of 124 financial plans studied, the study rated only two as “very good”. A further 23 plans, or 19 per cent, were ranked “good” and 29 per cent were “OK”.
Ten per cent of plans were rated “very poor” and 17 per cent “poor”. Major deficiencies were identified in the 24 per cent rated “borderline”.
“The overall quality of the plans was disappointing,” the report says. “Only half the planners provided a financial plan that was judged acceptable.”
Fifty-three investors took part in the study, with each participant approaching three planners seeking a comprehensive financial plan.
The report says high fees do not guarantee a quality plan, with 24 per cent of plans costing more than $4000 rated “poor” or “very poor”.
Of those planners with links to a big financial institution supplying investment “products”, 67 per cent recommended that at least some of the money be invested with that group.
“A common observation by several judges was that clients’ interests did not appear to be the sole factor in the plan strategy or product selection,” the report says.
“They characterised this practice as commission-driven product selling, not impartial advice.”
This does raise the question as to why such poor performance has been allowed to persist. I would suggest it is because of a complete lack of interest by the industry to clean up its house and an unwillingness of a poorly resourced regulator to bring serious chargers against very powerful opponents. As I wrote earlier attempts to clean up the industry are doomed to fail –
It is now thought by those in government that the solution to this problem is better education – financial planners will be required to be degree rather than diploma qualified. The belief here is that being more educated will somehow have an effect upon the behaviour of rogue financial advisors and the organisations that allow them to flourish. This false nexus misses the point that education has nothing to do with culture. The culture of an organisation is the external manifestation of the philosophy and morality of those involved in an organisation. It is generated by those at the head of an organisation and filters down. Altering the educational standard of those giving advice will do nothing to fix a poor culture. Such a result can only be achieved by removing those at the top of the organisation who perpetuate belief structures that place the interest of the client behind the interest of the individual.
Whilst, I do agree that you could program a machine to take a clip from the client in the way casino’s do with their machine based games, attempts to defend an industry that seems unable to do the right thing will always ring hollow no matter what straw man is held up.
PS – The best solution I can think is to nationalise the industry and force everyone simply to buy an index fund – it will put a large number of shonks back driving taxi’s which is where they were before a weekend course made them a financial planner and it will go some way to solving our looming retirement crisis. 🙂