Where our money goes
Financial advice and personal investment
The push for a return to an easy life for financial commission agents
Remember the days when so-called “financial advisers” had an easy life, helping themselves to a percentage of investors’ deposits, and taking commissions from products they promoted to clients, without revealing their charges or their conflict of interests?
The Gillard Government introduced a raft of reforms, banning such forms of conflicted remuneration, requiring advisers to act in the best interests of clients, and requiring fees to be disclosed to clients.
The Coalition, under pressure from financial advisers to wind back these reforms, established an inquiry, presumably intended to provide cover for more permissive regulation of financial advisers. The report landed on the current government.
In March 2022, shortly before the election, the then Minister for Financial Services commissioned a review into the Quality of [Financial] Advice. As explained in its terms of reference, the review was intended as a follow up to three recommendations of the Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Haynes Commission), specifically relating to the quality of advice provided to clients and to forms of remuneration to advisers.
The Coalition assigned the task to Michelle Levy of the consulting firm Allens and Linklaters. Her clients include “the wealth management areas of each of the major banks, life insurance companies and industry and corporate funds” to quote from the firm’s website.[1]
Her report – the Quality of Advice Review – was completed in December and the Assistant Treasurer, Stephen Jones, delivered the government’s initial response on June 13.
Those who remember the Haynes Commission will recall that one of its main concerns was the way financial institutions provided advice to clients apparently “free”, but actually paid for by trailing commissions deducted from clients’ account balances, and generally shaped to maximize the return to the financial advisers (actually commission agents) rather than to their clients. Such practices earned the epithet “fee for no service”.
The context for this further review is essentially a concern among financial advisers that they have been finding the obligation to act in the consumers’ best interest too burdensome. They have been seeking a return to the good old days of trailing commissions and conflicted advice.
Commenting on the origins of the reference the report says:
Financial advisers complained loudly about the obligation to prepare fee disclosure statements, consent agreements, statements of advice and financial services guides. They said the time spent and cost incurred in preparing these documents is the single most urgent area for reform.
In the name of making financial advice more widely available to consumers, the report recommends loosening protections against conflicted advice, and allowing more parties to provide advice. In a piece of doublespeak of Orwellian elegance, the report states:
The challenge for the regulatory framework is to permit the self-interested to give advice in a way which is not only safe but which also serves the interests of their customers and clients. The recommendations do this by focusing on the content and merits of the advice rather than the conduct of the provider.
The report also urges a relaxation of rules applying to insurance products. There is no acknowledgement of the extent to which Insurance of all types – life insurance, consumer credit, property, health – has served clients poorly. Insurers, using agents with incentives shaped towards insurers’ interests, generally oversell expensive products for risks most people could easily cover from their own resources (e.g. zero deductible home contents cover), while leaving clients under-insured for risks that they could not cover (e.g. flood and bushfire).
The consumer organization Choice has been highly critical of the review’s recommendations. It objects strongly to the idea that the obligation for financial advisers to act in clients’ best interests should be watered down. (Choice was one of the movers of the Gillard government’s reforms.) By contrast the report’s author, Michelle Levy, in an interview on the ABC, is critical of the government for not having gone far enough in implementing the review’s recommendations. Her arguments are far from convincing.
The government’s response, linked above, is not particularly informative for anyone who has not been closely involved with policies around financial advice, but Stephen Jones gives a clearer summary in a short (6-minute) summary on the ABC’s The Money: Government plans to adopt some Quality of Advice Review recommendations. The government will clean up some of the red tape around rules applying to financial advisers, but it has no intent to remove the “best interest” obligation.
It intends, however, to relax rules applying to superannuation funds, who will have more latitude to be remunerated for client advice. This is because they are already bound under trustee provisions to act in clients’ interests. Such obligations do not apply to other financial products sold by the banking and insurance industries, however, which is why the government, aware of the “spectre of fees-for-no-service”, is unlikely to relax their regulations to any extent.
Trends in personal investment – a return to equities and away from property
The government should go further than simply responding to the review. Rather, it should look more broadly at how people are making investments, and help them make wise decisions without being so dependent on financial commission agents.
The 2023 ASX Australian Investor Study reveals that half of Australians have investments outside their home and superannuation – mainly shares and related products sold on the stock exchange, particularly exchange-traded funds.
From 2003 until around 2014 there was a slow decline in direct personal investing, but since then this trend seems to have reversed. One promising sign in the ASX survey is that investors seem to be turning off residential property. In 2020, 39 percent of investors had residential property investment in their portfolios; in 2023 this proportion was down to 35 percent.
A little background explains the significance of these trends.
Paul Keating’s 1987 taxation reforms, that included dividend imputation and full taxation of capital gains, were designed to encourage Australians to invest in Australian businesses – to share in the nation’s prosperity. This would be mainly through superannuation, supplemented through direct investments in shares. In a way it reinforced an Australian tradition, the small investor with a handful of BHP shares.
The Howard government was determined to wind back the Keating reforms. In order to encourage “financial dynamism” – i.e. the quick turnover of assets – the Howard government established the conditions to encourage small investors to engage in property speculation rather than long-term investment in equities. That’s one of the main reasons for our presently over-priced real estate. Financial advisers were one of the beneficiaries of these changes.
It is notable that the general tone of the Quality of Advice Review is to suggest that there is a shortage of financial advisers. It asserts that “there are too few financial advisers to provide advice to all who need it”. Stephen Jones, explaining the government’s response, directly contradicts that assertion.
The ASX investor study reveals that only a quarter of investors use financial advisers. Some investors believe financial advisers are too expensive, some don’t trust them, some have had poor experience with them, and some believe they can make better decisions themselves. Nothing points to a shortage.
In short, we don’t need more commission agents sucking funds out of Australians’ savings.
Previous reviews, however, and studies by consumer organizations, have found that there is a shortage of independent financial advisers – competent individuals who have nothing to gain from promoting any particular product and who charge an upfront fee-for-service instead of taking commissions. The author of the Quality of Advice Review seems to assume that the only model of advice is one based on commissions, a model that inherently encourages over-selling.
Well-informed and well-educated consumers should be able to exercise more autonomy in managing their own finances, for example bypassing commission agents such as mortgage brokers, and should be able to understand the value in taking advice from an adviser charging a fee upfront who has no interest in promoting particular products or in overselling.
Hopefully, in responding to the Quality of Advice Review, the government will go no further than to clean up a few loose ends. A longer-term response should be more attentive to consumer education, including the teaching of basic financial mathematics in free or low-cost community education – real and nominal rates of return, the relationship between returns on investment and risks and volatility, diversification, how mortgages work, biases in financial decision-making, and an understanding of probability risk and uncertainty. Financial advisers pretend that finance and insurance are very difficult to understand, beyond the average consumer, but they involve only simple mathematics and are easy to teach.
1. To clarify language, the term “wealth management” as used by “financial advisers” is a misnomer. It refers only to financial resources. It does not include other aspects of individuals’ or society’s wealth – shared public goods, social capital, human capital and environmental capital. ↩
Gambling – back to pre-pandemic levels
Research by the ANU’s Centre for Social Research and Methods reveals that during the pandemic and associated lockdowns there was a reduction of gambling activity, but it is now back to pre-pandemic levels: Gambling participation and risk after Covid-19.
Those classified by the researchers as problem gamblers, however, did not reduce their gambling during the pandemic.
The researchers also found that as the restrictions eased a small but statistically significant proportion of people who had been non-gamblers and non-problem gamblers during the pandemic became problem gamblers. Young men are heavily represented in this cohort.
Remembering coins, banknotes and cheques
No longer needed
Just six years ago almost 70 percent of consumer transactions were by cash. Now just 13 percent are by cash, with debit cards comprising 50 percent of transactions. Covid-19 helped a little as people sought to avoid touching too many things that others had touched, but otherwise the decline of cash has been steady.
Similarly payment by cheque has gone out of fashion. Now only 0.1 percent of non-cash payments are made by cheque, and the cheque system will finally be put to rest in 2030.
These figures are from Peter Martin’s Conversation contribution: Cash could be almost gone in Australia in a decade – but like cheques, who’ll miss it? Cheques and cash are expensive forms of payment. Martin mentions the cost of moving banknotes and coins around between banks and merchants, and the cost of clearing cheques. There are other costs as anyone who has ever reconciled cash register transactions knows. Also cash held on premises, or carried by staff going to or from a bank, provides a temptation to criminals and carries risks to retail workers.
Martin mentions one convenience of cash: it’s anonymous. In terms of public policy that’s its disadvantage: you can bet that the cafe imposing a surcharge for non-cash payments is evading GST or income tax, and that a builder offering a discount for cash is evading tax.
Martin mentions that the Commonwealth had plans to prohibit cash for transactions above $10 000, as part of its attack on the black economy, but the Morrison government, ever mindful of its support from small businesses evading tax, knocked it back.