Financial planning and low investor sentiment - it's not all bad news

Investor sentiment is still low and financial advisers are blamed for losses. Advisers will face a difficult period in the next 12 months, but will be presented with a range of opportunities, writes Jim Minto.

The past four years have seen very high levels of regulatory uncertainty and change for the financial advice industry.

Parallel with this, the adverse effects of very difficult and volatile investment markets have been seen by savers, investors and retirees.

It is a fact that when markets are weak, financial advice is blamed for losses; and when markets are strong, advice is often, but not always, given credit.

Aside from markets themselves, the financial advice industry is presently discredited by product offer failures (such as Westpoint) and advice and governance failures (eg, Storm Financial).

Financial advisers feel that they are marginalised as the Government responds to reform financial advice and four years of constant reviews, which have frankly been too long for all parties.

Hopefully, we are now at a point where the future is clearer and financial advisers can get on with their jobs, although there is still uncertainty with respect to the legislative process.

However, the outlook remains cloudy at best.

Turning away from the proposed changes to the regulatory financial advice world, the outlook on the consumer confidence side around superannuation and investment is difficult at best.

In my view, there is a real risk that the next year will see consumer confidence in superannuation deteriorate more. As someone who has been at the financial advice and consumer end of the market during my career, I am reflecting how difficult it is now for both consumers and financial advisers. It could become even more difficult.

There are some wider themes that are driving this, and the lack of confidence has a significant effect on how client opportunities develop with financial advisers.

1. Global markets have been difficult since the global financial crisis. For a balanced fund holder there is every chance that by the third quarter next year, the investor will have seen three negative or flat return years in the prior four years.
2. Retirees (or near retirees) no longer have the appetite in many cases to simply stick with growth assets.
   There is an acceleration of investors emerging toward more certain returns including cash, bonds and deposits inside superannuation. In short, individual investor appetite is steadily becoming more conservative. This is not a short-term issue.
3. As consumers face difficult asset markets and tougher economic times, they are looking to reduce their risk themselves, by paying off debt, reducing consumption, price shopping and avoiding increasing superannuation contributions.
   All of this can be seen happening, and these behaviours are flowing negatively through the economy.
   Rising household living costs are also driving these behaviours, and those who travel a lot globally will understand how relatively expensive it is to live in large cities in Australia.
   One senses a release point or correction in this cost of living emerging. The strong mining sector has been holding the dollar up and making that correction more difficult. It will come eventually because it has to.
4. Public confidence in superannuation is now a mainstream concern. It is in fact now a global issue.
   As global governments and employers have for 30 or so years now encouraged schemes where individuals built their superannuation savings, the investment risk was transferred to individuals. A great idea in strong and steady markets, but when individuals lose capital they blame the system design and – if they have an adviser – they blame the financial adviser as well.
5. The tax regime, with negative gearing benefiting those on high marginal tax rates around growth assets and in particular equities and properties, has distorted investment markets.
   This tax policy was always foolish as is the complexity of the tax system.
   A simpler tax system, with lower marginal rates and fewer deductions, including lower or no income offsets from gearing, would encourage an environment where people could invest because it made good sense, rather than primarily to save on tax.
6. Geared investors in property and equities are now seeing this is as painful at best, and it has been for some time.
   Core assets in some cases have dropped at least 25 per cent. In a geared environment the equity losses are higher. The old dogma of ‘time in markets is more important than market timing, so stick with it’ is all very well, but investor appetite is badly bruised.
   Who knows when asset prices around property will improve – but the behaviour of investors to stay conservative in cash is reinforcing the market weakness. It is too simplistic to say that this is just another market cycle and all will return better than ever.
7. Investment managers – especially around superannuation – whether retail, industry or both, are either discredited or severely tarnished by these effects, in the same way that financial advisers are receiving negative responses from investors.
   The asset and strategy consultants will in turn come under more criticism for failing to respond to funds’ concerns for fresh thinking around strategies.
   Consumers aren’t interested in whether they are losing less than benchmark. They look at absolute returns. This is especially the case as they get older and start approaching retirement.

So what will flow out of all this?

Financial advisers and all superannuation funds face a difficult 12 months ahead. Good luck asset consultants need to think about another script. Some fresh thinking is required; there should be no more reliance on the next results being better when investor memories are of four difficult years.

Frustrated investors will continue the drive for more control. This will see more growth in do-it-yourself (DIY) funds and directed funds of collective schemes. Cash, bonds and deposits will grow in portfolios.

Investors don’t understand the composite management expense ratios of DIY funds that can be very high when one accumulates all the costs of administration, the underlying investment management expense ratios of assets invested in, and so on.

But frustrated investors will go for it – just as they have in the past bought properties. At least they will feel in control.

The superannuation guarantee contribution increase from 9 per cent to 12 per cent is becoming more difficult to sell but it is staged over a longer period, which may allow it to flow through. Financial advice will continue to be doubted, including advice provided by funds themselves.

The most material conclusion I have of all is that, as difficult as the environment is, people will really need financial advice more than ever. If they value it, they will be prepared to pay for it.

The glass is half full and Australia has many frustrated savers, investors and retirees who need to be listened to and provided with valuable financial advice and strategies. The challenge for the advice industry is to be contemporary and to listen, tuning into what people are feeling on a case-by-case basis and giving them confidence.

By contemporary I mean we can’t just keep trotting out the financial advice of the past when people have changed appetites and are looking to limit their downsides.

The old adage of staying for the long run may no longer be enough. The financial advice needs to connect to the investor’s needs and aspirations. The lower confidence tells us that perhaps it has not been in all cases connecting well.

With increased needs for security, life insurance will potentially play an even larger part in future – another good opportunity where strong, sound financial advice will be needed and appreciated

Despite these and other challenges, 2012 will also be a period of opportunity for financial advisers.

Jim Minto is the managing director of TAL Limited (formerly TOWER Australia).