Adviser forum: sounding out the industry’s big issues

Roundtable attendees:

Chris Murray, financial planner, Monitor Money

Rob Keavney, chief investment strategist, Centricwealth

Bill Murray, financial planner, Verve Financial Planning

David Carney, financial planner and director, Aspect Partners

George Cepak, financial planner, Economos

Larissa Tuohy, editor, Money Management

Investment outlook

LT: I know it’s difficult to make predictions on the future outlook for investment markets, but what are your general feelings about Australia’s performance over the next 12 months? Are you seeing clients allocating a larger share of their portfolio to international equities?

CM: Having looked at the Australian market, I think it’s still fairly priced. The earnings that are coming out from companies at the moment suggest that we’re not looking at a reflection of 1987, where there was an over-inflated market. So at the moment I’m feeling comfortable with what is being reported. I guess we’ll just wait and see how it is moving forward.

It’s nice to see the international markets starting to move because they’ve certainly been very slow. I would suggest there have probably been some strategic movements now from Australia into international; to start picking up some of the added growth that maybe has been missing for some time.

I do have some clients who are getting concerned about Iran, whether the Americans will go in there, and they’re getting concerned about having enough cash.

RK: I’d never put a view as to what would happen in the short-term because I’ve got no basis for it, but looking at it from a market valuation method, we find it hard to find a lot of exciting value in Australia.

Conversely, if you’re just looking at how many individual stocks are outside what we would consider is the price range we’d be prepared to buy at, it’s hard to find a lot of value. So I find it hard to express great enthusiasm about long-term prospects from here.

BM: One thing I’ve noticed in the last 12 months is that it’s the exact reverse of how it was five or six years ago, when you couldn’t get people to invest in Australia because it was an old style economy.

We didn’t have tech stocks, everyone wanted to put their money offshore, you had fantastic returns on international funds, and I’ve seen anecdotal evidence where people are starting to say the same things about the Australian market — they are saying why invest internationally when Australia’s the best place.

Putting aside all the intellectual issues about valuations, I have a gut feel that small investors generally get it wrong and this is probably a sign that it has had its run, and that probably international is the next place it’s going to go. There’s nothing intellectual about that, other than just a gut feel.

RK: One of the things investors like to invest in is whatever has done well recently, and the other thing is that if they’ve got an adviser who is good, they want to invest in what their adviser invests in.

They are the two enduring things and I think that any adviser who’s experienced and confident knows that clients generally do want to invest in what their advisers invest in, because they’ve actually bought the concept that this person is competent, of good character and they will follow their advice.

That doesn’t mean there’s not pressure at the edges, but I’ve seen over the years that advisers will truthfully say my clients invest in X, and X can be very different, and it happens to be whatever the adviser believes in. So for better or for worse, it kind of rests on our head.

DC: Certainly, the love affair with property has probably been well warranted. The lowering of interest rates through the 80s and through the 90s has really just fuelled the property bubble. I think any sort of nation has a bias to their own domestic products, so I don’t think that’s unique to investors in the Aussie market.

In the late 90s, early 2000s, a lot of the balanced funds were making large alterations to asset allocation towards international, at a time that has now proven not to be the most prudent sort of strategies.

But you get a sense that whenever people sit at the start of a year and look forward — and there are some things which seem like absolute certainties such as the stability of interest rates, the resource boom, or China continuing — and a year later when you look back you see that maybe those absolute certainties weren’t the case.

GC: There’s a much stronger propensity for people to want overseas equities. Two or three years ago you couldn’t drag them in there, even though their portfolio needed to balance. Now they’re essentially saying why not more?

But that may be a function of the way I’ve handled the intervening years, and I’ve been under-weighting international equities so long I’m having to make a mental shift to say they’re okay now, there is some performance there.

Interest rates

LT: What is your view on interest rates?

RK: You read everywhere that interest rates are low and we’ve been hearing that in Australia for 15 years. It’s been wrong for a decade and a half, but that hasn’t slowed down the confidence for which people make the same mistakes.

BM: I think we’re probably in a realistic interest rate environment. I think one of the advantages of low inflation is stable interest rates. The whole reason for getting inflation down is you get a stable economy, so I think it’s probably just about appropriate.

I don’t think we’re going to see any great movements personally, not unless we see the inflation rate pick up.

RK: Compared to what people think, on a world scale interest rates here are not low. If you look back in all previous low inflation periods in Australia, they’re not low.

GC: I lived through big mortgages through the early 90s when 15.5 per cent fixed for 10 years was an attractive fixed interest rate, so it’s low.

RK: I lived through that too, and I think that the great limiting factor in this market is that most people seem to have a memory that goes back 30 years.

In the 70s it took a very long time for interest rates to rise, even though inflation was up at 70 per cent at one point, because people were so embedded in what was a normal interest rate in the 50s and 60s, which for government bonds was 5 per cent.

Shadow shopper

LT: What is your opinion of the Australian Securities and Investments Commission’s [ASIC’s] recent shadow shopping report? What was your view of the overall results?

DC: It was fairly predictable. I mean, they want certain outcomes, and you know it’s not hard to get those outcomes.

Still, as much as we in the industry get upset, we’ve still got a long way to go.

The challenge is you’ve got a diverse market of advisers out there with all sorts of remuneration structures and all sorts of ways that they can advise clients, and so you’re going to get people who manipulate that.

CM: We get a lot of information from our compliance department to say do this, that and the other, and at the end of the day it means paperwork anyway you look at it.

I know that the FPA [Financial Planning Association] has been working very hard asking ASIC for their examples and this is an ongoing situation.

LT: This year’s shadow shopper report did show that the levels of advice had improved since the last report was issued. So do you think Financial Services Reform (FSR) has made an impact in improving the standards within the industry?

CM: I don’t have a problem with compliance. If you’re doing the right thing by your clients that’s great — they’re fully informed, you’re informed, and they know what they’re paying for.

But there is a long way to go, and it’s interesting that ASIC keeps saying we don’t want to be prescriptive, and every time they come out with something else what are they doing? They’re just pushing us into another area to be prescriptive.

GC: I think that’s the industry’s response as well, because the industry isn’t taking the lead and saying ‘that’s the legislation, here is an example of best practice’.

Everybody’s turning round and saying ‘alright regulator, you’ve put it together, you give us your example’. Nobody wants to take that lead within the industry and, therefore, we’ll get the prescription that we deserve.

BM: I wonder what the agenda is with ASIC sometimes, because we’ve just been through this Westpoint collapse, and I think most people in the industry could see something like that happening to one of these providers. They just seemed to stand by and watch it happen and at the end they pointed the finger at 20 financial planners.

RK: When you run a business or a practice of a certain size you know it’s hard — there’s always challenges and difficulties, you’re never making perfect decisions in every area.

Then put yourself in the position of a regulator trying to run a whole industry. The industry contains really first class professionals, it contains shonks, it contains people who are commercial, and it contains people who have commercial motivations that aren’t aligned with client’s interests to distribute product. And so you’re going to write this set of regulations for all of those people.

Then you put these regulations out and there’s a group of us there who, if you actually look at what those regulations are trying to achieve, we’ve always done those things, but now you’ve got a set of prescriptive requirements that actually mean that sometimes you feel you’re conveying the information less clearly. It slows down the process and adds to costs.

So you want to say ‘take this away, we were behaving true to our relationship to our clients before it’. Then you meet other elements in the industry and you think, ‘how come someone isn’t looking over these peoples’ shoulders trying to sort them out?’.

GC: My greatest concern is that this whole regime of Statements of Advice and full disclosure, if you put all of the things side-by-side, the people who are rogues will produce a document that is every bit as plausible as the most professional one that you and I can put together.

I think we’re regulating the wrong thing.

I think people are vulnerable and all the disclosure in the world isn’t going to make them less vulnerable. Creating a Statement of Advice that’s now 50 or 60 pages long plus PDSs [Product Disclosure Statements] for every item isn’t going to help them.

DC: We all whinge about paperwork and problems, and that’s largely because we’re doing the right thing by our clients without that overlay with the FSR.

Unfortunately, if you take FSR away, you become unregulated, and then you wind up like in real estate, where you’ve got all ranges from property sales people to guys who are largely charlatans.

RK: It’s pointless wishing that inevitable trends would reverse, so in every area of life the world is heading to more regulation.

I think the focus should be on where the trend is going. What we’ve seen recently, in all sorts of areas, is the FPA’s focus on conflicts of interest, which I think is actually the correct catch-all phrase for the issue.

Now if that’s the start of a trend, it is a significant event for the industry, because there are some large elements of what’s called the planning industry or profession which have inbuilt into their business operation conflicts of interest.

Product recommendations

LT: The shadow shopper report highlighted a number of areas of poor advice where planners had recommended the products of their institutional owner to a client where it wasn’t appropriate. How can this problem be addressed?

BM: I have the belief that you should only call yourself a financial planner if you have no product affiliation. Although you can still do the job, I shouldn’t be allowed to call myself a financial planner if I am a representative of X company.

I think there has to be some sort of branding in the marketplace that those people who call themselves financial planners don’t have a conflict of interest with a product provider. So I suppose that’s maybe something the FPA could look at.

DC: The choice is there [on recommended lists], and they’re all happy to give you the choice. But if you’re under a particular platform, and you choose their product, they will give you 100 per cent of the trail, and you will qualify for 2.25 per cent towards your overseas trip bonus and all that.

Then, when it all gets disclosed in seven pages at the back of a 90-page plan, of course it means nothing to the consumer until a shadow shopper comes along and someone painstakingly trolls over it.

I think the UK have taken that on board where they have their independent adviser definition, which is for advisers that don’t have any alignment. There are things that could be done more at a regulatory level to differentiate. But you’re always going to have that until no commission exists.

RK: As a non institutionally-owned dealer group, of course we’d be happy with that direction. However, one of the lessons learned in England is that the division into independent and product-selling meant that there were no sources of capital for independent financial planning businesses.

What you’re seeing, which I think is really healthy, is a number of firms that have accessed private and increasingly public capital, where access to capital comes without institutional value.

But I think the number of planners who would be in favour of that as a principle is greater than the planners who would be comfortable with the consequence that they’d never actually have someone to sell their business to.

Focus on conflicts of interest is the main game. If clients went in with their radar saying ‘can I identify conflicts of interest here, and if so, am I comfortable with how they’re managed?’, you’d actually have people being alert to most pitfalls.

GC: I think the number of consumers who would recognise a conflict of interest and the potential impact on the advice that they get would be in the low fraction of single digits.

I don’t think most people would understand how a conflict of interest would be adverse to their case and, frankly, the commissions are only an indicator when there’s a collapse.

There are some products with high commissions that are absolutely appropriate for the risk profiles of the clients that take them. And what are we trying to do, stop those? We’re not, we’re just trying to make sure advisers don’t go to those products automatically by debt of their interest in remuneration.

Planner remuneration

LT: The industry is again debating fee-for-service versus commissions. Can the industry continue with both, and are each appropriate in different circumstances?

BM: I haven’t found it to be a huge issue with consumers. Very few people come into my office and say I only want to pay a fee, or I only want to pay a commission.

My preference is to agree to a fee with a client and then get paid off a platform. It’s a very efficient way of getting paid. You’re not chasing debtors; you’re not having to invoice people. I think it’s a fairly efficient way to run a practice. But I haven’t found many people coming in and saying it has to be one or the other.

DC: It’s not something that really ever comes up as an issue, we just say this is how we do it … it’s a combination fee mostly.

GC: I think true fee-for-service is as the accountants do it. You come in and we start the clock, and if we applied that religiously to this business we would all go out of business because our clients wouldn’t pay the cost when they needed it, and we wouldn’t have the gall to charge them on September the 16th, 17th, 18th and 19th when they’re queued 47 deep, and you’re working 16 hours a day plus overtime.

I don’t think an absolute pure fee-for-service, which is time-based, is ever going to succeed in this industry. You’re always going to go back to some form of hybrid where, if they want a reconciliation, it can be done, but you need to have a way in which you can keep your business open by having a steady stream of fees.

However, that is basically negotiated, and it’s got to be reasonably painless for the client to pay.

DC: The majority of advisers who would say that they’re fee-for-service are charging a percentage of assets through the platform, which is really just commission.

RK: It isn’t, I disagree. We charge different clients different ways, so I’m not speaking from being locked into percentages, but there are two differences.

First, if it’s a fee, it appears in every client statement every month or quarter and they actually see they’ve paid it, whereas from a product they don’t.

Second, if it’s a fee, the day the client fires you, your income stops.

If it’s a trail, the day the client fires you your income goes on and you actually get paid for nothing. Those are two material differences, and the comment I always make when people say there’s no difference is why don’t you go to fees then?

But people are resistant to do so even though they might purport to be the same. You have to be confident that your client will continue to maintain the relationship even though they see what they’re paying, and you’re sufficiently confident that you’re delivering value for service.

GC: You’re prepared to call a fee a fee because it appears on a client statement. I think a fee-for-service is when the fee appears only when the service is given.

If you have the right to apply a fee when no service has actually been delivered, which is what a regular fee out of a wrap or a platform is, that’s not genuine fee-for-service. That is a negotiated fee arrangement that is acceptable both to the business and the client, and that is fantastic, right? It’s a good business model, but I don’t think it’s pure fee-for-service.

RK: I don’t know any industry that works purely time based. Take law firms. You actually get inside a high order law firm and ask them what the correlation between the remuneration they earn from clients and the actual hours that they’ve put in is, and there’s not nearly the correlation that you would think.

The idea that there are businesses out there that do nothing but work on time, or that time is the only thing you bring to the table that’s of value, neither of those makes any sense.

DC: If you ask a consumer what they believe fee-for-service would be, I think it conjures up a time-based type service. We believe the way we structure our fees and commission the money that we’re going to earn is based on the value that we create.

I agree that if a client comes in the day before they turn 65 and you can make some significant benefits to them in the longer term, and you do that then and there, that value you create means you could charge a lot more and they should be happy to pay it and be pleased about the outcome.

As long as the client understands what they’re paying, that’s what they’re happy to bear. The problem that the industry has had is that if we’ve given advice away for free, we’ve made it through product sale.

GC: At the end of the day, you’ve got to find a model that clients will accept and that they pay happily, so you aren’t spending a disproportionate amount of your business time just chasing fees or negotiating or billing fees, because none of those things actually add anything to the value of the client’s investments.