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Another one bites the dust …

190326.Another one bites the dust
Westpac exits financial planning …
You may (or not) have noticed my Blog article output has reduced over the past 12 months. Having written about 180 articles over the last 10 years and with retirement imminent, it has become increasingly difficult to find new personal financial planning matters that compel me to “put pen to paper”.

Unlike the financial media, we have refrained from recycling our old articles. However, re-reading many of those articles gives me some pride that we have remained true to our original intent of 10 years ago to provide educative material that would stand the test of time. While often prompted by a topical matter, the articles always addressed the subject of interest in terms of our “Principles of successful wealth management”. There isn’t too much we would change if we were to write on the same topics today.

The catalyst for today’s article is Westpac’s recent announcement that it is quitting personal financial advice, the last of the “Big 4” banks to do so. The article is more commentary and personal opinion, rather than the usual educative piece. It is motivated by the irony that as I approach the end of my 20 plus year career in financial planning the institutions primarily responsible for making it increasingly difficult and costly for firms like ours to “help (more) people make better financial choices”[1] have finally decided to vacate the space that, in our view, they should never have been allowed to occupy.

…but the damage remains

Unfortunately, the “Big 4’s” departure will leave behind a lot of baggage, in the form of overkill regulation and bureaucracy that will not easily be dismantled. The vested interests of the regulators, lawyers and educators who benefit from the bloated edifice created to “protect” consumers from inappropriate financial planning practices will almost certainly replace the bank lobbyists in arguing for the status quo or even more draconian regulation.

Bank lobbyists were extremely successful over the past twenty years in persuading legislators that irreconcilable conflicts could be managed, through such contrivances as prescribed:

  • Disclosure requirements;
  • Client best-interests duty;
  • Client servicing requirements; and, most recently;
  • Education and ethical standards.

However, the resulting compliance burden placed on all participants in the personal financial planning industry increased to the point where the “Big 4” banks were unable to make money from financial advice (e.g. Westpac lost $53 million in 2017-18 from its financial advice businesses), while remaining exposed to huge actual and potential reputational risks.

The costs of providing financial advice to those consumers the regulators believed they were protecting have been pushed to a level where most people who need assistance can’t afford it. Unless the legislators and regulators consider that good personal financial advice has no value, their constant tinkering over the past 20 years has been an unmitigated disaster for most consumers. The “red tape” has pushed financial advice into the luxury good category.

The future of financial planning?

Before you can provide an adequate solution to eliminating the poor financial advice practices uncovered over recent years (particularly by the Financial Services Royal Commission[2]), that persist despite ballooning regulation, you need to acknowledge the core problem. In our very strong view, that core problem has not changed in the past 20 years. For us, it’s difficult to conceive how impartial financial advice in the clients’ best interest will be consistently provided if the adviser’s employment or business is linked to that of a financial product provider (e.g. through shareholdings, revenue sharing, referral payments, bonuses etc.).

The solution then appears obvious – to legislatively separate product from advice. Any incentivised link to a financial product provider should preclude the giving of financial advice. The Hayne Commission appeared to be heading down this path but backed off (for reasons that aren’t clear) in its final report, suggesting enforcement of existing legislation is sufficient to counter poor practice.

But now that all four major banks have indicated their intention to exit financial planning, perhaps the political will to tackle the obvious conflict of interest head-on will emerge. Some existing institutional resistance will remain (e.g. AMP, IOOF and Macquarie) but its lobbying power to protect the status quo will be weakened by the absence of the major banks (except to the extent those banks want to sell their financial advice businesses to institutions that continue to provide conflicted advice).

Also, the one-stop accounting/financial planning/legal/mortgage broking practices would strongly object to the separation of product and advice. But their “convenience” pitch should not be strong enough to counter the significant potential to place the interests of the business conglomerate ahead of that of the client.

With regard to one stop shops, it is interesting to note that the financial advice firm Westpac intends to transfer about 175 of its current financial advice personnel (with their clients) to, Viridian Advisory, is rife with conflicts of interest.

The Financial Services Guide covering the Viridian Group states:

“The Viridian Group includes VPW, IAM, Viridian Advisory and VFGL. VPW, IAM and VFGL provide financial services such as financial advice, funds management, insurance, superannuation, investment and administrative services.”

It would appear that the affected Westpac financial planning clients will be going from the “frying pan into the fire” when it comes to receiving conflicted personal financial advice.

Some final observations

So, the “Big 4” banks conflicted wealth management models have collapsed under the weight of regulation. That’s a good thing for those, like us, who believe that financial advice should not be tainted by product links. But is has occurred 10-15 years later than it should have and left a compliance driven, still largely conflicted, industry that can’t profitably help those who most need help.

If the legislators are serious about making impartial financial advice affordable to the majority, they should quickly remove the product / advice conflicts and dismantle most of the regulations that have been progressively put in place in the unsuccessful attempt to manage those conflicts.

Realistically, I will have left the industry before that happens. It will be interesting to watch how things evolve over the next 5 – 10 years. But the exit of the “Big 4” banks leaves me more optimistic than any time since I began my financial planning career that personal financial advice can become a true profession.



[1] “To help people make better financial choices” is Wealth Foundations’ guiding objective.

[2]  The Hayne Commission i.e. the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.


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A more complete view of share market performance

190116.Share returns

The share market “news” you’re hearing may be misleading

The four months to 31 December 2018 saw a nasty fall in both Australian and global share markets. As measured by the S&P/ASX200 Price Index, the Australian share market fell 11.3% over this period. At an end December 2018 level of 5,646.40, financial commentators couldn’t help themselves adding to the gloom by noting that the index was 15.7% below the all-time high of 6,700.6, recorded on 26 October 2007.

The implication is that the Australian share market was still well below pre-Global Financial Crisis (“GFC”) levels, despite the passage of over 11 years. A further conclusion that might be implied is that the share market isn’t a great place to invest. While not claiming the past 11 years has been the best experience for investors, the focus on the 26 October 2007 S&P/ASX200 Price Index peak as a benchmark is potentially misleading, for at least two reasons:

  1. The peak may have represented an extraordinary level, rather than what could be considered “normal”; and
  2. The “Price” index doesn’t measure the total return from share investing, capturing only changes in the prices of shares and completely ignoring the impact of dividends.

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The keys to a successful retirement

181122.Retiree couple

Your financial resources are the best predictor of a successful retirement …

As financial planners, we are heavily focused on our clients being financially well prepared for the retirement they desire. And, the psychological research[1] that we discuss in this article suggests that the adequacy of your financial resources is the most important indicator of a successful adjustment to retirement and to retirement satisfaction.

However, it’s probably fair to say that adequate financial resources are a necessary, but not sufficient, condition for a successful retirement experience. The research identifies five other resources’ domains that require assessment and, potentially, proactive interventions. These are, in order of importance after finances:

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What investment returns should you expect?

181023.Investment returns

Is history a reliable guide to future investment returns?

When doing long term cash flow projections for clients, it is necessary to make some “guesses” of future investment returns. Unfortunately, for the 50 year cash flow projections we do, the results are very sensitive to these guesses.

If they prove too high, without any adjustments along the way clients may end up in a considerably worse financial position than projected while, if too low, they may have led unduly financially constrained lifestyles. The antidote, of course, is to regularly review the projections, ideally annually, and make regular small adjustments rather than put an initial Plan in the drawer and see how things turn out in 50 years’ time.

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“Back of the envelope” financial planning

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Making financial decisions based on what others are doing can be dangerous

My children and many of their friends are now at the age where they are making very important decisions regarding starting families and meeting housing needs. These decisions, of course, have a strong emotional element. But they also generally have massive financial implications that, once made, lock in commitments that will extend for many years into the future.

Entering into such commitments, without detailed consideration of your “best guess” capability to both meet them and continue to be able to enjoy a desired lifestyle, sets up a high likelihood of serious, unanticipated financial pain later in life. Anecdotes suggest that many young adults who borrowed to purchase in the Sydney housing market over the past three to four years are already finding this out.

A focus on the “here and now” and peer comparison when making financial decisions is fraught with danger. Young adults often wrongly presume because their friends are buying houses and starting families, they can and should do the same.

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What is good financial health?

180724.Financial health

Good financial health not measured purely by wealth

When we started Wealth Foundations in 2007, we embraced 20 principles of successful wealth management. These continue to underpin our approach to personal financial planning.

Principle 17 states that: “Money is a means to an end, not an end in itself”. Our original rationale for this principle was as explained below:

“Research indicates that a pursuit of wealth and its trappings for their own sake is unlikely to result in life satisfaction. Also, it is important to realise that maximising wealth may be a poor proxy for maximising life satisfaction.

Therefore, we believe that effective wealth management requires you to first examine and articulate what is important to you in life (i.e. your lifestyle objectives) and then consider what, if anything, may need to change financially for those objectives to be achieved. To blindly pursue increased wealth without first asking “what for?” is really putting the cart before the horse.”

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Low financial literacy: a serious threat to financial health

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Retirement readiness is low, both in Australia and internationally

Recently, the Aegon Center for Longevity and Retirement released its 2018 international Retirement Readiness Survey, a survey it has conducted annually since 2012. For each of the 15 nations surveyed, an Aegon Retirement Readiness Index (ARRI”) is calculated, ranking retirement readiness on a scale from 0 to 10.

A high index score is between 8-10, a medium score between 6 and 7.9, and, a low score being less than six. The results for workers in the fifteen surveyed nations (with a comparison with 2012 results, where available) are shown below:

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The “Jurassic Park” of financial advice


The usual suspects’ advice practices again under scrutiny …

The latter part of April saw the Financial Services Royal Commission[1] examine some poor financial advice practices that had been brought to its attention. The Big 4 banks and AMP came under intense scrutiny, with the following areas highlighted:

  • Fees for no service, including continuing to charge the accounts of people who had been dead for some time;
  • Investment platform fees;
  • Inappropriate financial advice, that was allegedly in breach of the client best-interests duty that all planners must adhere to; and
  • Improper conduct by advisers.

While the poor practices highlighted resulted in a lot of adverse publicity for the banks and AMP (and, since, a number of board and executive resignations), they didn’t surprise us or, I suspect, most in the financial planning industry.

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Is the search for higher income yield misguided?

180423.Leaky bucket

Income yields are down, but should you worry?

The last few years have seen a fairly dramatic drop in the income yields obtained from typical balanced (i.e. roughly equal defensive and growth investments) investment portfolios. Reduced interest rates, lower rental yields on property and flat to declining dividend yields on shares mean that many retirees are no longer able to meet living expenses solely from the cash distributions (i.e. the income yield) generated by their portfolios.

There is often a reluctance to sell investments (i.e. draw down capital) to maintain desired spending. Rather, the apparent solution to the shortfall is often seen as higher yielding investments (e.g. higher risk fixed interest securities, including hybrids, high dividend paying shares and other structured products), with there being no shortage of financial product manufacturers happy to respond. However, yield enhancement always comes at the expense of a combination of increased credit risk, reduced diversification and/or increased taxation.

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Will investors benefit from a reduction in the company tax rate?

180315.Company Tax

Is a company tax reduction a second best solution?

The Government has proposed to reduce the large company tax rate from its current 30% to 25% by 2026-27. It argues that the reduction is necessary to keep Australia’s company tax rate internationally competitive and will create “jobs and growth”, ultimately leading to wages growth.

It’s been a hard sell, with those opposing the move citing, among other things, the budgetary cost and a lack of confidence in the reliability of so-called “trickle down” benefits to Australian workers.

We don’t propose to enter into the argument as to whether a drop in the company tax rate is a good or bad thing for the Australian economy. However, as a generalisation, we don’t think a tax on companies is a particularly efficient tax, given the scope for avoidance and that shareholders ultimately bear the tax burden. Most likely, it would be more effective to tax shareholders directly.

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