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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