Shorten must not let planners dodge reforms

By Jackie Pearson

According to a recent Crikey report, the Financial Planning Association has distributed  kits to members so they can lobby their local Federal MPs to oppose reforms slated to outlaw trail commissions and give planners a fiduciary duty.

Bill Shorten, now minister for superannuation and financial products, needs to stand up to the planners and ensure the proposed 2012 changes do become law. Here are just some of the reasons why the Australian financial planning industry needs to be cleaned up.

1.       We have compulsory superannuation. This is a forced savings regime under which a substantial percentage of our earnings gets locked away until we reach retirement age. Most of the funds in our super accounts are invested in growth assets, such as shares, that also carry high short-term investment risks. The majority of the trained, qualified and licensed financial planners we can go to for advice about our super are paid upfront and ongoing trail commissions by the fund managers they recommend. Upfront commissions have been cleaned up to some extent in recent years and investors increasingly understand the importance of paying for advice on a fee-for-service basis to ensure it is unbiased but trail commissions remain. And many planners receive trails for doing absolutely no work for the client, year after year. It’s a rort that should be stopped.

2.       We have compulsory superannuation. I’ve said it before and I will say it again. This is a forced savings regime and as such surely the people who are supposed to be license to provide unbiased advice about our super and other investments should have, as a minimum, a fiduciary duty to act in the best interests of their client. Financial planners market themselves as professionals and experts but they don’t seem to want any of the responsibilities that come with those titles.

3.       We have compulsory superannuation. Financial products and services are complex and Australian consumers are forced to rely on disclosure as their only real protection from fraud and misrepresentation. I am talking about the types of misrepresentation that resulted in battlers losing their houses because they followed the advice of licensed advisers at Storm Financial. But I am also talking about the fact that if an independent audit was conducted of the number of people who currently have their superannuation invested in options that are appropriate for their life stage, risk profile etc I would be very surprised if even 50% of our current superannuation nest-egg is invested appropriately. Some may say this is due to the fact that not enough super fund members seek out good financial advice but I am certain that many advisers are still making inappropriate and commission-driven superannuation recommendations.

And then we have the rise and rise of self-managed superannuation. It seems the funds management industry and its intermediaries (financial planners) have decided, during the past couple of years, that they can’t make self-managed super go away. Their solution is to climb on board the engine and get it revved up. Suddenly advisers are espousing self-managed super as an excellent way to gain control of your retirement savings. The trouble is it is the advisers gaining control and the self-managed, diy, independent nature of self-managed super is increasingly becoming a misnomer.

There are some true experts in this area: Dixon Advisory, Cavendish etc but there are many claiming to be experts who have very little real expertise in the area. This is another reason why we urgently need reforms to ensure financial planners do have a fiduciary duty to their clients and that trail commissions are abolished.

Perhaps consumers who’ve had poor experiences with financial planners should be lobbying their local Federal members of parliament to counter-balance the FPA campaign. It only takes a few minutes to write a letter outlining how you feel about your treatment by a planner. Perhaps we should also be writing to Mr Shorten, the whole of cabinet and relevant opposition, independent and Greens MPs too. The difficulty with consumer issues, irrespective of which major party is in power, is that the industry’s lobbying manages to drown out any voice of reason representing the consumer.

The bottom line, however, is that if we have a compulsory retirement savings regime in the form of superannuation, the government should put adequate protections in place to ensure those savings are protected.

CUSTOMERS DRIVE COMPETITION

I must say I am finding the banking competition inquiry a bit too cosy and friendly. Not a great deal of hard questioning from our Senators to the bankers or non-bankers or consumer reps.
As someone who has written about banking and interest rates from the CONSUMER perspective for some time now, the Treasurer's "reform" package and ideas being recommended during the public hearings are classic deck chair re-arranging.
Competition between banks and non-banks, banks and mutual deposit-takers such as credit unions will not improve until consumers demand a better deal.
Initiatives to improve financial literacy in this country over the past 10 years have not garnered great outcomes. Many Australians still do not understand their mortgages, realise how interest is calculated on either their savings or credit contracts. They don't even keep track of what they are earning and spending. Until that changes, the banks can continue to get away with peddling complex, incomprehensible contracts that bind the uneducated customer to their brand for longer than necessary.
It will be customers that make the financial services marketplace truly competitive and while we are all slaves to our offset accounts and credit cards, the level of awareness and effort needed to drive a truly good deal, simply won't exist.

MONEY TOO TIGHT TO MENTION?

By Jackie Pearson
A new report by The Australia Institute explains why Australians are in so much debt.
The report, entitled Evidence versus emotion: how do we really make financial decisions? says that a large proportion of the community "confesses to not even knowing what their mortgage interest rate is or who their electricity provider is."
The report labels these consumers "the oblivious". By contrast a much smaller group are described as "human calculators" ... "hyper-vigilant in ensuring that they do not pay credit card interest, they compare phone plans and seek out things they need when they are on sale".
According to the report, orthodox or noeclassical economics is based on the idea that people behave rationally, whereas behvarioral economics is based on how people really do behave.
Orthodox economics makes some pretty interesting assumptions about human behaviour, according to the report, such as that "consumers have access to complete information, collecting and analysing information is costless... suppliers have no market power, there are no spillover costs or benefits associated with consumption decisions... people are motivated solely by self-interest".
The report goes on to say that behavioural economics indicates that, in reality, consumer behaviour is completely at odds with the above description. Instead we are creatures of habit, concerned about the approval of others, bad at computation when making decisions, want our actions and behaviours to be in line with our convictions,..."
According to the study's results:

• 28% of the population are over-confident. They think they are better-than-average at making financial decisions but their actual behaviour suggests otherwise;
• 18% admit to being overwhelmed but think it's too difficult to take steps to get a better deal;
• 30% are playing catch-up: don't pay their credit card balance each month and continue to use it to pay for essentials;
• 41% are oblivious: unconcerned or unaware that they could, in fact, get a better deal on their banking, mortgage or phone plan;
• 44% of people who took out a mortgage recently are described as 'eternal optimists': they took out the loan without considering the possibility of losing their job or getting sick

The other three categories are compartmentalisers, spending hawks, and, of course, the human calculators. 
So which group do you fit into? Are you a human calculator or honestly oblivious when it comes to your finances, or somewhere in between?
Do you know, for example, how much money you owe on your credit cards and how long, if you stopped making new purchases on those cards today, it would take you to pay them down to a zero account balance?
Can you honestly answer whether you are beating the bank when it comes to paying off your mortgage or are you completely behind the eightball, making regular redraws and not quite sure how many more years it will take you to own your home outright.
Todays headlines are talking about the European sovereign debt crisis pushing to global economy into stage two of the Global Financial Crisis in 2011.
Many Australians are, unfortunately, having their own personal financial crises right this minute. Another interest rate increase, a job loss or illness and they could be pushed over the edge.
According to The Australia Institute 52% of the respondents who had experienced financial difficulties in the past year said they did not pay off their credit cards in full. Forty one percent of all respondents said if they were in financial difficulty they wouldn't talk to anyone about it but would attempt to sort it out themselves.
In recent years the Commonwealth Government and Australian Securities Commission have been pouring substantial funds into improving our financial literacy. The Australia Institute Study would seem to indicate that we still have a long way to go.
It also adds evidence to the argument that many people don't understand the increasingly complex nature of the financial transactions they enter into. I commend the study to you. You don't have to be a rocket scientist to understand it and it could be a helpful starting point for changing your attitudes to your own financial situation.