The Hayne royal commission has shed welcome daylight in dark corners of our financial services industry. But it was not designed to answer the real issue raised by its stories of financial advice and planning gone badly wrong: how to better prepare Australia's retiring baby-boomers for the flood of money about to arrive as decades of compulsory super saving starts moving into serious payout mode.
Wanting individuals and institutions have been exposed in the arena of the royal commission. The theatre of public shaming however does not give much sense if these experiences are common, much less the norm. And important a catalyst it might be, the royal commission itself does not have the job of reshaping and reforming the industry to become more efficient in its primary job of using Australia's $2.6 trillion retirement largesse most effectively.
A poor response by policy makers to the problems raised by the commission could be counter-productive. If advisers are decimated by misguided regulation, a retiring generation of workers may be without any support and advice just when they need it most. For all the complaints about the blunders and complacency of the big financial services groups in controlling their armies of financial advisers, it is hard to see what is gained if they quit the sector en masse in favour of smaller, less-resourced and less-accountable players – more likely to offer Orwellian "client protection policies" that do the opposite of what was intended, as the royal commission heard this week.
We need an advice system that will be true to the public that has to use it, but not so onerous that respectable players will not stay in the business.
Even simple income streams from a super fund may not be transparent or easily comparable. And this is not only a compulsory system; almost $500 billion is held in default accounts where savings are allocated automatically to a fund chosen by an industrial award – invariably to industry funds. Savers who have been apathetic before are therefore expected to become informed consumers on retirement. AustralianSuper head Ian Silk told The Australian Financial Review Banking and Wealth Summit last month that such savers are lucky to be channelled into industry funds that have performed well. But a huge business model based on customer inertia hardly seems good for the future when a crisis of customer knowledge and control is being revealed at the royal commission.
The best guardian of the system has to be professionalism at the level of individual financial planners. Like a doctor or a lawyer, those handling irreplaceable retirement savings should put client interests first and always. But it does not take a lot of training to become a financial planner, even though standards are already being tightened. The financial planners' industry associations have no control over entry or ability to discipline members over standards. They appear reluctant to name and shame. Strengthening the role of industry bodies – without building expensive new barriers to entry – is one obvious change that could follow Hayne.
The title of planner or adviser that goes with the job sounds neutral, when often it is not. Many advisers are part of a so-called vertically integrated financial group that sells products generated by their parent or principal, much as a Ford dealer sells Fords. With that distinction clear, there is not necessarily anything wrong with vertical integration. It may be that large integrated groups have the scale and security to offer one-stop advice shops that savers often want. The Future of Financial Advice system tackled the primacy of client interest, and banned commissions for in-house investment products, but it has only been partially effective.
It has long been recognised in the super industry that the one-size-fits-most model that suits the accumulation phase of super does not fit the complexities of the retirement phase, which does demand more individual attention. Whatever comes out of the Hayne royal commission needs to help the market work out how to supply trusted and reliable financial advice, without much increase in costly regulation. Governments can only do so much.
By The AFR View
27 April 2018