“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, [for] knowledge has marked the upward surge of mankind.”
Gordon Gekko, Wall Street (1987).
Ever since that ‘greed is good’ speech, in what was termed the ‘decade of greed’ (the eighties), the finance industry has been Hollywood’s, and the public’s, go-to villain. The global financial crisis emboldened that view.
Public investigations satisfy a desire to vilify a maligned section of society, but vilification is not a solution.
In August 2016, 70% of respondents to a Cuffelinks survey opposed the setting up of the Royal Commission (see What readers think about a bank royal commission). Two points, ‘There are already enough regulators, inquiries and committees’ and ‘Banks have many stakeholders and can’t keep everyone happy’ had three-quarters of readers agreeing.
I wonder how many have changed their minds about the Royal Commission being a bank-bashing fest and a waste of time and money. I admit I have.
The most high-profile recent backflip came after a strenuously evasive denial on national television. It was a masterful samba, even for a politician, many of whom have earned honorary doctorates in the art of evasion.
Minister for Financial Services, Kelly O’Dwyer, dodged Barry Cassidy’s question on ABC’s Insiders eight times on Sunday, 22 April. Five days later, O’Dwyer told an SMSF conference in Melbourne:
“With the benefit of hindsight we should have called it earlier, I am sorry we didn’t, and I regret not saying this when asked earlier this week.”
Sales or advice?
Does anyone go to a Honda car dealer and receive a recommendation to buy a Toyota instead? When was the last time real estate agents recommended a comparable property not in their portfolio? Does that make car dealers and real estate agents morally corrupt by virtue of their profession? We understand they have a duty to their principals, the sellers, and not to potential buyers. More importantly, there is no ambiguity: the agent/dealer has a sales function, not an advisory one.
Even the legal profession has a niche for advocacy. It’s the court’s ambit to find the truth, but advocates are duty-bound to represent their client’s interests.
So how does a financial adviser become a selling agent for someone and an unbiased adviser for a client at the same time without developing a multiple-personality disorder? Watch how this exchange on Day 15 at the Royal Commission traverses toward the obvious. It’s between Rowena Orr, QC, Counsel assisting the Commission (RO) and Michael Wright, Head of Advice at Westpac (MW):
RO: Do you think of yourself, Mr Wright, as a sales professional?
MW: No, I don’t.
RO: I have had a look at your LinkedIn profile which lists various things about what you do, and one of the descriptors that you give of yourself is as a sales professional; is that right?
MW: It could be.
RO: Would you like me to show it to you or – I’m happy to?
MW: No, I’m happy to believe you.
RO: I’m interested in that because I want to understand whether you think of the financial advice industry as a sales industry?
MW: I don’t.
RO: You don’t. And do you think it’s possible for a financial adviser to be both a salesperson and a trusted adviser at the same time?
MW: Well, to me, they’re – they’re connected. To be a trusted adviser means that you understand your customer, you tailor their needs to their needs – sorry, to their desires. Often, to realise that, you need to put strategies in place which, in essence, result in products. So, by default, if you genuinely care in taking action, there will be an element of product to bring that to life. So, yes, you could say that is a sale.
RO: Maybe there won’t, Mr Wright. Maybe the right advice for a person is not to sell them products?
MW: Yes, I agree.
You can see the whole exchange here.
Financial incentives have power, as do desires for professionalism, knowledge, and respect. Can we align financial incentives toward doing the honourable thing? That’s where the Commissioner, Kenneth Hayne, went as well:
“Well, forget beating up on yourself, Mr Wright. Can you offer any way in which that sort of thing – I’m trying to find a neutral expression – could be reflected in management structures, organisation, or anything of that kind?”
Contradictory incentives hurt. Terry McMaster, the head of Dover Financial, collapsed while taking questions at the Royal Commission. The Commission is not falling short on its fact-finding mission, and on drama, it had surpassed Hollywood by Day 19.
Long-run outcomes gravitate toward incentives
The big players lobbied during the development of the Future of Financial Advice (FOFA) legislation for keeping the commissions not just because they had bought businesses based on cash flow models that assumed the commissions were there to stay. They wanted to create even more products to sell. What they bought was a sales model dressed up as an advisory service, and it compromised the professionalism of advisers.
The industry knows this. We saw it in Michael Wright’s and Jack Regan’s (AMP) testimony. Executives are themselves now pleading for a law that will bind everyone to a fee-for-service model, addressing the first-mover disadvantages. Consider this exchange between Michael Hodge (MH) for the Commission and Jack Regan (JR):
MH: Do you, as the head of advice – I’m sorry, as the group executive in charge of advice, have a view about whether the taking or continued taking of commissions is compatible with the purported professionalisation of financial planners?
JR: Well, as I said before, my preference would be for fee arrangements expressly.
MH: And is that because you don’t think that it is compatible with the idea of financial planners being a profession that they continue to receive commissions?
JR: I think fees are much more consistent with a professional environment, yes.
In the earlier Round 1 interviews on mortgage broking, CBA admitted there was a conflict of interest created by the commission payments, and that brokers were likely to burden customers with debt they could not repay. In 2011, KPMG and Westpoint directors paid $67 million to ASIC, acting on behalf of Westpoint investors. In that case, it was alleged that financial planners were receiving around a 10% commission to sell clients into mezzanine finance for property construction.
Baring Brothers, a merchant bank that stood proud for 223 years, was brought down by a perverse incentive structure. Nick Lesson was an accident waiting to happen. Give someone $10,000 to play at the casino all night, every night. They keep 20% of the winnings, none of the losses. Will they play every night? You bet.
Incentives matter a great deal in both directions. Fund managers and equity analysts must look deep into incentive structures in the companies they put a valuation on. Perverse incentives will eventually create perverse outcomes.
By Vinay Kolhatkar (assistant editor at Cuffelinks)
3 May 2018
#ASIC #Advice #FinancialPlanning #FrankingCredits #specialist #will #enduringpowerofattorney #smsf #law #estateplanning #Contribution #Retail #Fund #SMSF #Superannuation #Cap #Retiree #EPA #lawyer #Pension