In defence of independents

In terms of mainstream media coverage, that was predictable.

For many journalists, it was always a two-cornered contest between the banks – and their unrelenting push to be able to offer financial advice and still sell product – and unsuspecting consumers who couldn’t discern the difference between the two.

Lambie and Muir are hardly seasoned political practitioners, but you would have had to have been in solitary confinement for the past several years to miss the public opprobrium that has been directed at the banks about poor financial advice.

In particular, the Commonwealth Bank, which, for many of those older victims of poor advice would still be remembered as a conservative, trustworthy government-owned institution, has dragged the financial planning industry into the gutter. This is what voters were telling Lambie and Muir – and this is why they changed their vote.

But their decision to “punish” the big banks will not end there. The independent financial planner, the small suburban practices faithfully serving mums and dads, have been caught up in this maelstrom.

In my opinion Cormann’s reforms struck the right balance between lightening the burden on the industry – particularly the independent planners – with undue paperwork (and cost) and the rights of the consumer.

I never subscribed to the argument that Cormann’s changes materially weakened the “best-interest” duty on financial advisers.

I don’t think the vast majority of independent planners did it pre-FOFA, so why would they start now?

Although there’s no hard evidence either way on this issue, what we do know is that Australian investors emerged from the Global Financial Crisis in better financial shape than their investing counterparts in most other countries – and this was pre-FOFA.

We also know most of the financial planning disasters have originated at the big end of town – not the suburbs. Even in the case of the Townsville-based financial planning consultancy Storm Financial it was the banks that signed off on the debt.

What I conclude from this is that all governments, to lesser or greater degrees, have looked financial advice through the prism of consumer protection instead of asking what is the best competitive structure to deliver the maximum benefit to the consumer.

Even after the changes to FOFA, the big banks (and AMP) still dominate the financial planning industry with about 80 per cent of the business.

This is a recipe for disaster. The same institutions that have their balance sheets dominated by residential housing debt (read the Financial System Inquiry and the number of submissions lamenting the lack of debt for SMEs) are hardly likely to bring innovative thinking to the far more complex – and individual – area of assisting people plan their financial security. That requires a planner-client relationship that is built on trust over many years.

For the banks, it must ultimately be about specific products that suit their business models, which, depressingly, are much the same. Like a Myer or David Jones, they are a one-stop shop.

Under this business model, where will the innovation, the individually tailored advice, come from?

This is a key issue that the FSI should have examined. Instead of thinking that innovation is about features on existing products, they should have been asking the industry about new products or new ways of doing business, and then creating the regulatory and legislative environment to facilitate this.

It’s my contention that the independent planner is best placed to provide this innovation. They know their clients best and what they need to be financially secure, both during their working lives and in retirement.

It is they that can demand the financial products that best suit their clients – in stark contrast to the banks that have a suite of products all clearly marked “one size fits all”.

My fear is the FSI and the final upshot of the FOFA reforms will leave the independents in a far more onerous situation than even now.

The regulatory burdens will leave them with higher cost structures that, in turn, will drive their clients to the lower-cost banks.

In my opinion, the end result will be not only be poorer-quality advice but also less choice.

George Lucas is managing director of Instreet Investment Limited. He has over 24 years' experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products. He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.