Late last year the Prime Minister announced that the “Government will establish a Royal Commission into the alleged misconduct of Australia’s banks and other financial services entities”.
You might think this is good news, but I expect that this will be yet another waste of taxpayers’ money (and time).
The role of banks has changed significantly over the past 2 to 3 decades
Banks and financial services businesses use to be the gatekeepers of information.
If you wanted to invest in the stock market in the 1980’s or 1990’s for example, you had to seek out a financial advisor or stock broker.
You could have tried to do it all yourself but because access to information was very scarce, it would have taken a large investment of time and you would have had to learn through trial and error – which is scary and costly.
It was just easier to go and see a financial planner.
The banks and financial services businesses exploited this power.
Their businesses model was to say: “if you want the information (i.e. how to invest), you need to buy this product from us”.
Their core competency was salesmanship, not investment advice.
Access to information is now longer a problem
The emergence of the internet means that an extraordinary amount of information is available to anyone with a computer at virtually no cost.
A very recent example of this is multi-billionaire hedge fund manager, Ray Dalio who has been sharing lots of insights lately to promote his recent book.
Ten years ago, it would have been difficult to learn anything about how Dalio invested.
Today, with one click I can learn from arguably one of the most successful investors of our time (for free).
As such, stock brokers and financial planners are now no longer gatekeepers of information.
Information is abundant.
As a result, gen X, Y and millennials (and, to a lesser extent, baby boomers) have enough information now to realise that financial planners and stock brokers have been selling us lies.
If we don’t need information, what do we need?
Not enough information is a problem.
But too much information is a problem too because we don’t know where to start.
What I believe people need from financial planners today is to identify what information is relevant and how to apply it to their individual circumstances.
They don’t want to be sold products.
People value and respect independent advice.
This is not a job for big business (the banks) because they’ll try and scale it
If you want to build a house you engage the services of an architect.
In order to do a good job, an architect needs to get to know you, your likes and dislikes, your lifestyle, what you want from your home (goals) and so on.
An architect’s starting assumption is that everyone’s different.
The architects design is therefore customised for their specific client.
Financial planning is very similar to this.
This is why big business cannot deliver what most people want.
Big business will always look for ways to scale and systemise their business to maximise profit – which is the opposite of customisation.
Also, they will try and find ways to reduce their business risk which ends up adulterating the advisory process.
This is what big business does – more specifically, the big banks.
They will do their best to convince you that their service is customised to you but it rarely is.
This is not what we want or need.
This is why architectural firms tend to be small businesses (20 or fewer staff) – because big business is the enemy of customisation.
A pharmaceutical company cannot own a medical practice
It is against the law for a pharmaceutical company to own a medical (GP) practice.
This ensures that your doctor (GP) is independent.
They have no financial interest in what drugs they prescribe and how much they prescribe.
Imagine if your GP was employed by Pfizer.
How uncomfortable would that make you feel?
Well this is what has essentially been happening in the financial services industry.
The banks have been prescribing their own products for years.
My advice to the Royal Commission
The answer for the Royal Commission is very simple in my view.
That is, you can either be a product manufacturer (e.g. banks, fund managers or insurance companies) or an advisory business.
You cannot be both – and no one can cross own both.
If you choose to be an investment advisory business, it should be illegal to accept any financial or non-financial benefits from investment providers (including property developers, fund managers, banks, stock brokers, etc.).
This one action would clean up 99% of the industry’s problems
What happens when you separate these two offerings (advice and product manufacturing) is that you create an army of independent professionals (advisors) that have enough education, experience and streetsmarts to help people decide if an investment is fundamentally sound and appropriate or not.
Independent advisors use their high levels of scepticism to avoid being seduced by marketing noise, look under the bonnet of an investment to assess whether its sound or not.
It is this army of independent professionals that will protect the public from greedy financial services businesses.
Will any one listen? Will anything change?
Sorry, but I must admit that I’m pessimistic about the likelihood of anything positive coming from this Royal Commission – but I’d be pleased to be proven wrong.
Even the initial signs are not that positive i.e. the Royal Commission’s draft terms of reference are shallow and weak.
That said, of course, I’ll be doing my utmost to share my views with the Commission.
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