Finance

Where Are the Customers’ Yachts? The problem with wealth management in Australia

One of the reasons I started Stockspot was that I saw too many people getting poor investment advice.

In 1940, Fred Schwed wrote a book called Where Are the Customers’ Yachts? The title came from a story about a visit to New York. After admiring the yachts that Wall Street stockbrokers and fund managers bought, Schwed wondered where the customers’ yachts were… of course there were none!

Sadly, 80 years after Schwed there is still far more money in providing investment services than in receiving them.

This story came to mind as we read recently that Dixon Advisory has now gone into administration.

Dixon Advisory, like many others named in the banking royal commission, were conflicted by offering financial advice and at the same time recommending their own in-house financial products.

The traditional wealth management industry was positioned in TV advertisements as a way to get peace of mind and secure your future. Behind the scenes it was designed to do exactly the opposite.

One of the reasons I set up Stockspot as I saw too many people getting poor investment advice.

People were being overcharged, given poor advice and pushed into products that actually harmed their ability to reach their goals.

In our very first Fat Cat Funds Report in 2013, we discovered that 45% of all the returns made over the previous 5 years were paid to the financial industry rather than clients!

Conflicted advice

It was clear that the problem stemmed from financial advisers, including those at the big four banks, AMP, and Dixon being incentivised to push people into certain products rather than give good advice.

To me this broke their fiduciary duty to their clients. The term ‘adviser’ was clearly mis-selling their practical job, which was better described as ‘product sales’.

This is what our Fat Cat Funds Report has found each year – the majority of investment products offered on bank platforms are hopeless because their costs erode such a large part of their returns.

The simple mathematics of the stock market means most high-cost products are destined to be losers. Yet they continue to be sold by bank-aligned advisers under the guise of ‘advice’.

The types of products that are actually in the best interest of most people (low-cost index funds and ETFs) don’t make it into these approved lists because they won’t pay advice businesses for distribution or shelf space on their platforms.

The public spotlight

The banks and AMP lobbied the government to water down the Future of Financial Advice (FoFA) reforms, which curbed their ability to pay bonuses to advisers selling in-house products. They then lobbied equally hard to stop a Banking Royal Commission. Fortunately, common sense prevailed both times.

The Royal Commission public hearings spotlighted issues like: advisers giving inexcusably poor advice, the banks encouraging it, and customers losing their houses, super and in some cases families due to this appalling behaviour.

The problems aren’t exclusive to the banks and AMP either, other financial advice businesses like Dixon Advisory also garnered attention from making over $236 million in fees by advising their clients into their own property funds.

Wealth management businesses must decide whether they want to be advice businesses or product manufacturers.

They can be either, but not both.

How to improve financial advice

I believe improving the quality and accessibility of financial advice in this country is dependent on four factors: better incentives, tougher penalties, higher education standards and technology.

To be called a financial adviser you should need to show that you have no financial relationship with the underlying financial products you recommend. Where you or an associated business receive any form of revenue from a fund, you should not be allowed to label your service ‘advice’. Only what is really is – sales.

Where advisers or their employers have not met their ‘best interests duty’ there needs to be stronger penalties that serve as a public disincentive to others. Currently there is a lack of accountability which has enabled poor behaviour to flourish.

Financial advisers also need better training so they can rely on their own knowledge, research and experience when providing advice rather than blindly believing the marketing spin from product manufacturers.

Within 10 years, I expect most people will be getting their financial advice online through robo-advice and other similar platforms.

Good financial advice isn’t rocket science but it does require cross-disciple competence. It’s about understanding your clients and where they want to be in the future, showing them the best path to get there and helping them avoid obstacles along the way. It takes an understanding of markets, products, risk and return, probability, regulations, ethics and human behaviour.

The Royal Commission showed that the current model isn’t working – processes are conflicted, inconsistent, there’s poor record keeping, biased decision making and a lack of ethics.

Many of the products being ‘advised’ are overly risky, expensive or inevitable losers which only enrich the financial industry, the advisers themselves, their managers and executives.

Within 10 years, I expect most people will be getting their financial advice online through robo-advice and other similar platforms. The benefit of these platforms is that the advice is consistent, evidence based and safe. The financial industry will be smaller, customers will be better for it, and customers might even get the chance to own their own yacht.

This article first appeared in 2018 and was updated in 2022 to include industry developments.

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Founder and CEO

Chris has been vocal in calling out the industry 'Fat Cats' and is known for telling it as it is. He was an inaugural member of two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Co-op Scholarship) from UNSW.

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