Another election, another upset, another realisation.
So be careful when you hear the first promises the re-elected government is sending the quiet Australians that retirement incomes are very important, and they will deliver the required supervision and control.
It may not be what you wish.
What if the constant review, intervention and inquiries of the financial services sector are like the pre-election polls? What if they too are a similar distraction for the quiet Australians?
When intervention is the norm
Despite good intentions, it’s clear over the last twenty years governments have successfully created a supervisory and compliance industry to oversee, and where necessary smother, the delivery of financial services to the quiet Australians.
The effort, time, money and headlines alone from Financial Services Reform (FSR) Act of 2001, from 2009 Ripoll inquiry, from the 2010 Cooper Review, the 2012 FOFA Legislation, the 2014 Murray inquiry, the 2015 Trowbridge Report, and last year’s Royal Commission into Financial Misconduct shows a robust political appetite for higher governance, supervision and control. Nor is this about to abate any time soon based upon our Treasurer’s comments last week.
What exactly is the problem the intervention is trying to address?
Is it a fairer return from the compulsory contributions made by every wage-earning Australian into their superannuation?
Is it better financial lives in retirement?
Is it the building of lifetime savings to reduce the welfare spending pressure on future governments?
Is it the building of funds to underwrite the needed infrastructure Australia needs to stay globally competitive, attractive, safe and clean?
Is it curtailing of the excesses of those who work with other people’s money every day?
Intervention means different things to different people. Considering the vast array of talent, experience, wisdom, effort and intent applied over many years by so many, there perhaps comes a time when all the intervention becomes part of the problem too.
We can’t forget that the person paying for all this are the quiet Australians. What’s in it for them? They must be the primary consideration of any change. They pay in the form of taxes, they pay in the form of fees, and in years to come, we will probably judge that they also paid in the form of lost opportunity costs working with an industry struggling to mature.
Better financial lives
The objective for all Australians is simple - better financial lives.
However, thanks to the fundamental structures and incentives still underneath most financial decisions, they continue to be distracted, resulting in weaker financial decisions, lesser financial lives, outcomes and opportunities.
For example, the tiring industry funds versus retail funds battle is thick with prickly distractions even after 21 years of compulsory retirement saving.
You’ve seen the adverts?
The ‘compare the pair’ campaign presents the industry funds as the best provider of returns due to their low-cost base thanks primarily and serendipitously acting as the default fund for so many Australians for so long while not requiring the ‘sales’ force employed by their more expensive retail fund competitors.
Writing in the Australian recently, Adam Creighton highlighted the evitable problem associated with the industry fund’s (or any industry’s) ‘race-to-the-bottom’ path by pumping themselves up via their lower fees.
It’s always only a temporary advantage.
Which will be their challenge as we are dealing not with short-term but the long-term financial lives of Australians. Even assuming the industry funds ‘win’ their battle over their sales-based ‘retail’ competitors, which they probably will, so what?
Because the fundamental structures and incentives haven’t changed (they are cheaper not different), as Creighton points out, there will be someone cheaper, with better technology, and price points fractions of what today’s industry funds can match (note that Creighton’s article quoted costs that are a twentieth - yes, that $150 a year on the current average superannuation balance versus average fees of about $3000 today).
Then what happens?
Same as now, more retribution, more inquiries, more distractions, more lost time, more attempts at greater supervision and worse financial decisions, outcomes and financial lives for Australians. Next time it will be the industry funds under pressure to please explain.
What’s being missed here?
We continue to be distracted by the parts of the solution while missing the whole.
The whole is greater than the sum of the parts
“The cure of a part should not be attempted without the treatment of the whole”.
Plato - 380BC
To make financial lives better, we must treat the whole, not just the parts. To do this, we need different structures and incentives, not more and more truckloads of supervision and control.
There are many parts - the loans, the cash flows, the pensions, the incomes, the insurances, the superannuation, the shares, the investments, the mortgages, the inheritances, the properties, the list goes on. There will be more added each with unique guarantees that the latest is the greatest promising stellar and exciting benefits.
There are also different parts, somewhat far more important than the product parts – these are the beliefs, hopes, dreams, fears, habits and mindsets of ourselves and those critical to our financial lives (our life partners, children, parents, friends, and business partners), with each of these parts being somewhat visible or invisible to the beholder.
Implementing different structures and incentives requires the total separation of payment of advice intended to help people led better financial lives from any incentive associated with product needed.
How are the quiet Australians ever going to be able to afford this advice?
Good question. However, here’s a better one.
How do we best create the conditions that make this advice valuable for as many Australians as possible? Then we will better understand how to deliver the advice more affordably for more Australians.
We must change the structures and incentives before over-loading a stumbling industry with more supervision and controls.
Why did Justice Hayne’s 2018 Royal Commission not force the separation of financial advice from financial product? Possibly for a similar reason, the Accounting Professional and Ethical Standards Board overturned their APES230 standard back in 2012, which also considered the same separation of financial advice from financial product.
Fundamentally it was probably confirmation bias. These bias had deep foundations.
The incumbent financial institutions are large. They are spending significant money on greater supervision and control. They have rid themselves of former senior executives, and board members believed responsible. Also, there are so few (if any) examples anywhere in the world to follow proven steps for the world’s fourth-largest global pensions fund (i.e. Australia’s) on how best to separate advice from product.
They are strong bias. Going against them would be a tough and brave call.
However, that is what’s needed, and it’s what the quiet Australians deserve.
Tough and brave calls sometimes work – ask our Prime Minister.
What do you reckon?
About Jim Stackpool
For nearly 30 years Jim has influenced, coached, and consulted to advisory firms across Australia. As founder of Certainty Advice Group, he supports professional advisory firms who seek to create greater certainty for their clients. As an author, blogger, columnist, and keynote speaker, Jim aims to bring greater financial certainty to the majority of Australians needing it. His latest book Seeking Certainty is available now.