Feb 23, 2015

How to fix financial advice

The financial advice industry is broken. Scandal after scandal has made this obvious.  Where can you go for quality, impartial, appropriate advice? Not this venerable investment bank. Not this retail bank. Not this retail bank either. And likely not anywhere else, unless you accept what seems to be the 50/50 odds that you will get good advice anywhere.

The problem?

Bad apple advisers, yes. But the problem for the industry as a whole?

Complexity, combined with a manual, subjective process.

The world of personal and wholesale financial investment has become too complex for individuals to manage alone, too complex for regulators to police it at the advice level, and too complex for financial advice firms to manage their advisers with the rigor and detail obviously required.

As someone who has worked in broking operations for many years, I can attest that there are, in fact, many good, skilled and decent advisers out there. They work hard for their clients and take pride in their work. But finding them is the problem. If you do not have high net worth, you are not likely to meet them.

I think the solution is to move the industry online, in the way insurance has. More recently, retail legal services have started to move online as well.

Broking already works reasonably well online. Yes, brokerage firms need to be very careful with their algorithms and constant monitoring and tinkering is required. But running a ComSec is a hell of a lot easier and ultimately more viable than running a JB Were.

I see a future - within a very short time, if a royal commission into financial advice goes ahead and accelerates things - where financial products are almost exclusively sold online, and "advice" is algorithm-based. Clients will enter their details and answer a questionnaire to set their profile and financial goals and determine their risk tolerance, and they will be guided towards simplified products that will serve them as well as anything on offer now. Every year, for their investments to continue, clients will be prompted to re-identify themselves and re-assess their investments.  This whole vetting and profile setting process would work much better, and be less risky for firms as well. Compliance obligations around client assent to advice, client receipt of terms and conditions, and client identification are many times easier to manage online, as is record keeping and retention. Algorithms can monitor advisor-client activity and commissions. An iSelect-style model would encourage good competition and keep offerings simple and transparent.

Canny advisers should get in now, work with a web developer and a compliance expert to set up a website, then approach APRA and ASIC and suggest the mutual benefits of support for this product.

It's well beyond time. Retail customers cannot be any worse off than they are at present.


  1. It is absurd that average workers have to become involved in investments etc when they get old and retire. Also absurd that they are put in a position where they could lose their life savings, and many have, partly through their own greed, that may have come to the fore because of their lack of experience with investing money. In more civilised countries it is governments who take on the role of looking after you financially when you are old and along the way you may possibly pay quite a bit in tax for this to happen.

    I don't think I am stupid, but I really struggle to make any sense of my superannuation. Fortunately most of it is 'defined benefit', so less complicated than many schemes. It is interesting about the algorithms. Maybe that is a better way to go.

    1. You are right and it's been pointed out by many people over the years since compulsory super came in, that it is not "client friendly". My major grumble with super is it's a bit of a rort. Yes it provides a benefit, but it is still YOUR money, not money that anyone is "giving" you, and the fees and taxes are too high.



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