Regular readers of Adviser 2.0 and our sister blog, The Evidence-Based Investor, will not be too surprised by the contents of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released on Friday.
We’ve written on several occasions about the conflicted nature of Australia’s investing industry, and the financial incentives for advisers to sell expensive products that, net of costs, will almost certainly fail to beat the market over the long term.
But even I was taken aback by the excoriating tone of Commissioner Kenneth Hayne 1000-page report. It is, in short, a damning indictment of the industry and the sheer greed (Commissioner Hayne’s word, not mine) of many of those who work in it.
There’s certainly plenty in this report to occupy the minds of Australian investors, advisers, asset managers, journalists, regulators and politicians. But it’s my belief that this is a landmark moment that has implications way beyond Australia.
The central problem identified by Commissioner Hayne is the link between financial advice one the one hand and financial product sales on the other. All around the world, advisers are incentivised to sell products that it's not in clients’ invest interests to buy.
Even in countries like the UK and the Netherlands where advisers are no longer allowed to receive commissions or other kickbacks from product providers, far too many advisers continue to favour costly and often complex products that have served consumers poorly for years.
This can’t be allowed to continue. Investors everywhere need to insist on a fiduciary standard. When we see a doctor, we assume that any advice they give us is genuinely in our best interests to take — so too any medication they prescribe. Why can’t we expect the same standards from a financial adviser?
I would encourage anyone with an interest in improving consumer outcomes in the global investing industry to read Commissioner Hayne’s report, or at least the executive summary. In the meantime, I’ve picked out these six key quotations from it.
1. On the prevailing commission-based culture in the industry
“As the market for investment products grew, the institutions that manufactured (them) looked to advisers to sell them. Most advisers came from a background of life insurance, in which a sales-driven commission-based culture prevailed. These being the roots of today’s financial planning industry, the culture has endured.”
2. On the widespread focus on profits and sales
“Selling became their focus of attention. Too often it became the sole focus of attention. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales. The customer’s ‘needs’ are formed by reference to what the entity has to sell.”
3. On the temptation to act out of self-interest
“The choice between interest and duty is resolved, more often than not, in favour of self‑interest. People rapidly persuade themselves that what suits them is what is right. And people can and will do that even when doing so harms the person for whom they are acting.”
4. On the misalignment of interests between advisers and clients
“It is the client’s interests to obtain the best product: best in the sense that it is the cheapest and (as far as can reasonably be determined) the best performing product available. By contrast, the adviser’s interest is to further his or her career and to maximise financial reward.”
5. On the overriding factor behind misconduct
“Why did it happen? Too often, the answer seems to be greed — the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?”
6. On the minimum standards we should expect of advisers
“Obey the law. Do not mislead or deceive. Be fair. Provide services that are fit for purpose. Deliver services with reasonable care and skill. When acting for another, act in the best interests of that other.”