The risky business of seeking financial advice: why investors face an appalling choice

The chances of finding good, independent financial advice at a reasonable cost are once again under threat.

Cbus chair Wayne Swan addresses the super fund’s annual meeting at the end of last month.

What are your chances of finding good, reasonably priced, financial advice? If we believe the headlines, the prospects have actually improved. New laws mean advisers will have less red tape and the big super funds will now be able to step into the market.

Mind you, it might be dangerous to rely on those headlines based on official announcements from Canberra. There have been two other headline stories from the financial advice sector in recent days – and they matter just as much.

Just as big super funds have received the sign-off in new legislation to widen their financial advice services, industry fund Cbus has again embarrassed the entire sector.

This week a report from Deloitte highlighted controversial expenses at the $94bn fund. As The Australian reported, Cbus failed to ensure payments of more than $900,000 to the CFMEU union were in the best financial interests of members, as is required under superannuation legislation.

It’s hard to keep up with the Cbus controversies, and there is also the ASIC investigation into late payments for death and disability benefits And now we are looking at funds like this to provide financial advice?

Keep in mind Cbus – led by ALP national president Wayne Swan – is not exceptional. Rather, it’s just an outlier. There have also been controversies at ART, AustralianSuper, HESTA and UniSuper in recent months.

The big funds are surviving these controversies easily enough for one outstanding reason: When things are going well nobody asks hard questions. This week the SuperRatings group indicated the median balanced super fund in Australia is heading for calendar year returns that look like being nearly double the long-term average. (Perhaps as much as 12 per cent against the long-term average of 6.7 per cent).

Now the big funds are preparing to offer expanded advice. The way it will work is that these big funds will charge in a pooled fashion – that is, everyone will pay the same fee for different service, or no service at all in some cases.

Even when you allow for the highly limited nature of any service a big fund might provide, it’s an accident waiting to happen. There will be low transparency, cross-subsidisation and that’s before we consider the ability of the call centre operators who may be offering the advice.

For anyone trying to find good advice at a reasonable price the big funds are unlikely to provide the answer. The issue is that if you go up-market and are prepared to spend a lot more, there is still no guarantee whatsoever you will be served well.

Just days ago – in yet another torrid saga of investors being led by advisers towards losses – ASIC said it is investigating the circumstances where a fund called the Master Shield Fund (that had a responsible entity in Keystone Asset Management) has come to grief. We are talking here about $480m and 5800 investors where some rolled money out of their super into property projects that have not worked out.

ASIC commissioner Alan Kirkland said: “I wish I could say this is an isolated incident buy it’s a sadly similar pattern of conduct we are seeing far too often where telemarketers recruit people and hand them over to advisers who then encourage them to move their super.”

So we have big funds riddled with problems that will soon offer low-cost advice and up-market advisers charging on average $5000 a year that repeatedly let people down. It’s an appalling choice. At the bottom end of the market we see renewed risks of the old problem where people who don’t know what they are buying deal with people who don’t know what they’re selling.

Senator Deborah O'Neill. Picture: NCA NewsWire / Martin Ollman

At the top end of the market – even when we know that more than 50 per cent of your annual advice fee is going on administration – there are still a spectrum of dangers, typified in the Master Shield affair, where investors get chaperoned into a minefield.

And if these are the issues in the mainstream, imagine the issues at the sharp end of the market. No wonder the so-called “financial abuse report” released this week needed to make an eye-popping 61 different recommendations to protect investors at all levels across the system.

Speaking on the Money Puzzle podcast this week, financial adviser Nathan Fradley suggested there are only a few hundred genuinely independent advisers in the entire market.

Let’s hope Fradley’s figure is a gross underestimation. After all there are 15,000 advisers out there, and there are 150 on our The List: Top 150 Financial Advisers 2024.

More than ever, as an active investor you need a guide to navigate the jungle.

Ideally, you trust an adviser and return to that adviser regularly as your plans evolve – but for most people, most of the time the message remains, ultimately when it comes to wealth building you are on your own.

James Kirby hosts the twice-weekly Money Puzzle podcast

Originally published as The risky business of seeking financial advice: why investors face an appalling choice