Self-defence is the ultimate protection in advice game

The inquiry into financial advice scandals confirms the perils of a vast and lucrative system.

A rotten — but insightful — joke is circulating in the market.

“Q. Define the financial planning industry. A. People who don’t know what they’re buying … dealing with people who don’t know what they’re selling.”

Ouch! That’s nasty, but it’s also at the heart of the trauma now being played out in the Senate inquiry into financial services.

How financial planning in this country got so bad that four major banks are now engulfed in different scandals is not a mystery. A sales-based culture has festered most problematically ­inside the big banks but also across the lightly regulated arena of ­“finance companies”.

At its worst this culture has turned feral where rogue advisers actively deceived people in order to line their own pockets and, ­inadvertently, their employers.

For their work in revealing these scandals whistleblowers such as ex-CBA executive Jeff Morris should be applauded.

More typically, the advice system simply lets people down because of the unpalatable fact that ordinary investors who do ordinary financial plans are not particularly lucrative.

The inquiry hearings this week have at least clarified a few highly important matters:

• A new planned register of ­financial planners was not going to include any previous crimes or misdemeanours of its members. This is now under review.

• There are moves towards an insurance scheme for all clients in Australia who suffer losses as a result of bad advice.

• There are plans to improve the education standards of financial planners.

• The mechanisms by which banks deal and respond to ­matters of poor advice are weak and inconsistent.

• The bitter irony of the compensation or remediation in the current system is that the banks can, at least, pay back clients who lose money. The worst operators — the bottom of the barrel ­finance companies that “go under” — can’t repay because they often end up broke.

• Frauds and charlatans who have been dismissed by one bank get re-employed within the system and everyone — except customers — knows who they are.

There is little here to build confidence for the future.

As far as I am concerned, the outstanding message from this most recent inquiry is that you have to look after yourself in the financial system.

There is good work being done by the Financial Planning Association of Australia within the system and the majority of financial planners are decent professionals doing their best. Indeed, regulations may occasionally catch up with the wider game, but the ­system is so vast and so lucrative that there will always be sharks in the water.

At the top of the market good advice can be available if you are prepared to pay for it and if you have sufficient funds to be taken seriously. There are no hard and fast rules here, but elite financial advice of this order tends to be worth it if you have $1 million in investable assets or you have the capacity to get to that level in the near future.

At the other end of the market the increased sophistication of computer algorithms means that many people who have some money and little active interest in how it is managed may be placated with automated investment tools or so-called “robo-advice”. This is generic advice you receive from filling out multiple choice questions to satisfy assessment criteria. Though this sounds a most prosaic idea, it could be ­better than advice “from someone who does not know what they are selling”.

Which leaves us with the vast majority of investors who are somewhere in the middle and need advice. Here are my four rules for finding success with ­financial advisers:

1. Deal with the planner on your terms. Think first about what you want to have in cash and how much of your wealth you wish to tie up in your home — then have a conversation with the planner about the money you have set aside for investing, that is, your investable assets.

2. Establish the planner’s wider qualifications — if they are industry standard “RG146 compliant” that means very little. It is too easy to get this qualification.

3. Are they “tied” to a major ­financial institution such as a bank or life insurance company? If they are, they may be more likely to favour that institution’s products over investment options.

4. Do they receive commissions from the sellers of the products they may recommend? They should not do this; instead they should charge by the hour for their services.

These are elementary rules, they don’t change from year to year and it’s unlikely the Senate inquiry — or its outcomes — will change them.

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