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Comments on Tom Valentine’s paper The Problems with Investment Advice Alex Erskine*, Strategic Intelligence Melbourne Mo

Comments on Tom Valentine’s paper The Problems with Investment Advice Alex Erskine*, Strategic Intelligence Melbourne Money and Finance Conference 1-2 July 2013.

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Comments on Tom Valentine’s paper The Problems with Investment Advice Alex Erskine*, Strategic Intelligence Melbourne Mo

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  1. Comments on Tom Valentine’s paper The Problems with Investment Advice Alex Erskine*, Strategic Intelligence Melbourne Money and Finance Conference 1-2 July 2013 * The views expressed are the personal views of the author and, while they have benefited from insights and comments from colleagues, the views are not necessarily shared by the Australian Securities & Investments Commission.

  2. Why the industry will find a way to prosper ... Source: Strategic Intelligence, from ABS data

  3. The paper Tom could have written: • FoFA: a compulsory (but gradual) business model change in the financial advising industry • FoFA a response to principal-agent problems/agency costs/failure of gatekeeping due to conflicts of interest/misaligned incentives • Not all problems directly addressed (eg vertical integration, grandfathering) • Is the industry changing to improve the usefulness and availability of financial advice? • Existing paper could have tied topics raised (risk profiles, disclosure, risk metrics) to the tension points in FoFA

  4. Why is there a financial advising industry? • 3 practical reasons for an advising industry • More savers now – employees now compelled to, for DC retirement incomes • Finance–tax–welfare rules individually and in combination very complex – too complex to be resolved by education alone • The future is not known • Made worse by increasing longevity and post-GFC rise in uncertainty, risk and correlations, and the fall in yields/values

  5. The FoFA Reforms [NB Parliament makes the rules, and ASIC supervises their implementation] • A best interest duty: advisers to act in best interest of their clients. Advice to reflect client’s ‘objectives, financial situation and needs’. • [p5] ‘risk profile’ questionnaire is one tool of many that may help. • [p7] FoFA prohibits payment of asset-based fees on geared amounts (NB not commissions on geared amounts). Also, an SOA not a new requirement. • [p7] Key heresy: ASIC does not approve prospectuses, PDSs or products. Can only issue ‘stop order’ if they don’t comply with legal requirements on disclosure. Informational content of PDSs set in legislation. • [p8] Is allowing insurance sales to attract commissions an inducement to over-insure? Legislation reflects view that Australians generally are under-insured. ‘Churn’ self-regulation again being addressed, now by FSC. • What is good advice? – Equities, property and leverage until close to retirement? • [p6] What are ‘long’ & ‘occasional’? A long downwave can last most of a working life or occur inconveniently later in a working life. • [p7] What is ‘moderate’ leverage? Maximums tend to become minimums.

  6. Management of conflictsThe test of adequacy of management of conflicts is to ask: if it was in the best interest of clients, would most advisers recommend it? If not, find out why. • [p9] Agree on problem persisting with vertical integration • But there are protections for consumers • Priority for interests of clients over own or related parties’ interests. • Conflicted remuneration (eg a volume bonus) is banned unless it can be demonstrated it is not conflicted. • RG 148, RG 166 and the MDA review all try to limit impact of vertical integration. • [p10] Advice from different sorts of agents/advisers • Insurance brokers need an AFSL. • Mortgage brokers covered by National Credit Act. • Advising on RE investments by SMSFs is a financial product and so is regulated. • [p10] Educational qualifications of advisers • 25/6/2013 Consultation paper on increasing knowledge and skill requirements for advisers – lift education standards eventually to a degree for Tier 1 advisers. • No amount of education or regulation can guarantee honesty, integrity, intelligence or commonsense.

  7. Endearing faith in booklets [p11]

  8. Industry response to FoFA– some positive, some negative … • Industry is changing • Current vertical integration approach of choice seems to be MDAs. • Vertical integration not just in the big end of town – some smaller advice groups white labeling/buying own platforms. • Grandfathering is creating a new conflict • One response seems to be to grandfather to last possible date and plan then to not touch client (ie under-service pre-FoFA clients, over-service FoFA clients).

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