Bank Inquiry & Good Advice

What was that all about?! This is the main question that comes to mind when reflecting on the much publicised and absolutely useless parliamentary inquiry into the 4 big banks.

Bank Inquiry & Good Advice

What was that all about?!

This is the main question that comes to mind when reflecting on the much publicised and absolutely useless parliamentary inquiry into the 4 big banks.

Would a Royal Commission be more useful?

 Surely the key to both questions, as with most things in life, is what was it meant to achieve, and whom is it meant to benefit?

What it did achieve and most commentators would agree, are some basic truths;

  •  CEO’s of the banks are paid 50 times more than average politicians for a very good reason.
  • Banks exist to make profits for their shareholders, not their customers.
  • Their ongoing profits can only be gained from their customers.
  • Bank employs and rewards its employees based on them being able to generate ever increasing profits from their customers, for their shareholders.
  • Shareholders have been well rewarded for investing in banks for many years.
  • Banks will spare no expense in making sure their agreements, contracts, statements of advice and any other likely money making exercise is legally and contractually water-tight and therefore binding, in order to protect the bank and its employees. (Protect against whom?)

All of the above is undeniably what publicly listed companies are expected to do on behalf of their owners (shareholders).

What they are not meant to do is rip off their customers, provide services and advice which leads to the sale of dodgy products or make secret and excessive gains from the sale of these products at the expense of their customers.  The recent introduction of the FoFA regulations address some of these issues.

In the instance where the banks have failed their customers, they can be brought to justice through various regulators, tribunals and courts.  Often the issue with this is that the customer doesn’t know what they don’t know.  They don’t know that the advice they received was inappropriate, or the product they were sold wasn’t purely for their benefit.  They trusted the adviser, who they handed their money over to, to act in their best interest and provide the best advice available.

The major concern which continually gets raised in this space is the conflict of interest between the advice provided by the adviser and the advisers’ employer who manufactures investment products which are sold via the banks distribution arm/s – financial advisers.

Consider this;

Most investment products and the advisers who recommend them, charge fees as a percentage of the amount of money you invest, otherwise known as funds under management.

The more money you hold in these investments the higher the fee, the higher the profit and the rewards for the bank and the advisers.

Given this, can you trust your trusted bank advisor to recommend that you withdraw your invested funds and maybe;

  • paying off mortgages, loans, credit cards, debts?
  • placing these funds into different deposits or products not offered by your bank?

It is certainly not in either the adviser or the banks best financial interest for you to do so.

What if the bank adviser recommends that you borrow money from the bank and place it into their investment products, as new funds under management? More fees/profit on the borrowings, insurance and investment.

Whose best interest is served by this advice?

Brian Hartzer, Westpac CEO, told the parliamentary committee;

“Good financial advisers could become unintentional victims of a proposal to crack down on perpetrators of dodgy advice. Those advisers, could take a more conservative approach to investing for fear of prosecution should they lose client cash. Taking risks was an inevitable facet of investing. If you try to run everything on the basis of rules and punishment you risk slowing innovation. The answer to everything is not the threat of criminal prosecution,”

He said what?!

This man is a boss of thousands of financial advisers managing hundreds of thousands of clients.

Is he saying that the regulators trying to stop crooked or incompetent advisers could spook the “good advisers” out of taking risks on behalf of their clients?

Is he really saying that the “good advisers” should be encouraged to take risks with clients’ money and be innovative and not be in fear of rules and regulations?

Who’s best interest is he advocating for again?

As a financial adviser, your only task is to fully understand your client and provide appropriate advice based on your clients needs.

It’s not that complicated if you really want to work within the rules. In actual fact, it’s very simple if you happened to be a truly independent adviser.

Regulators should be given all the powers to implement and regulate these processes and provide absolute client protection.  More funding should be given to these agencies to enable them to continue to investigate and punish those who do wrong by the customer.

Bank’s philosophy is simple; “Let the buyer beware and let the competition regulate the market”.

The best advice for consumers is not to wait for anything particularly meaningful or useful from the politicians on this front, but rather make sure that you have engaged an adviser who’s allegiance is unquestionably to you.