Why the royal commission mirrors the ball tampering scandal
June 2018 | Justin Hooper
It’s been a while since I last wrote, but with all that is happening in the industry today I think there is a need for more frequent communications from businesses who have been succeeding with their clients in a transparent and purposeful way, and so, I’m going to write a piece each week. I hope you enjoy the new format and I’d love to hear your feedback.
The banking royal commission has resumed taking evidence recently. There is a lot to learn from what’s unfolding.
The most important point to make is that it will be good for the profession of financial planning. It will flush out the system, shine a light on all the skeletons, create a separation of advice from distribution, and create greater value for those advisers who have been doing the right thing for longer.
There has been much absorbing of the evidence given, and there have been many surprises. The arrogance of the big players has been apparent by their lack of preparation. But the big revelation — the failure to provide services charged for — wasn’t news to me, nor to anyone in the industry. It’s a bit like the recent ball tampering saga in cricket was really more about arrogance and greed, combined with stupidity, and leading to disaster. Let me explain.
Anyone who has played cricket will know that it has always been within the laws of the game to shine the ball in order to attempt to make it swing through the air. It is an acceptable part of creating a contest between batsman and bowler, and using any natural substance is acceptable. The problem was that the Australian team had been allowed by Cricket Australia to get away with a variety of rule and ethical abuses. Eventually they pushed it too far.
Similarly, the large financial institutions have been able to get away with pushing the limits. Add the constant desire for increased profits, a smattering of personal greed, a splash of arrogance and you get a lack of care for the customers and a focus on self-interest.
To really understand a problem, one needs to go to the roots. Financial planning evolved from the life insurance industry, which paid high upfront and small trailing commissions. As the industry grew, new investment products rewarded salespeople in the same way. None of these commissions depended on servicing the client, but did depend on the client maintaining the product.
It is this legacy of clients that were seldom or never serviced that has so far been the biggest exposure. And it’s about time.
We’ve already had two new referrals directly related to what’s unfolding on the royal commission — friends of clients who had advisers who hadn’t fully disclosed various conflicts. We’ve also had advisers and other potential staff approach us. If the topic ever comes up in conversation, please don’t hesitate to offer us as a second opinion for anyone concerned.
In all this criticism, we should never forget that in a democratic, free society, legislation should never be that prescriptive that it prevents people making decisions for themselves. And there will always be investors who lose money due to unrealistic expectations, not accurately assessing risk, or paying unfair costs.
The royal commission will recommend many changes and over time there will be improvements. It’ll take time.