When it comes to investing, it can be a jungle out there.
It's one thing to see the danger in plain sight, but quite another when the wolf may just be in sheep's clothing…
With shares, you're buying from or selling to an unknown counterparty, and there's no shortage of high-frequency traders, professional money managers and highly-paid analysts happy to take advantage of you if they think you're wrong.
The answer, of course, is to embrace the sort of investing The Motley Fool has long preached – the long-term, business-focused, buy-to-hold kind. That means you're making fewer trades, not trying to read a chart or beat a computer algorithm to that final half a cent. That's the penny-wise pound foolish (lower-case-f) way to a pretty unsatisfying investment career… or the poor house.
By following a company — not a stock code — trading rarely and letting time (and a company's management) do the heavy lifting, you can focus on the long term, not today's closing price.
Now that's the stock market itself, where adjusting your focus can make a significant difference. And when it comes to the stock market, the ASX and ASIC have rules which mandate equal and timely access to company information for all investors on an even playing field – so that the big end of town doesn't get an advantage over the little guy (or girl).
When it comes to the broader financial services industry, though, the playing field is far from level – and the federal government (with help from the Senate cross-bench) has just tilted the playing field further against you and me.
The playing field just got tilted against us…
You would have likely read a lot about FoFA. Well, you would have seen the headlines, anyway. There's nothing like an acronym to make readers' eyes glaze over, and I've been as guilty as anyone on that score.
I – and a lot of journalists, commentators and consumer groups – have been arguing for months that the government's proposed (and now legislated) changes to important investor protections were wrong-headed, and not in the interest of retail investors.
I'm sorry to say we lost…. at least for now. The federal government didn't listen. You are now less protected when it comes to financial advice than you otherwise would have been. Apparently, the profits and the paperwork burden of those providing financial advice are more important than making sure you receive understandable and conflict-free financial advice.
If you go to a doctor tomorrow morning, she'll be an independent medical expert, remunerated for the time she spends with you. She doesn't work for a drug company, and isn't remunerated based on how many of that drug company's products she pushes on you. That's as it should be.
If you call a lawyer next week, he'll be paid by you, either if he wins your case or on an hourly rate. He doesn't provide advice and/or act on your behalf in court on any other basis.
Your accountant doesn't get a kick-back from the ATO for steering you down a certain path, or by suggesting (or not suggesting) certain deductions.
But your advisor…
Who's paying for the advice you receive?
Statistically, it's likely your financial advisor works for a company owned by one of the big four banks.
And it's likely that advisor is being paid a bonus based on how many of his or her employer's products they sell. There aren't any commissions any more — the government calls that a victory — there are just bonuses.
A rose by any other name…
And while commissions were earned on product sales, bonuses will be paid on… product sales. Just don't call it a commission, and we're sweet.
Oh, except they can earn commissions for some products like insurance. Turns out it's okay for them to sell you insurance products you don't need, or that don't suit your financial position. And it's okay for them to recommend whichever one offers the best commission.
Or they might recommend exactly the right product for you… but how would you know, given the inherent potential conflict?
And if you go to your local bank, don't imagine your teller has your best interests at heart when they suggest you see a planner or buy a financial product… they're being incentivised, too.
Whose bread I eat…
Apparently, the government will add some additional regulations in the next three months to strengthen the 'best interests' test for financial advisors and to set up a register. We can only hope they are regulations with real teeth.
In the meantime, next time you see a financial advisor, you'd be well advised to remember just who they're working for, and how they're remunerated. For a large majority, the more of their employers' products they recommend, the more money they make. Sure, they're supposed to act in your best interest, too, but how can you know whether they are?
Fools rush in where angels fear to tread… and that's a good thing
Perhaps ironically, The Motley Fool, as an independent company with no financial ties to product 'manufacturers' (yes, that's what they're called), stands to benefit to a greater extent when other financial advice is more conflicted.
So we could have just held our tongue then trumpeted our independence. We didn't – and wouldn't – do that because we think the changes are just dead wrong, and we had to say so.
The financial planning bodies had the opportunity to stand up for consumers, but they sided with the government's changes. Sorry, investors, from here on in, the government and financial advisers have decided you're on your own.
