House_Keeper said:
Same thing happened to me... Funny that.
There are some ethical player in the industry. However, the way the system is set up, I doubt that they are the one who are doing the best financially.
Unfortunately, the way the system is set up drives the behaviour that we all experience.
It is a case of market failure exacerbated by the long-term nature of investing. The seeds of this failure can be found in both consumers and industry.
Though we're supposed to be a service economy (70% of GDP), people are much more comfortable about paying hairdressers, plumbers, car repairers, estate agents and masseurs on a fee for service basis than financial advisers.
In all these cases there was a tangible service rendered. In most cases the customer knows how good it was pretty soon after they get it. And if it isn't much good then they've only lost a few thousand at most, so it's no big deal.
Not so with financial advice, where people have much longer time-horizons and much bigger amounts involved. Also investment relies on all sorts of externalities like asset prices, economic growth, demand assumptions etc. So you don't know if it's successful until 5, 10, 20, 30 years down the track. And even if it sort of works, others might have made two or three times as much despite having identical capital.
The only partial parallel (ie the uncertain results) I can think of is alternative medicine practitioners. However the cost is typically in the $10s to $1000s range, any curative effects should be apparent in a shorter time (a few days to a few months) and if it doesn't work, there's always conventional doctors, hospitals and Medicare. Also we all understand that 'not all cures work for all people' and 'it might do some good' so if their pain is acute there's little to be lost 'giving it a go' and pay the relatively small sum involved knowing it's a chance.
In contrast the average 60 year old retired manager who loses a $500k portfolio to a dodgy scheme isn't going to be in much of a position to get it back unless their working life was miraculously extended 20 years.
Another problem with fee for service is that those who need it most are least willing to pay an upfront fee for advice given all the above uncertainties as to its quality.
One possible treatment of a market failure is to provide a government scheme or subsidy so that people are forced into it. Thus we recognise that the free market can stop needed things getting done so try to modify behaviour through government intervention.
A prime example was the Hawke/Keating Govt's Training Guarantee Levy that forced employers to pay for employee training. Skills were seen as key to industry productivity (and thus national competitiveness) by people like Bill Kelty but bosses were seen as unwilling to do it on their own so a government coercive measure was seen as necessary (until it was scrapped by Howard & Co).
Hence government could either set up a financial advice body (as opposed to a consumer watchdog that puts out press releases that few would read) or give people a subsidy or tax deduction for getting it themselves.
The latter would hand money to the financial planning industry (just like the mollycoddled private health insurance industry which would fold tomorrow if it wasn't for government) but if legislation prohibited commissions as a quid pro quo it could work.
As for the former, Centrelink are already in this field to some extent. However I have some unease about government getting more involved in this area, mainly because if it did give advice recommending certain investments then taxpayers would be exposed to liability (whether legal moral or political) and have to bail investors out.
It is also not free of corrruption and misuse, as in the notorious 'Western Women/Robyn Greenberg' case in WA, where a dodgy adviser stripped divorced women of their savings, using a government welfare service as a front organisation.
Fee for service also won't necessarily eliminate bad judgements by advisers for other reasons.
So I don't know how it can be fixed.
Peter
