Road ahead from Banking Royal Commission
Even for the experienced investor, the revelations made during the Banking Royal Commission have been shocking. Charging dead clients for financial advice was a particular lowlight. Sadly, most of the news that came across my desk fell into the “tell me something I don’t know” category.
Now that the Royal Commission has stretched on for more than a month, there are a few themes that we’ve been following at Sharesight, the behaviour of bad actors that ran the gamut of idiotic to outright theft notwithstanding.
Superannuation for good and evil
Australia’s compulsory superannuation system is lauded worldwide because mandatory contributions do seem to provide good outcomes for most people. However, it also creates an expensive, bloated and lazy industry rife with conflicts of interest.
The list of business models with government-guaranteed sales is awfully short, and those 9.5% contributions from every Aussie paycheck do a lot to keep the skyline reaching higher and higher above Sydney Harbour.
It’s all about the plumbing
Investment portfolios, superannuation funds, and insurance policies are products that need to be sold, tracked, and safeguarded. The investment platform industry sprang up as a result and has been a focus of the Royal Commission.
Unfortunately, due to commission-based pay for financial advisors, the platform itself became the product, not the underlying investment.
Platforms evolved to be sales tools for bankers - think Salesforce for investing. It didn’t matter what was on the platform, so long as the fund manager paid the right fees to be on it, the financial advisor got paid the right commission for selling the fund, and the client started pumping their money onto the platform.
Platforms are therefore closed systems, powered by uninspiring technology. Over time, the fees layer up and increase. As we’ve said time and time again, the fees you pay to invest are the most important thing because they never change. An investor who goes off platform can save nearly 75% on fees.
Open Banking to the rescue?
The pain and cost of switching investment providers or financial advisors helps propagate the platform industry.
If it carries a bank logo, you can be sure that it’s a closed system designed to benefit the institution, not you the investor.
Open Banking was given the government’s tick of approval during the Royal Commission. For investors, this should mean that switching your investments and superannuation from one provider to the next should be frictionless. Sharesight looks forward to embracing the coming Open Banking regime in Australia and using it to build the next generation of fintech services.
A few things need to happen for this to work. First, banks can’t drag the chain by delaying, or more likely degrading, access to client financial data. Second, companies like Sharesight must invest in systems to extract the data, and third investors must be motivated to use a product like Sharesight to move information from one place to another.
Good apples and financial education
Most of us felt a sense of schadenfreude seeing bankers hauled in front of the Royal Commission on live TV no less. I don’t know if the bad behaviour on display represents most of the industry, but I can definitely say it does not represent all of it.
Over the years, we’ve built partnerships with hundreds of high quality financial advice practices and asset managers. In fact, when someone asks me to recommend an advisor, I always turn to our client base.
These advisors are overwhelmingly independent, and don’t take commissions from product providers. They may use a platform, but only if it suits the client’s needs. They attract and retain business the old-fashioned way by looking after the long-term interest of their clients.
One thing I fear is that this group of honest, high quality advisors are used mainly by people with enough money and time to do their research, or by those with the wherewithal to follow an event like the Royal Commission.
The investment industry thrives behind a cloak of manufactured complexity and elitism. The movie, The Big Short was successful because the filmmakers did an incredible job of explaining what a credit default swap on mortgage backed securities was.
And because basic financial education is terribly lacking in Australia, and most of the world, events like the Royal Commission do more to damage the entire industry than to encourage people to gain knowledge and take action.
Everyone from the white knights of the industry to fintechs like Sharesight have a big job ahead of them.