Why fill the tumbrels with middlemen?

Today in The Australian

Even those who delight in life’s ­little ironies will have been troubled to see the major culprits, in this case the banks, emerge from the ­financial services royal commission with what so far is barely a scolding, while the mortgage brokers and financial advisers, who were bit players in the drama, are hauled to the guillotine.

About Henry Ergas

Henry Ergas AO is a columnist for The Australian. From 2009 to 2015 he was Senior Economic Adviser to Deloitte Australia and from 2009 to 2017 was Professor of Infrastructure Economics at the University of Wollongong’s SMART Infrastructure Facility. He joined SMART and Deloitte after working as a consultant economist at NECG, CRA International and Concept Economics. Prior to that, he was an economist at the OECD in Paris from the late 1970s until the early 1990s. At the OECD, he headed the Secretary-General’s Task Force on Structural Adjustment (1984-1987), which concentrated on improving the efficiency of government policies in a wide range of areas, and was subsequently Counsellor for Structural Policy in the Economics Department. He has taught at a range of universities, undertaken a number of government inquiries and served as a Lay Member of the New Zealand High Court. In 2016, he was made an Officer in the Order of Australia.
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21 Responses to Why fill the tumbrels with middlemen?

  1. jupes

    No different to Abbott’s Royal Commission into unions. The biggest criminals just continue their corrupt behaviour. Nothing changes.

    Meanwhile lawyers make a lot of money. How about a Royal Commission into Royal Commissions but this time conducted by Cats and Kittehs (at lawyerly rates of course).

  2. Gertrude

    The RC was not tasked with thinking about the types of structural changes that would be necessary to make banking more competitive – and hence lower prices (smaller margins). The RC was tasked with investigating behaviour.
    Ironically, the RC had relatively little to say about the non-aligned financial advisors. This is not surprising since the fragmented nature of that industry makes it difficult to get consistent reliable data on behaviours. However, even a cursory examination of the accounts of these businesses will tell you that they frequently operate on EBIT margins of over 50%. Conversely, it is also well known that the bank owned financial advice businesses are not remarkably profitable. If there are problems in the banks’ delivery of financial advice, one can easily be led to the view that the delivery standards in the non-bank advice businesses are much worse.
    Sanctimonious tut-tutting of the sort “aren’t the banks terrible” is to ascribe bank problems to malfeasance or conspiracy. A better place to start is with Forrest Gump’s admonition that ” xxxx happens” and try to work out how to fix the problem.
    When one takes legalistic and behaviouralist perspectives on the problems the solutions which present themselves all involve more regulation. More regulation will also raise operating costs and inhibit competition. The government and opposition need to think about this trade-off before they rush and promise to implement every recommendation of the RC.

  3. Herodotus

    Financial advisers just bit players? I don’t think so.
    Our banking since about 1970 has been free of issues – except for an occasion when a financial adviser with NAB gave me potentially disastrous advice circa 1988. I was fortunate in appointing an accountant at that time and he saved me from that disaster.

  4. stackja

    Herodotus
    #2928191, posted on February 8, 2019 at 9:09 am

    A friend recommended my accountant who recommended my financial adviser. My solicitor was wary of any financial adviser. It comes down to trust.

  5. bollux

    Henry, that’s why it’s called the “Big End of Town”, or haven’t you heard? And why all the wannabees wannabee.

  6. 1735099

    Back in February 2011 in the USA, I recall the release of the Financial Crisis Inquiry Report.

    On this side of the Pacific, on February 1st this year, the report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services was presented to the G-G (not the Treasurer – that was a photo op in which the Commissioner refused to cooperate).

    These reports were separated in time by eight years, and set in very different locations, both in terms of purpose and intent, but there are some striking consistencies in their conclusions.

    Comparisons are intriguing.

    The Financial Crisis Inquiry Report (I’ll call it the FCIR) has a summary of conclusions dealing with the causes of the GFC. I’ll use the headings for this summary including the prose from the report to keep it simple.

    They include the finding that the financial crisis was avoidable, that it was the product of widespread failures in financial regulation and supervision, and that there were dramatic failures of corporate governance and risk management at many systemically important financial institutions..

    It also found that a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.

    It concluded that there was a systemic breakdown in accountability and ethics and that collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.

    The final conclusions were that over-the-counter derivatives contributed significantly to the crisis and that the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

    In the case of the Australian Banking Royal Commission (henceforth called the RCBSFS), Commissioner Hayne lists Four Observations.

    Paraphrasing, they are the connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account.

    Comparing the conclusions of these inquiries is fascinating.

    Working from the Australian commission, we can neatly group the findings of the FCIR under Hayne’s Four Observations.

    Under the connection between conduct and reward, we can group a systemic breakdown in accountability and ethics and collapsing mortgage-lending standards.

    Grouped with the asymmetry of power and information between financial services entities and their customers we find a combination of excessive borrowing, risky investments, and lack of transparency.

    Under Haynes’ holding entities to account. we can align widespread failures in financial regulation and supervision, and dramatic failures of corporate governance and risk management.

    The RCBSFS observation of the effect of conflicts between duty and interest cannot be characterised quite so neatly. It actually conflates references to failure of corporate governance, and accountability and ethics.

    There is one very clear thread that runs through the findings of both reports. The yielding of financial institutions to unbridled greed without any concern for the consequences to the consumers of the industry (or more correctly – the service) is stark and clear.

    In the case of the GFC, these consequences went well beyond the local scene, of course. The term “collateral damage” comes to mind. Depending on how the politics pans out, collateral damage could occur in terms of the brokerage industry in this country,

    The cliché holds. When Wall St sneezed, the rest of the world caught cold.

    What bothers me about the financial services industry, both here and in the USA, is that those responsible for the damage seem quarantined from penalty.

    We know what effect the GFC had on Australian workers. It’s been studied. The effect on American and British workers, especially the middle class was comparatively worse.

    And the effect on the Masters of the Universe, the traders and financiers responsible for the whole GFC catastrophe? Not much.

    I won’t be holding my breath to see any local penalties from the RCBSFS. That’s not how the finance industry rolls..

  7. RobK

    I think the finance industry exists in the form and to the extent it does precisely because there are so many regulations. To my mind, finance is the art of packaging the same thing and marketing it as an array of “products “when really they are relitively simple contracts.

  8. John Bayley

    Financial advisers have been subject to new and ever more onerous regulations AND costs constantly over the past 20 years. The most recent addition, of having to pay a direct ‘levy’ to fund ASIC to the tune of, apparently, $240M/year, is just another example of that. Because ASIC REAAAALY delivers, hey.

    Despite all of that, the current standards are arguably not much better than they were all those 20 years ago. The government’s latest answer is to make advisers complete a course in ethics as part of their educational requirements. Problem apparently solved.

    The combination of these past measures has, however, ensured that the few truly independent/unaligned advisers are unable to offer services to a large portion of their prospective clients, because with starting price for advice necessarily being in excess of $2,000, it is not a viable proposition.

    Meanwhile, the *real* issue, which goes back to the dark prehistory of the industry, namely the entire licensing regime, which makes ‘independence’ almost impossible, and the so-called ‘vertical integration’ where major institutions own their advisory networks and use them as distribution channels for their insurance and investment products, are not to be changed.

    The obvious solution would be to go to individual licensing and a model comparable to that under which accountants operate. Doing so would provide a huge boost to advisers’ independence and remove, or at least reduce, all sorts of conflict of interest.

    However, something making sense does not imply it will actually be implemented. Instead, let’s create another regulatory level to regulate the regulators, ASIC & APRA, who have both patently failed in their duties.

    Look – more jobs!

  9. Terry

    “let’s create another regulatory level to regulate the regulators, ASIC & APRA”

    Well why not? It seems like something to do while we start writing the recommendation for the need for a regulator to regulate the regulator of ASIC & APRA.

    We’re creating “jobs” don’t you know.

    The Banks have done many shady things BUT they operate in a swamp MADE by the same politicians and bureaucrats that are now manoeuvring to “fix” it (ie exacerbate the problem).

    The behaviour of Banks is the symptom, not the cause.

    The RC into Banks, like the RC into Unions was a ‘show trial’.

    What is needed is an RC into regulation, government and bureaucracy.

  10. Why fill the tumbrels with middlemen?

    It is good for tumbril manufactures and tumbril sales and rentals.
    We don’t care who is in the tumbril.

  11. Cynic of Ayr

    Well, I have a private Financial Advisor.
    He’s an ordinary family bloke, with skills in this department, that I do not have in spades!
    He charges 1% of my Super Fund balance.
    He earns between 7% and 10% of my super Balance. (May be due to DT!)
    Anyway, there is no way that I could manage that money myself, and earn anything like what he earns with it.
    He’s honest and straightforward. Sure, he’s in business, but no different to the fish and chip shop down the road.
    He and his father (who I went to school with, but didn’t knock around together all that much) celebrate 50 years in the business, this year. You don’t last that long in business – any business – if you don’t service your customers, and give value for money. Sure, they’re not struggling, but neither are they as rich as the Bank CEO’s and the Medical Specialists I need to visit now and again.
    I mean, my Financial Advisor may well say, “”Let me handle your money, and I will do my best to help you. Your choice.”
    My Medical bloke says, “Give me a fair bit of your money, and I will do my best to help you. Or you can die! Your choice.”
    My bloke is becoming concerned that he won’t be able to offer the same service as before for 1%, as it appears that the do-gooders and “The Mob” are out to get him, and swamp him with rules, regulations and requirements, that will exceed the work he does for me.
    Think about that for a minute.
    Every little rule, regulation, law, report requirement and utter bullshit will be paid for out of our Super Balances.
    Then once the little blokes are forced out, the big blokes – like the NAB f’rinstance – will be free to screw and rob everyone with a Super Account for years, until there is another Royal Commission to make things worse.
    In recent years, in my area, there was one super-dodgy financial advisor. Anyone remember Storm Financial?
    The fact is this bloke promised his clients money for nothing, and they were so greedy, they took his advice. Many lost it all. The clients forgot or ignored the basic rule of finances – if it looks like money for nothing, it very, very likely isn’t. The thing is, it worked great – on paper- until everything went pear-shaped.
    Of course, in this case, the Banks did the dirty on everyone, selling them up when all they had to do was wait a year of so, when the Market returned to normal.
    I will be very disappointed and at a bit of a loss on what to do if “The Mob” destroys my financial advisor.

  12. Terry

    “Every little rule, regulation, law, report requirement and utter bullshit will be paid for out of our Super Balances.”

    Precisely. A “bureaucracy tax” levied on savings, paid in tribute to those that know best to keep them in a manner to which they have grown accustomed.

    Australia is just a massive kleptocracy.

  13. Deplorable

    Insurance brokers and financial advisors bring to mind that story of a jar of jelly beans with perhaps 20% of the jelly beans being poisonous. You do not know which bean will harm you until it is too late.
    I am my own financial advisor and I do not pay 1% of my balance to an advisor. I do OK not the top but not the bottom with a return that minimises risks especially those involving jelly beans.

  14. John Bayley

    @Cynic of Ayr:
    There are moves afoot to abolish percentage-based fees, as they are currently charged by many advisers. Arguably it’s not the best remuneration model, because it creates pressure to get ‘FUM’ (funds under management) rather than concentrate on advice, plus there is little to no relationship between amounts charged and work time spent on the client’s behalf.
    Having said that, that it itself is not the reason why a few advisers do the wrong thing. Just like commissions paid to loan brokers don’t automatically turn them into unethical grubs who do not care about their clients.
    Regardless, for many of these guys, a forced move to flat fees will only accelerate their exodus, thus passing on even more business to the institutions.

    @Deplorable
    Good for you, for being able to do your own financial stuff. However you can rest assured that the ‘average’ Australian is utterly and totally financially illiterate. They do need help and often even some very basic advice can make a massive difference. Even some very high income earners (i.e. $250K+) are totally hopeless at managing their money and/or personal cashflows.
    Alas, if an adviser has to write a Statement of Advice with some 50 pages of legal disclaimers mandated by the firm’s legal department and necessary thanks to government regulations, the average bloke/sheila will not get a look in, because s/he cannot possibly afford to pay for the advice, plus it’s even debatable whether they are, at that point, paying for advice or predominantly for compliance tick boxes.
    Never fear – nothing a few new rules could not fix.

  15. One ScoMo doesn’t make a Spring

    I sought financial advice from my Accountant. He put me onto a low risk , low interest investment which was also financed in. It wasn’t until the whole thing collapsed and I crawled away from the wreckage that I found out he received a 15% clip upfront plus trailers. Ruined my finances. Independant advice indeed. Conflict of interest abounds. Poisons too good for em sir!
    Anyone want to buy some trees aka Great Southern Plantations?

  16. Eyrie

    Financial advisors need to be regulated with a a swift 9mm to the back of the neck. A “noodle” in Wehrmacht slang.

  17. Cynic of Ayr

    @ John Bayley
    Thank you. I appreciate your like mindedness. Also, your statement that 50 pages of compliance and legal arse covering does nothing for the benefit of the Client. To the Clients detriment, actually.
    As far as fees go, yes, I was always a little put off by the fact that the fees remained the same, irrespective of performance. In fact, the same fees apply with losses, as profits.
    However, I am not at all convinced that I want to have to walk into a huge building, filled with Financial Advisors, all working for salary, at the XYZ Financial Advisor Company Pty Ltd. All will be on quotas or some incentive to earn – steal – as much money for the Company as possible. And I’ll not deal with the same bloke at each visit.
    At least, if you end up with a dud Private Advisor, you know whose fowl house to kick down. With the Institutions, not at all!
    Government intervention in the only way Governments know how to intervene, that is with endless regulation, will, on the average, make us all poorer.
    I go back to the Medical Profession. In the main – as are Financial Advisors – an ethical mob out there to do the right thing, and at least half adhere to the Hippo Oath. I’ve had the misfortune for it to be necessary for myself and my wife, to seek the advice of these fine people many times. However, there are duds there too, and the consequences are far worse than losing money, and to add insult to injury, you lose your money there too! Also, I am unable to argue the toss with the Medico’s advice, and one merely “pays your money and takes your chance.” What the hell else are you gunna do? Say, “No, I don’t need no steenking Heart Operation! I’m fine!” Could be written on the headstone.
    So, are we going to institutionalise the Medical Profession even further than it in now? Not a good move either.
    Interestingly though, I’d say very few people would think to do their own Medical Procedures. @Deplorable may be able to do his own Heart Surgery, but not most of us. (No offense D, just tongue in cheek stuff 🙂

    @ Deplorable
    Methinks perhaps you hope you are doing OK. You will, of course, never know if you are better off, or worse off, without a financial advisor.

  18. Tel

    … I found out he received a 15% clip upfront plus trailers …

    You are either an incredibly dopey investor, or crank yanking.

  19. Linden

    A course in ethetics, amusing thought, similar to making a child eat something it does not like.

  20. John Bayley

    @Tel & One ScoMo:

    What ‘One ScoMo’ says is actually true – it was possible, pre-GFC, for accountants linked to financial planners via ‘joint ventures’ and such like, to pocket significant commissions on ‘tax-effective’ schemes, like tree plantations.
    Most of these schemes of course ended up in tears for the investors, but it has to be said once again that the very reason why they existed in the first place was because the ATO had given them their blessing! Every one of the larger ones (Timbercorp or Great Southern Plantations come to mind) sported an ‘approved by the ATO’ paragraph in their prospectus.
    Later on it came out that in particular the GSP projects were essentially a Ponzi scheme, and yet as far as I know, nobody from that company ended up doing jail time, while investors lost some 98% of their money on average.
    These days accountants are not allowed to offer investment advice of any sort, unless they are licensed under the AFSL regime.
    Of course, that does not stop some of them from doing it anyway, but that’s a story for another day.

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