Sorry investors… you're on your own!

Who's paying for the advice you receive?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »