Earlier this week, I shared my concerns with the way in which I think much of the financial services industry is stacked against us.
Excessively high fees, compromised incentives and a slick sales machine are conspiring against individual investors. Too many Australians are being taken for an absolute ride. It's nothing short of disgraceful, and it makes me sick.
How so? Let me count the ways!
Too many managed funds (including superannuation funds) are charging enormous fees, and still failing to beat the market. If you invest in funds — and let's face it, most people take the easy option — then you're paying good money to do worse than the average!
Too many stock brokers are remunerated not on your investing success, but on how often you trade! And they charge well in excess of the prices you could get from an online discount brokerage.
Too many discount brokers unfortunately also encourage you to trade 'early and often' and to subscribe to expensive data and research packages so you can trade with up to the minute information. It's data you simply don't need.
Too many financial planners have a list of 'recommended' investments that are provided by head office — and are precluded from recommending products outside that list. We can only speculate about how those 'approved' investments are chosen, but it's no surprise that a large number of those products are actually funds managed by head office or related bodies.
Excuses, excuses
The Motley Fool won't stand idly by while Australian investors are taken to the cleaners. Sure, all of the above is legal, but so is smoking!
"We have to make a living" they say. "What do you expect us to do?"
I'm glad they asked. How about charging only for market-beating performance? That'll really test their mettle — and challenge their conviction!
"Ah, but you charge for Motley Fool Share Advisor" they'd retort. And that's right — but our members not only enjoy a 30 day money back guarantee, but we have to earn their renewal each year. If they don't find our services valuable, they can simply walk away.
Oh yeah, and how many brokers, advisors and fund managers offer their services — share recommendations, investing education and weekly updates — at less than 50 cents per day?
I imagine you're getting a sense of my frustration.
Pay him well — he deserves it
We did receive a few emails in response to my "It makes me sick to my stomach" email, sent earlier this week.
The first was from a financial planner who suggested that I'd been a little tough on him and his colleagues. He gave an example of a situation where he'd managed to increase a client's after-tax income substantially.
Fair enough too. I hope he was well-paid as a result. He obviously deserved it.
We have no problems with being paid well for delivering a result for clients. In fact, we actively encourage it. Top notch professionals — in any field — who can provide excellent service which makes money for their clients deserve to be paid well.
But that's the only test. And it should apply to all finance professionals — including us.
If you're getting value for your money, keep paying. If not, you're wasting your money. It's time to move on.
Your services are no longer required
The second email was from Ray in Queensland.
Ray was a loan approval officer for a bank who was apparently told his services were no longer required when he didn't approve loans fast enough. He says he was told:
"It is their problem if they can't afford the repayments"
Does that sound like any of the ads you've seen recently from the banking sector? I'd like to think it's an isolated incident in one branch of one bank.
Unfortunately, while I'm an optimist by nature, I'm also sceptical.
As Warren Buffett's business partner Charlie Munger once said:
"I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it."
When a bank executive is remunerated based on the number of loans he or she writes, you just know it's going to end in tears… for all parties. Bank shareholders take note.
The last email was from a reader who chastised me for the Americanism 'sick to my stomach'. For the record, I'm not American. If this helps prove it, let me say when I see or hear about people being frankly ripped off by some in the financial services industry, it makes me mad as a cut snake.
You can pick your idiom – I hope my frustration is clear!
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More reading
- Finally, some bank competition
- Is this the start of a retail recovery?
- Why I recently bought Billabong
- Should you buy SCA, Woolworths' property fund?
- RBA tells savers: Switch to shares
Scott Phillips is an investment analyst with The Motley Fool. You can follow Scott on Twitter @TMFGilla. Take Stock is The Motley Fool Australia's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).
