The Cost of Arrogance

Round Three of the (appropriately named) ‘Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’ kicks off again on Monday.

Next week, the Commission’s forensic analysis will be applied to the subject of ‘Loans to Small and Medium Enterprises’. That should be interesting.

Banks ‘draw blood’ from the small business sector.

I say that with authority.

We have several business accounts — savings and term deposits — with a number of banks.

We also have personal accounts with the same banks.

The business accounts — for identical amounts of money — attract less interest and more fees.

Is there any additional service provided?


The banks — like Governments — just gouge fees because they can.

But it’s always the public that pays.

The Government’s cost to stage the Royal Commission is estimated to be somewhere north of $75 million.

Throw in the legal fees of the institutions and you have a big number.

The Australian Financial Review (AFR) ran this headline before the Commission started:

Banking royal commission may be a billion dollar show.’

That figure is probably going to be close to the mark.

But who really pays?

Where does the Government get its money from?


Where do the banks get their money from?


Who pays for the bad advice, the dud loans, the shifty board room deals?


This is the cost we bear for the arrogance and contempt shown to the public. 

Banks pay lobbyists to make sure Canberra keeps that ‘blind eye’ turned. Nothing to see here. Only a couple of bad apples. We’re good corporate citizens.

Governments — of both stripes — turn a blind eye to the festering issues until something blows up and ruins people’s lives. Then they jump up and down, make a big ‘song and dance’ about it and waste our money solving a problem that could have been addressed before it became a problem.

In August 2014, the banks were being grilled by a Senate inquiry.

At the time, I wrote…

The stench around financial planning has a Greens Senator calling for a Royal Commission into the industry.

We don’t need to spend untold millions of taxpayer dollars on a Royal Commission.

People may say the Greens Senator was correct in calling for the Royal Commission…four years before it actually happened.

The way I see it, the need (and cost) for a Royal Commission could have been avoided if those paid by the public had done their job in the first place. In effect we’re paying twice because they failed to act in the public’s best interest.

Governments create problems and then spend untold millions on coming up with half-baked solutions.

In August 2014, I outlined my two step proposal to avoid us having to foot the bill for poor advice, a Royal Commission and the banks legal fees.

Here’s an extract…

Everyone (well, nearly everyone) in the financial planning industry knows the root cause of the problem — tied sales forces (let’s call it for what it is).

Fixing financial planning is a simple two-step process:

  1. Ban all financial planners from being employed, tied or incentivised by institutions. Any institution that has a fund management business, owns an investment administration platform/s, is a margin lender and/or provides insurance products are automatically disqualified from being associated in any way, shape or form with financial planners. Full stop.
  2. Ban all commissions, brokerages, volume bonuses etc. All planners to be remunerated by the client on an hourly fee basis. Full stop.

What’s the bet that if these proposals were put to the person in the street — ones with no vested interest in the industry — the overwhelming majority would agree with the straightforward and transparent approach? That bet would have very short odds.

The two steps would go a long way to transforming financial planning from an industry into a profession.

What are the chances of the government grasping the nettle on wholesale reform in financial planning? About as good as the prospects of snow in Cairns on a summer’s day.

The financial institutions would mobilise a battalion of lobbyists to ensure these proposals never saw the light of day.

Financial planning businesses are not hugely profitable. Large dealer groups struggle to cover costs — staff, compliance, professional indemnity premiums etc.

So why do institutions want to own them? The primary reason is to build a pipeline into the institution’s products. Funds management is the pot of gold. A captive distribution network is one sure way to increase the pots of gold.

For example, the CBA Wealth Management division (Colonial First State, CommInsure etc.) contributed $793 million to the recently announced CBA record profit.

On a price/earnings ratio of 15, the CBA Wealth Management division is valued at $11.9 billion. With these dollars at stake, it’s not hard to see why the institutions would fight ‘tooth and nail’ against my proposed reforms.

Without a tied sales force, the institutional products (investment, insurance and administration) would have to survive on their merits. Heaven forbid we should allow that to happen.

You’d think a bit of healthy open market competition would be in the public’s interest?

Obviously our political leaders are not that enthusiastic about embracing this concept. If they were, they’d have been more serious about the Future Of Financial Advice (FoFA) reform.

According to the Australian Treasury website:

“The objectives of FOFA are to improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice.”

Admirable objectives. However, my friends in the industry tell me FoFA has changed precious little. ASIC’s exposure of the lack of client care by CBA and Macquarie have left public “trust and confidence” in short supply.

Affordable high quality advice is another feel good statement with little bearing on reality.

What’s the likely outcome from the Royal Commission into banks behaving badly?

The murmurings at this stage suggest we’ll see some, if not all, of the two-part solution being recommended.

It’s frustrating (no, make that, infuriating) that these costs could have been avoided if those charged with looking after the public interest had not acted out of self-interest.

The other likely consequence from the Royal Commission will be the exodus of planners from the industry.

According to the AFR on 27 April 2018:

…8000 [financial] advisers are set to leave the industry due to the introduction of higher standards…

Here’s one final extract from my August 2014 article…

A reform of the magnitude [I’ve] proposed would obviously result in winners and losers.

The losers would be institutions that do not improve their investment performance and costs structures. Also those financial planners who lack the skills to adapt to a world of truly independent advice would need to find alternative employment.

The winners would be the public and the many financial planners who strive every day to deliver quality advice outcomes to their clients.

To me it’s a clear choice. What do you think?

Here’s another prediction…when the next market crash occurs (and it’ll be far, far worse than 2008/09), the number of planners leaving the industry is going to be significantly higher than 8000.


Vern Gowdie,
Editor, The Gowdie Letter

The above article is an edited extract from our sister publication Markets & Money. To find out more, go here.

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Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

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