It’s the new year, and financial planning as an industry is headed pretty much where previous posts have suggested. Happy New Year!
Today, we are going to continue to investigate the ins and outs of bias as it stands in the financial planning industry in Australia. Pour a cup of your favourite brew and let’s get started on how institutional bias works.
Financial Planning holds an inherent bias in regards to investment processes and preferences. Understanding this is an important step in understanding what financial planners attempt to do when they sit down to analyse money issues. This post focusses on some of the more blatant bias that exists in the financial planning industry. This does not mean that it is all bad or that i am making a judgement in this regard. The point is to simply highlight where bias may exist, and ways in which it benefits or penalises the individual seeking financial planning help.
Financial Planning is Biased
i know that in using the term ‘bias’, there may be people who wonder just what i am suggesting? The key point under the microscope in my latest posts is “bias” in all it’s various shades. i am really trying to strip away the myths surrounding bias – and to point out that bias comes in many forms. Strangely enough, the most obvious are usually quite tame in their impact, and are not really a big deal. Here’s an example.
Large institution bias
You call into a branch of one of the Big 4 banks, and the person behind the counter suggests that your recent deposit results in your account balance being of sufficient size that a chat to the branch financial planner may worthwhile. As a spur-of-the-moment thing, you decide “why not?”, and sit down to discuss this or that with a helpful and informed individual. After appropriate investigation into your financial position, preferences, objectives and relevant financial issues they recommend a managed fund. You think it all sounds quite logical and appropriate to your needs, so you agree to have your cash transferred to that investment product. The financial planner provides you with a Statement of Advice (an “SOA”) that confirms the basics of what you are doing and why. The SOA confirms that the advisor is on a salary with the bank and receives bonuses and incentives based on performance and results. The fees don’t appear out of the ordinary, so you are happy with your decision.
Where is the bias in this?
- The teller is on a salary – but most likely receives bonuses or incentives for referring customers to the branch financial planner. In many cases, tellers actually have a quota to meet for such tasks. The teller is not just being paid to do the ‘teller’ work – directing you to the financial planner is part of their job requirement.
- The financial planner provides investment advice based around an “Approved Product List” (an “APL” in financial lingo). This is a short-list of products that have been thoroughly researched and approved by the relevant bank dealer Investment Committee, and the in-house compliance system has ensured that each advisor can only access products for which they are suitably qualified and trained in. This list will usually include products from other institutions, so where is the bias? Actually, these APL’s are the ‘gateway’ through which product providers channel their wares, and are one of the most overt forms of bias in the industry. If the bank is say, CBA then you can be sure that the bulk of the products available to be selected from will be CBA products. Where there is a conflict between a CBA product and another institution’s then the other will usually only be included if it is through a “platform”, where the funds under management still count under CBA’s ‘book’. It does not matter whether we are dealing with CBA, NAB, ANZ or Westpac – they all have massive financial planning arms and the same process exists in all businesses.
- The planner arguably gains an advantage in recommending a product to you, whether it is appropriate or not. The planner may be on a salary (which is usually taken to indicate the possibility of a lack of bias – something that is often promoted as a positive in the “Private Banking” sections of the big institutions) but the planner will receive bonuses for higher sales levels. In many cases, they must also meet sales targets each month. If these targets are consistently missed then the relevant person will have their ability to fulfil their job put under scrutiny, which suggests a fundamental incentive to sell products or services.
There are clearly a number of stages in this process in which bias is being displayed. Is this bias always a bad thing? i would suggest that in this case, it is not necessarily a bad thing. If you’d like to see someone else’s views on this, here is an article from the Sydney Morning Herald from earlier this year, in which the writer attempts to cast light on the comparatively simple question of “who is behind the advice being provided?”.
Bias is not always ‘bad’
The individual who walks into a Big 4 bank knows that they are in an area in which everything that is done is being done under the auspices of a large, globally recognised institution. They expect that in dealing with that institution they will be treated fairly, and that the institution will take appropriate steps to protect its reputation by ensuring that its representatives are well trained, knowledgeable and efficient. They usually feel more comfortable that they won’t suffer from fraud – and even if they do then they would expect that the relevant institution will recompense them fairly for any loss suffered through that fraud.
To me, this is a less insidious form of bias. The large institutions will generally work on a ‘lowest common denominator’ basis, and will offer suitably vanilla products that do what they purport to do, at a reasonable cost.
As a privately owned business, the dealer group for which i am a financial planner, can offer a range of financial products from a range of companies. However, it is often the case that people will select a large institution’s products over others – even ones that may be cheaper, have more options or be more flexible. This is a form of ‘large institution bias’ on the part of the financial planning client, and can hardly be pointed to as a bad idea. It may not be the most ‘ideal’ outcome when looking at the world but that doesn’t mean that it isn’t the most appropriate answer for that particular person.
What is lost through large institution bias?
This is where your own preferences come into play. If you are wanting a recommendation on which product would suit you best – then that is something where a planner who offers a limited range could possibly provide you with a more limited answer. However, this is not necessarily the case. As a long term financial planner, i know of many planners within the various major dealer groups and they will do the absolute best that they can for every client who walks through the door. The fact that their available options may be slightly more limited does not have to mean that they are doing a bad job or that the final recommendations provided will be inappropriate.
Who owns your financial planner?
Did you realise that “Garvan” is an MLC dealership, ultimately owned or controlled by National Australia Bank? Or that BT is owned by Westpac, Colonial First State by Commonwealth Bank, ING by (predominantly) ANZ? The chances are that the dealership under which your financial advisor operates is one of the Big 4 banks or AMP is very, very high. Charter Financial Planning was owned by AXA, now AMP. The list goes on and on and on. Behind most of these big names is a very large bank, seeking to control not just deposits and loans but investments, insurance and superannuation as well.
Again, where is this bad?
Compare the Pair
We’ve already looked at the marketing name “Industry Super” funds, and their particular advantages and disadvantages. With their vertical integration ambitions (which include setting up and funding their own computer services company, and will be the topic for another post), these businesses which are masquerading as super funds (or is it the other way around) are now the equivalent of large institutions, and need to be grouped with the large bank institutions in terms of bias. Exactly the same issues of “salaried” advisers and the limited Approved Product Lists apply to Industry Super funds as they do to the large bank-owned institutional funds. Again, this is not to say that such bias is a good or bad thing – it is more the case of highlighting where such bias exists. As with my previous “Animal Farm” comments, Industry Funds are gradually morphing into exactly what they claim to not represent. However, this is simply a fairly standard industry development/maturation, and should be seen as an expansion of the availability of financial advice to a larger demographic than was previously the case.
Financial Planning Bias – tbc…
There are so many areas in which financial planning is biased that it would be silly to attempt to cover them in one post. This is simply one step in what is an ongoing attempt to highlight some of the differences in opinion, process and options that exist within one of the world’s largest financial planning communities (bet you didn’t think Australia was that large or that leading in its global impact, did you..?).