Here’s a Michael’s Musings look at financial planner bias from the perspective of the a financial planner.

Why financial planner bias?

Because financial planner bias is a key issue driving commentary, legislation and daily financial planner activity today.  Community perceptions and assumptions of financial planners have changed over the years, with the decades-long battles between bank super funds and ‘industry super funds’ fueling questions of just who financial planners represent. Financial planner bias and independence has become an ever more sensitive issue as average super balances have grown, and member choice has forced more people to pay attention to the money sitting in their super.

There are many ways in which bias can exist in the world of financial planning. My focus in this post is on the changes that have led to financial planner bias becoming such a key issue. In fact, bias is such an issue that financial planner usage of the word ‘independence’ is now regulated by legislation. A planner can’t just call themselves ‘independent’ – they have to meet stringent tests to be able to do so. So financial planner bias is a very big thing in the world of money.

The Global Financial Crisis changed attitudes

There is the old saying that “history does not repeat itself but it does rhyme” (vaguely attributed to Mark Twain). In the world of money and investment, this is a very solid statement. The post Global Financial Crisis (“GFC”) world can be seen as rough repeat of the post 1987 sharemarket crash. It isn’t exact but it does have similarities. When looking at financial planning in the post-GFC world compared with the post-1987 crash though, it is the differences that are most telling. This is where financial planner bias became a focal point for discussion on financial planners and ethics.

The 1987 sharemarket crash

I am old enough and have worked in the financial industry long enough that i have vivid memories of the 1987 sharemarket crash. I was Customer Service Officer for MLC at the time, so i was exposed to a range of issues and people’s reactions to the crash. One memory that stays with me is sitting in a hotel café and watching an older (and wealthier!) manager avidly studying the financial pages for share prices of companies he wanted to be part of and invest into. It was a bit like watching someone study their pantry for things they were a bit low on. He was bargain hunting, and using the substantially reduced prices to top up his existing share holdings and to venture into a bit of speculation. It sort of made sense but my focus was elsewhere. In general, my experiences of the time suggested that many people saw the large falls as something that impacted ‘other people’. A few – like my manager – saw it as an opportunity.

In 1987 the fear and loathing of sharemarket falls did not have the same impact that it has today. Mainstream media saw bad financial news as a sideline to its standard fare, and most people still did not read the financial sections of papers. A lot of people weren’t really all that aware of their superannuation account balances day-to-day, with the result that a crash wasn’t really all that big a news story once the initial *wow* factor had worn off . People basically got on with getting on, and did what they could to take advantage of the falls.

If anything, “the market crash” was seen as something only really affecting rich people and speculators. Jokes quickly made their way around the traps. Jokes like “what is the difference between a pigeon and a Yuppie? – A pigeon can still put a deposit on a BMW..”. By comparison, in the depths of the Global Financial Crisis nobody was making jokes about financial markets any more.

The Global Financial Crisis

Fast forward to November 2007 and we have a very different situation. To start with, the sharemarket fall wasn’t a crash in the 1987 sense – where markets fell by large amounts in a matter of days – it’s a very slow, grinding and seemingly never-ending train crash. From the 2007 peak, the GFC low point isn’t reached until February / March of 2009. So rather than a short, sharp correction and a gradual recovery, we have a slow, grinding descent in markets and no clear signs of a recovery.

During that grinding market fall, every attempt at a positive interpretation of market potential for recovery and growth being shot down in flames by subsequent events. Analysts would suggest a longer investment time frame was required. They would point to past “crashes” and suggest that these were cyclical events, and average recovery times were relatively short. But the Global Financial Crisis never seemed to end, and one by one the traditional recovery time frames were exceeded, with still no clear direction for a return to strong and reliable growth in prices and markets.

The GFC tested traditional sources of authority

One by one, traditional sources of advice and authority were seen to have failed, and the feedback loop gave free reign to “confirmation bias”. In other words, each failure of the market to recovery seemed to just confirm that the market wasn’t going to recover, and that even experts were at a loss. Doomsayers would make grand statements of woe, and be proven right again and again. Where long term historical track records suggested that “buy and hold” was a valid strategy, it often turned out that those who panicked and sold quickly at the hint of price falls ended up better off. Even when a recover seemed to be underway, events soon turned and the recovery was at risk or appeared to have been illusory.

Eventually, investors, analysts, institutions and commentators all turned on the idea of long term investment. I noticed more and more commentary highlighting the failures of taking a long term perspective… It was not active enough. It was a mugs’ game. If you didn’t act, you were doomed to fail. It didn’t matter what you did, so long as you did something. A shortened news cycle and 24 hour data updates made a lot of people feel that they should be far more active with their money.

Investment time frames were becoming shorter and shorter. And even long term historical trends or deep market knowledge and expertise didn’t seem to be able to bring about a better result than the average person with a laptop and an internet connection.

The fall of authority

This is where financial planner bias really came to the fore as an issue. But it wasn’t just financial planners – all levels of authority were being questioned. And to some extent, with good reason!

Who would have guessed that money market makers and regulators and figures of authority would lose their control of markets and economies to such an extent that politicians and central bankers feared for the very foundations of the capitalist system? Or that USA politicians would seriously consider – and campaign for – the USA government to not pay its bills? Who would have guessed that an economic bloc as huge as the European Union would turn out to be built on rubbery guidelines and questionable guarantees? Is it any wonder that financial market analysts, institutions, political leaders, financial advisers and standard figures of authority were no longer granted an automatic assumption of having “special” or even useful knowledge? It appeared as if even the most powerful figures in the financial world had lost control? Authority was losing its authority.

The move away from all forms of established authority was accelerated during this time. Investors questioned the ability of institutions to do a better job than the average DIY person with a laptop and an internet connection. Clients wondered what value financial planners could add when account balances kept going down? If even the most experienced professionals couldn’t stop the rot then who could you turn to? And it wasn’t just money.

Even voters were turning away from traditional authority figures

Voters decided they’d like to see someone – anyone – different have a go at running the country and to hopefully bring back some sense of order. Fractured parties and hung parliaments reduced the capacity for concerted national action that might improve economic conditions. Breakaway politics took over national unity, whether in Spain, the Ukraine, Syria, Nigeria, and even Italy and the (mostly) United Kingdom.If central authorities weren’t able to deliver security and prosperity then why not DIY a new nation or enclave?

Back to money and back to Australia and we find that superannuation fund members decided they could just do it themselves at a lower cost and with more transparent risk taking. Self Managed Super Fund (“SMSF”) usage escalated dramatically, until nearly a third of super assets were held in these private funds. This happened post the 1987 market crash but at a much lower level, and technology had yet to step in and make the process easier and cheaper. In the post Global Financial Crisis world, doing it yourself was not only cheap and convenient – it became the de rigueur thing to do. Barbecue conversation moved from the latest house price moves a discussion on the intricacies of superannuation fund trust deed management. If you weren’t doing it yourself, you were being ripped off and treated like a mug.

Authority had lost its shine.

Death of “safe” interest earnings

And then the central bankers weighed in with the idea that you would not be rewarded for saving money anymore…

Across the developed world, central bankers moved official interest rates to multi generational lows or even zero, and now even into negative interest rates – an idea so strange that it sounds like someone just made it up as a party joke.

In this new central banker dominated environment, if you wanted to earn any benefit from your capital and savings then you would have to amplify your risk taking. Even if you’d never done that before and even if you seriously didn’t want to. You had no choice.

And even worse, you had nobody to turn to. The previous figures of authority had proven inept or unable to secure a better outcome than you assumed you could achieve yourself. So the capital that you’d worked hard to accumulate and didn’t want to put at risk, now had to be put at risk. But how was the average person to do this if even hallowed institutions had failed?

Do It Yourself – everything..!

People who were used to dealing with their financial planner on a regular basis were generally comfortable with the process and made changes as required. However, for those who were not familiar with financial planning and planners, it seemed like a leap-of-faith to put your future in the hands of a planner. I noticed the change in public perceptions in my business and i heard many planners experiencing similar outcomes.

So even less people were actively seeking advice.

Do-it-yourself options came to the fore again, just as they had after the 1987 sharemarket crash, except now they were empowered by technology in a way that hadn’t even been imagined in 1987. Unlike 1987, in 2007, you didn’t have to buy a newspaper to see yesterdays share prices. You didn’t have to go to the stock exchange to watch brokers madly bidding to buy or sell. You could just log into the internet and that information was openly available. And technology had destroyed the cost walls that previously allowed institutions to be power brokers in the world of finance. Stock exchange terminals and long term agreements costing tens of thousands of dollars could be comfortably replaced by a laptop and an Internet Service Provider. Or even a basic internet café. So data was now free and the gatekeepers were hobbled and the figures of authority were no longer granted the assumption of useful expertise.

Rise of the no-advice Advisor

Market and industry experts who previously worked for institutions or larger groups saw an opening and started to sell their experience and expertise direct to the wider community instead of to a select few. And it actually made sense from a business point of view. Why take risks giving personal advice when you can say the same thing you were always going to say – but with the startlingly profitable caveat that it is now “general advice” only, and you are no longer responsible for whether it worked or not at a personal level. People familiar with markets and good at marketing realised that newletters and books could reach more people, faster, and with less compliance requirements. Email lists and client databases were suddenly in massive demand, as direct marketing could turn those individuals into Do-It-Yourself’ers who would pay good money for a subscription service to a website or newsletter that allowed them access to the ex-authority figures core information database.

The democratisation of financial markets was steamrolling flat every hierarchical system of authority and power from the past, one after the other after the other. And nothing seems to be altering the pathway of that steamroller.

Regulations and business risks were forcing change

The backlash against figures of authority continued in all areas. Regulators tried to respond to public angst and consumer group pressure by tightening regulations and systems requirements. They increased the scope of supervisory guidelines and lifted education standards. Regulators increased consumer access to independent complaints forums and lawyers saw the potential for litigation and compensation claims and criminal persecution for even relatively mundane process failures. Professional Indemnity insurance companies found themselves paying out ever increasing claims for personal advice failures of one kind or another and were encountering risks they had not factored into their actuarial calculations. Conditions to obtain professional indemnity insurance grew ever tighter. Financial planning businesses had to impose standards on the assumption that everyone was “doing the wrong thing”. Yet this was still not enough to stop the do-it-yourself trend.

Financial Planner bias

Strangely enough, all these changes increased the prevalence of financial planner bias. The need for tighter research protocols meant planning groups faced much higher business risks if they offered products outside of “traditional vanilla offerings”. In the face of potential litigation and the difficulty of proving appropriate advice, the “Approved Product Lists” for planning firms shrunk and became more mainstream. Whether this was good or bad, it reduced the scope for individual tailoring, which further enhanced the idea that there was a financial planner bias. Planning groups found that they were having to meet higher costs with less avenues for recouping those costs. Some resorted to “white labeling” investment or superannuation products in order to gain some additional income from that source. Again, this reduced the range of offers from many planning groups which further enhances the idea that financial planner bias is at work.

Personal financial advice became harder deliver. It became more expensive and it became more limited in scope. All of these led to even more discontent for the average person and further disenfranchisement from not just institutions but for the financial planning industry itself. And further perceptions of financial planner bias. The feedback loop between investors, consumer groups, commentators, and regulators led to general agreement that the financial planning community had failed to deliver on its promise of financial security, and financial planner bias was seen as a big part of that failure. Something needed to be done.

Robo Advice

A logical extension of this process was the growth and development of “Robo Advice”. The idea behind this is that you don’t need a personal adviser, you just need a clever computer program. If you have the right technology, you can feed in the risk/return parameters that you want and an algorithm will match your parameters to an appropriate investment profile.

Why pay for personal advice when you can go online and achieve the same outcome? And Robo Advice is cheaper to deliver. Once the system has been established and basic costs met then there is virtually no addition to marginal costs for each new user. The profit potential is enormous. And the risks are substantially reduced as you are no longer providing personal financial advice. Or rather, you are limiting the advice only to areas that you can robustly defend in a court of law or regulatory framework. Both the advice provider and the person seeking the advice are stripped of personality and nuance in favour of lower costs and a streamlined delivery process. It’s not personal service but for those who can wrap their minds about the process, it is cheap and it is effective.

Robo Advice bias?

But does it remove financial planner bias? It certainly removes one part of the financial planner role, so perhaps it removes some of the bias but I would argue that it doesn’t really do much to remove financial planner bias – it just introduces a different form of bias. In this case, a computer version of financial planner bias. You may see this as sour grapes on my part, and just my own version of financial planner bias but it isn’t really. I quite like the idea of “RoboAdvice” as it can help remove some of the more mundane components of a planner’s day-to-day activities. However, a computer program by definition needs to have a process, and it is the exact act of following a process that creates bias!

Life insurance has followed a similar pathway, with regulatory investigations and consumer backlash against long-standing industry practices leading to more do it yourself options being made available. Online comparison websites proliferated, and the ability to do it yourself has expanded into even into the arcane world of life insurance. Yet again, this doesn’t really alter financial planner bias – it just introduces a computer based version of bias.

What to do about financial planner bias?

So where is authority, and what place is there for experience and knowledge and training, in a world that is seeking ever greater efficiency, lower cost, open data and the removal of bias? What role is there for a financial planner in this post GFC, technology-driven world?

I am actually very positive about the future for financial planners in this ever-changing and cynical world. Over time, i will add to my ‘bias’ posts and set out just why i believe that Financial Planners and Financial Planner bias will, over time, be perceived in a completely different light.