Forewarned is Forearmed

In 2005, as part of the inaugural FinancialAlert “Financial Planning Practice of the Year” competition one of the components of the competition was to write an essay on what we saw as the greatest challenges facing the financial planning industry over the next five years. We wrote the following essay. It was titled “The Big Investment & Insurance Industry Challenge”.

“The establishment of credibility and consumer confidence, in our opinion, is the biggest challenge for the industry in the coming five years.  Let us consider where the industry is now at by looking at the past and learn from the industry’s historical mistakes. 

There is the need to eliminate the repeats of the dodgy investments, especially the old fads such as forestry, goats, property syndicates, and junk bonds.  What these had in common were high commissions that rewarded those sales organisations posing as investment advisers.  The investments had high failure rates, with few providing returns anywhere near those claimed in the promotional material.  To establish credibility, investment providers, both the intermediaries and the product originators, need to act and be seen to be acting as fiduciaries. 

Portfolio returns need to be enhanced by the introduction of new enhanced methodologies both for asset allocation and portfolio construction.   The uptake of new asset allocation models based on returns derived by using for example the Occam’s Razor approach, as being commercialised by Farrelly’s, may see clients’ investment objectives being increasingly met or exceeded.  Increased use of hybrid investments to provide enhancements over benchmark indices returns, with the added benefit of capital protection may also help to increase credibility. 

The move towards establishing networks with higher compliance standards may also enhance credibility in the eye of the investing public.  To be successful, these networks must deliver cost effective solutions for both advisers and investors.  There is a lot of work to do.  The public are well aware that networks are not new.  Unfortunately some networks in the past seriously undermined the credibility of the industry, being the prime culprits of pushing dubious investment products, and also producing below average investment returns. 

Credibility should be enhanced by some form of regulation.  This is a dual edged sword.  To be credible, regulation must be seen as being strong.  If it is too strong, costs will increase to all participants.  History shows from countries such as Australiaand the United Kingdom, that the heavy handed regulatory approaches adopted by their authorities have not made the gains in improving the level of advice being offered to consumers. 

The hidden cost to the investor of services is an area that needs to be changed to enhance credibility.  These should be fully disclosed.  Unfortunately, some industry participants are very much against disclosure particularly commission rates for insurance products. 

In conclusion, the industry has a limited time in which it must improve it’s credibility.  Without improvements, there is the danger that the industry will continue to be judged by the performance and lack of credibility of the poorest participants”.

Since we wrote the essay, there have been a number of steps taken by both Governmental agencies and the industry as a whole in order to address many of the issues that we raised at that time. The article was written before the Finance Company collapse. As we progress towards the introduction of regulation, we should sound another warning. Regulation will not be the great panacea. There will always be some who operate around the fringes, and there will always be investments that fail. The best that we can hope for is a significant reduction of problems at the investor level.