Financial Advice – Commissions are only part of the problem

There has been a lot of debate in this country about financial advice and specifically the issues associated with commissions skewing advice towards the more profitable products for advisors rather than clients. I think this is a good debate and removing commissions and focusing more on paid for advice is a good step.  But that is only part of the story. Unfortunately, there appears to be a perception that the bad advice has come only from the advisors receiving the commissions and that if you pay for advice the outcomes will be better. However, any advice received is only as good as the qualifications, knowledge and experience of the people giving the advice. I can see no evidence to suggest that if a consumer seeks paid for advice they will not be prevented from:

• investing in expensive and poorly designed products;
• investing a significant proportion of their savings in one asset or product;
• taking on inappropriate exposures; and
• exposing themselves to ridiculous levels of risk that were identifiable right from the start.

The reason this is the case is simply because many financial advisors do not understand the construct and risk of the products they recommend – whether they get a commission or not. The Basis Capital debacle is a very clear example. Sonray Capital looks like another. Now, the advisors may try to hide behind the rating agencies, but if that is the case then what advice were their clients paying for in the first place?
This is why we keep seeing people losing their life savings and wondering why. It takes a life time to save for retirement and yet you can lose it all overnight. Therefore, there must be a much greater focus on the skills and experience of the financial advisors. If that means advice becomes more expensive then it is a price worth paying. It will be a hell of a lot less than your life savings.