Financial Services Industry helps prove Einstein’s Theory of Insanity

Reading a recent article in a finance industry publication (see extract below) made me think of Albert Einstein’s well known definition of Insanity, ‘repeating the same behaviour but expecting different results’. 

Aussies don’t trust financial planners, but all is not lost
10 August 2012 | Patrice Thomson, Wealth Professional In a recent Nielson Global Survey of Investment Attitudes, the theme of trust – or lack thereof –weaved throughout the findings. When it comes to trusting the recommendations of financial advisers, the results make for a disappointing read. Just 16% of Australians currently rely on a financial planner or adviser, with the majority (57%) preferring to be solely in charge of their investment decisions.

I often wonder why the Financial Services industry continues to bother conducting these surveys because the results never change and I’m even more surprised when they are disappointed by the findings.  The industry would really benefit from referring to Einstein’s definition of Insanity as a reminder that repeating the same behaviour whilst expecting different results is truly insane. 

While I’m no genius like Albert Einstein, I do know that building trust starts by telling the truth (my dear mum taught me that and she’s no genius either).  Yet financial institutions like banks, superannuation companies, insurers and some advisers continue to treat their clients like mushrooms - keeping them in the dark and feeding them fertilizer. 

Let me explain:  new legislation known as “Future of Financial Advice” or FOFA bans Financial Adviser’s from receiving commission on superannuation. The original intent was that insurance held within super was included in the ban. However, throughout the development of this legislation there was extensive industry consultation, during which the Financial Services industry argued that banning commission on insurance within superannuation was not in the community’s interest.  They argue that the majority of Australians would not be able to afford to pay for financial advice, but rather that commission was a much more sensible methodology for advisers to be remunerated.

In my opinion this is a load of ‘fertiliser’ designed to grow a terrific crop of mushrooms.  What the industry fails to mention is that within a standard retail insurance policy the commission component increases the premium by 25-30%, not only in the first year but each year the policy is in place. 

Surely instead of caving in to big corporate interests the government should legislate to provide clients with the choice to pay by either commission or flat fee. 

So if the average Australian (read ‘mushroom’) is paying $3,000/pa for Life, TPD and Income Protection insurance, including commission adds an extra $10,000 to their premiums over 10 years.  Please tell me how is that in anyone’s interest?  Now compound the lost return on your superannuation balance over your lifetime and imagine the difference this makes to your lifestyle in retirement. 

Now I recognise that adviser’s should be paid, but surely separating their remuneration from the products they recommended is a no brainer and no government should have to legislate common sense. When will this industry understand that commission taints advice; is the most expensive way for clients to pay for service; reduces people’s super account balances and is damaging their future retirement lifestyle?

I notice that the next issue on the Financial Services reform agenda is what to do about churning, the practice of an adviser recommending the replacement of your existing insurance policy with a new one every couple of years, resulting in new commissions.  Doesn’t this practice again prove that there is something fundamentally wrong within the walls of the Financial Services institution? 

The refusal to embrace FOFA and get rid of ALL commission, while expecting us to view the industry as a trusted group of professionals is indeed unequivocal proof of Einstein’s Theory of Insanity.

What do you think?  Post your comments if you feel as strongly about this as I do or feel free to Contact Us if you want to have a chat about the insurance within your superannuation.

SMSF - The Silent Revolution

I was really worried after reading a recent article in the Australian Financial Review by Sally Patten regarding how members are continuing to reduce the amount of voluntary contributions that they are making to their Industry and Retail superannuation.

Super savers abandoning big funds
21 July 2012 | Sally Patten, The Australian Financial Review, pg 1
"Investors are dramatically reducing their voluntary contributions to superannuation funds after five years of dismal returns and constant changes to super rules by the federal government. Disenchanted members are shunning large pooled funds and moving into self-managed schemes, where they have greater control over their investments and can diversify into assets such as direct property."

Whilst the reasons for this shift are perfectly understandable; what with global investment markets in turmoil and a lack of viable alternatives offered by industry and retail superannuation providers, it comes as no surprise that we are all abandoning traditional superannuation as the best method of funding our retirement. My concern is that if we don’t embrace a solution (and fast) ultimately it’s our own living standard in retirement that will suffer.

As evidence of this, a recent Russell Investments survey revealed that Australians believe that will need a lump sum of approx. $750,000 in retirement to be able to enjoy the lifestyle they want, but they have lost faith in superannuation as the best vehicle to provide this. We Aussies typically love the power of property and believe that an investment property or two is the best way to supplement whatever balance we end up with in our superannuation.

Of course, Industry and Retail super continue to argue that in the broad scheme of things the current market turmoil is just a blip and that we should all just “hang in there” and wait for the market to recover. Furthermore they hold the view that property will deliver no better future returns than their investment offerings. Maybe they’ll be proved right in the long term, but it seems we’re all sick of waiting and our patience has run out.

I think it’s really important to remind ourselves that superannuation is not an investment. It is just a blank tax structure that receives generous tax concessions in return for holding our funds in trust until we retire. If we really think about this, surely we need to ask our superannuation funds, “Why can’t I use my superannuation balance to purchase my next investment property?” Their answer usually has something to do with their trustees believing that it’s not in their member’s best interests etc, etc, etc. Most of us are starting to question whose interests they are really serving, theirs or ours?

In fact you CAN buy your next investment property with your superannuation by establishing a Self Managed Superannuation Fund. According to The Russell Investments survey 1 in 10 Australians are considering starting a Self Managed Superannuation Fund. I suspect the reason is twofold – individual investment choice (including direct property) and ultimate control. Two very powerful reasons indeed. So perhaps I shouldn’t be worried after all. The growth of the Self Managed Super sector must reassure me that Australian’s retirements won’t be so lousy after all. In fact the superannuation system is stronger than ever and in the safest hands of all… Your Own!

Are you thinking about establishing a SMSF and need some more information or interested in transferring your SMSF to Exelsuper? Please feel free to Contact Us if you have any questions.

Chris Harris

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