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Monday, 7 July 2014
Page: 4304


Senator BERNARDI (South Australia) (21:49): As someone who spent 10 years, prior to entering this place, as a financial adviser, I am appalled at the recent conduct of financial planners within the Commonwealth Bank. I am not going to trawl over the respective facts, which have been canvassed quite thoroughly by the Senate committee and the media; however, I do want to make a few remarks about what did not protect the clients of these, or any other, crooked financial planners, and that is excessive regulation.

Far too often we are told that more and more regulation is required to protect individuals from rogue elements in our society. This is often heard in the arena of financial advice, where people are regularly dealing with their life's wealth—money that is meant to see them through their retirement and assist with a comfortable life. As someone who has spent 10 years in the industry and as a keen investor and private trader on the financial markets for the best part of a decade before that, I have seen a lot and learned a lot along the way. Many things have changed in that time and yet, no matter how much regulation and red tape is implemented by government or industry bodies, there are some things that will never change.

One of those is that investors are ruled by one principle emotion. I suggest it is fear. It is the fear of losing their money or of not having enough of it in the future. Some might say this is two emotions, fear and greed, and that might indeed be the case. But it is from this raw emotional state that clients seek to visit a financial adviser. When a client consults a planner, they have every expectation that the advice they receive is going to be suitable for their circumstances. Alas, that is not always the case, and some advisors are driven by their own greed and see the commission to be received from the sale of investment products as their overarching concern. It is hardly surprising that this is the case given, as ABC journalist Emma Albereci noted recently, it is harder to gain a hairdressing qualification in this country than to qualify as a financial planner.

It goes without saying that these so-called advisors, many of whom are really just slick salesmen, need to be exposed and drummed out of the industry as quickly as possible. By requiring planners to substantially invest in their own education before they can invite others to invest in them, we would go some way to addressing the 'get rich at the client's expense' mentality of a small section of the planning community.

However, there is another group of people that no amount of education will ever stop. These are the criminal elements. The ones prepared to falsify documents, forge signatures and lie in order to enrich themselves. These types of people are in every industry, but few of these 'white-collar crooks'—as they are called sometimes—in other areas have the impact that creating financial ruin can have on the trusting client. Frankly, that is why I am appalled that the Commonwealth Bank still retains the services of some of the planners involved in this most recent scandal and that the Commonwealth Bank funds the stress leave of some of the individuals involved through one of its insurance policies.

I have spoken on a number of occasions in this place about the shonky operators who need to be rubbed out and not given soft passage by ASIC or the FPA or anyone else for that matter. Unfortunately, these warnings have too often fallen on deaf ears. The rogues in the industry were supposed to be cleaned up by the FSR reforms of the early 2000s. These reforms put new regulatory and compliance burdens on securities dealers, which virtually doubled the amount of paperwork overnight. Business overheads skyrocketed, which ultimately means the costs are passed on to clients. This made even simple financial advice prohibitively costly for those of modest means. At that time I was a director of a securities dealer's license holder, which struggled under the compliance burden of the new regime. My clients were a mix of retirees, sophisticated investors, high net worth individuals and regular mum and dad investors, but the new consumer protections did nothing to protect them. They only served to increase my paperwork, their paperwork and the associated costs. The only answer for me was to get big or get out. I chose to merge my business with another reputable, independent, client oriented organisation, but many in a similar position were forced to move to the corporatised product pushers like the Commonwealth Bank.

It is now a matter of record that 80 per cent of the country's financial planners are controlled by the big four banks and the AMP. This is purely and simply a product of a regulatory regime that made the small, personalised advisory business too hard to be in. Clients are still being ripped off—perhaps even more so than ever before. To me it is a clear demonstration that all the rules and regulations in the world will not protect people from unethical or criminal advisers. So, if increased regulation is not the answer, how do we best resolve to protect consumers in the financial services marketplace? The answer can only be education—not just for the planning community but also for their clients and for every other member of the Australian community.

Throughout my time in the industry and since, I have sought to apply myself to helping people understand financial matters. I sought to document the difference between saving, investing and speculating because in many minds there is no real difference. And on that matter they could not be more wrong. If people understood the essential differences, fewer would fall for the slick sales patter. Saving is a skill based on habits that are most effectively learnt whilst young. So too is the discipline of investing. Time is the greatest advantage in the arsenal of the investor and patience one of the key elements of success. Speculation, on the other hand, may be done successfully, at least over the short term, through dumb luck, but success over the longer term requires highly specialised knowledge and enormous discipline. Unfortunately, too many supposed investors today are really only guessing on markets going either up or down. Thus they are speculators rather than investors.

In many ways speculating is just like having a bet, and those who provide the leveraged products for these punters are in reality financial bookmakers. Now some are very honest about this: those who provide financial spread services or contracts for difference describe themselves as such, while in other markets, like the futures markets, they provide a very similar service and marketplace but they require a much deeper capital pool with which to play. In the case of the former, it is interesting to note that the house usually bets against the client knowing that 80 per cent to 90 per cent of them will actually get it wrong. This is a highly simplified analysis, but the principle remains entirely true.

However, these sorts of speculative service providers have a place within our financial market, but they are not for the uneducated because they offer extreme leverage, which can be a wealth hazard. As I mentioned, most of the speculators in these markets will be wrong most of the time, but the truly successful ones have a plan on how to know they are wrong and what to do when they know it. Timing is absolutely everything. That is why I find it so frustrating to see people close to retirement being advised to use their home equity to invest in further leveraged instruments like margin lending, and then encouraged to punt on the market by outfits like Storm Financial and, more recently, the Queensland based Financial Technology Securities. The double leverage game is not investing; it is gambling of the highest order. The risk of loss is huge, and when risk became reality people do not know what to do and so they just hang on and hope. But hope is simply not a strategy.

The only strategy is ensuring the client knows what they are doing and why they are doing it and what action to take when it starts to go wrong. To me that means investor education is the key to ensure they understand the principles and differences attached to saving, investing and speculating. I have sought to do that over many, many years. When I was in the industry I presented seminars at ASX investor briefings, I wrote columns for newspapers, I presented financial reports for the media and I did talkback radio answering listeners' financial questions. I have written trading courses for finance markets; I have provided personalised tuition on how to use leverage and speculate on global equity and commodities markets whilst limiting risk to clients across the world. I wrote a manual for parents on how to help ensure their children's financial future and education while also hopefully learning a few financial skills for themselves. There was a subsequent children's book based on these simple but wildly effective techniques. It was released in 2007 and thus far tens of thousands of copies have been downloaded or given away for free through schools and community organisations to families. I have spoken and provided trading seminars on multiple continents in an attempt to help transfer my experience and knowledge from managing equity portfolios and client accounts to as many people as possible.

It is a start, but I am only one person. Simple lessons are vital to ensure people understand the implications of leverage, volatility and human emotion in the finance world. And this is one area where successive governments have failed miserably. Almost every year I hear of new financial literacy initiatives designed to educate people about how to save and invest. And every year I hear more people demonstrate just how unknowledgeable they are when it comes to money. For all the millions spent by government, they would probably be better served by directing people to the many personal financial blog websites available on the internet. Having spent some weeks recently reviewing many of these sites, I found more wisdom and common sense residing there than in many so-called professional advisory firms.

These blogs are real people applying real principles to bettering their financial lives. Their successes, their failures and the lessons learnt are there for all to see. None of them blame the government for their failures; none of them rely on regulation to protect them. Instead, they rely on personal responsibility to educate themselves through the wisdom of others' experience. They use leverage sparingly and know the difference between investing and speculating. They have emergency savings. They use index funds instead of expensive managed funds and they keep cash buffers for a rainy day to protect them. Within these blogs resides a plethora of common sense. As someone who has produced, sold and promoted both free and expensive investment education products, as someone who has managed investor funds worth hundreds of millions of dollars, and as someone who has benefited from the prudent use of leveraged financial products to speculate, I can categorically state that these personal blogs may be the best financial education that anyone's money cannot buy.