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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
03/09/2009
Financial products and services in Australia

CHAIRMAN —Welcome. Would you like to make some opening remarks?

Mr Forsyth —We appreciate the opportunity to speak before this inquiry on behalf of thousands of independent investors, many of whom are our members, and on behalf of investors who, although not members, have told us their tales of woe or we read their stories in the press. We have thought for years that the financial services industry has many disgraceful aspects. We regret that it took some multi-million-dollar losses of mum and dad investors for these disgraceful aspects to become obvious to everyone.

The root of the problem is human greed, affecting the investor and the adviser. We believe that the fundamental matter to be resolved is that advice must be objective, appropriate and free of conflict of interest. I think we are all well aware of the fact that if I were to go to a financial planner with, say, an inheritance of half a million dollars, the most likely advice I would get would be to put it into managed funds or possibly Australian shares, with little or any consideration being given as to whether a better use of the funds might be to pay off the mortgage, contribute to an industry super fund, pay off other debts, and so on. The advice I would receive would be to do something that led to a commission payment to the adviser—not all advisers but a huge percentage of them. The AIA sees such an industry as being about selling rather than advising.

Our submission asks that you: (a) remove inherent conflicts of interest at present in the industry; (b) separate the sales and advice functions; (c) raise the low educational level that was required of advisers; (d) address the illusion of independence of advisory firms connected with banks and insurance companies; (e) provide simple investment risk signals for consumers; (f) require payment for services to be initiated by the client, not the investment product provider; (g) require clients to have more control over the investment advisory process; (h) promote investment education among consumers; and (i) provide for better regulation and enforcement within financial services.

I remind the committee of the case of the pensioner widow reported in the Australian on Monday morning who signed a blank margin loan application form that someone else filled in for a $208,000 additional loan. This was added to her existing $625,000 margin loan. The form stated that she earned $104,000 per month, even though she was in fact a pensioner. She now faces the loss of her home. So we present ourselves here today to reflect the point of view of investors, many of whom have lost confidence in the financial planning and advisory industry.

CHAIRMAN —I am sure you have read submissions and heard witnesses and heard all sorts of tragic tales of people’s circumstances. In the simplest terms, what do you think is at the core of the problem? We will leave regulation aside for the moment. Where do you think the problem stems from?

Mr Forsyth —The core of the problem, in our opinion, is the fact that too many of these people are remunerated by commission, which tends to be provided by the people who provide the investment. Any advice that I get is not paid for in most cases by me; it is paid for by the person from the managed funds or whoever it happens to be who is providing the investment.

CHAIRMAN —But that is a pretty general statement. That does not cover the vast majority of different circumstances. As we have heard from Storm, for example, people charged a very large upfront fee and claimed they had no commissions. How do you balance that? Is just the remuneration of the problem or were there other incentives?

Mr McKenzie —I believe that another way of looking at the root problem is the need to separate advice giving from sales. I think that is the fundamental problem that exists. We ought to have a structure of advice giving—say, registered financial advisers who are professionals, as I have seen suggested in some of the submissions that have been made to this inquiry. They would give advice quite separately from the investment salespeople or investment advisers who in fact sell products. Just as when I go to a doctor I get advice and I take it to a chemist and get a prescription filled, can we not have the same thing happening here in the financial services industry? Separating sales from advice—I think that is fundamental.

CHAIRMAN —How do you practically do that?

Mr McKenzie —It is really hard, I agree. It is not easy to do because we have a history in this country of 20 or 30 years of moving from stockbroking salespeople, insurance agents and salespeople and we have come through and the profession has tried to make itself a profession and so any change is going to be hard going. But I think it can be done with the notion of a registered financial adviser around whom legislation and regulations are set up and such a person has this function and this fiduciary responsibility and charges fee-for-service.

CHAIRMAN —Do you think that is more important than perhaps distinguishing between classes of investment that are more sophisticated or, let us say, risky and other types of investments that are less risky? Which one is more important? Do we go down a path of trying to define who is so-called advising and who is so-called selling compared to the different products that exist in the market?

Mr McKenzie —The emphasis now is on the investor and wanting to distinguish the sorts of investors. I can imagine that that is a simpler thing to do. I am not sure that it is fair. I am not sure that it will work. Fundamentally, if we want to create a profession of financial advisers then we have to do what it takes to create a profession. I have no problem with people selling products, just so long as they do not pretend to give advice at the same time.

CHAIRMAN —If that is the case, are there good products and bad products? Are all products good products and it is who you sell them to that makes the difference rather than the other way around?

Mr Forsyth —I think there is a degree of risk that comes with all of the products. The Storm Financial situation was predicated on the fact that the market was going to keep going up and up. As we have seen, the market did not do that. That was not the first time: go back to 1987, when the market dropped 50 per cent in a couple of days. These are risks, and investment in the stock exchange certainly carries a lot more risk. I think it is the risk that one has to look at. ASIC is suggesting much the same thing with their ‘between the flags’ approach. We think there should be stuff outside the flags and stuff way outside the flags, as well, so that people are alerted to the risk. I do not think that it is the product itself that is essentially bad; I think it is the degree of risk associated with the product.

CHAIRMAN —We hear a lot about graphs and averaging. People have risk explained in seminars and education sessions. They are sort of told, ‘Over the length of the market and from the data we have got in the last 100 years, if you average it all out the line starts here and ends up here, in a straight line.’ Does that really do any justice to informing investors about risks or about the chances they are taking with their life savings?

Mr Forsyth —I do not think that is alerting them to the risk. I think it has to be pointed out that in 1987 and 2008 this is what happened. I believe a competent adviser would do that.

CHAIRMAN —I asked a question earlier, in another session, about the power imbalance. In your experience where does all the power sit in the relationship between an adviser and the client?

Mr McKenzie —With the adviser.

CHAIRMAN —It is with the adviser.

Mr McKenzie —And I agree with a couple of the submissions that say one of the things we should be on about is finding ways to empower the consumer in this.

Mr Forsyth —The investor.

Mr McKenzie —Yes, we should empower the investor.

CHAIRMAN —Why has the adviser got so much power?

Mr McKenzie —Well, there is an information power, for a start, that the adviser has. I must be upfront; I am an adviser.

CHAIRMAN —We will not hold that against you; it is all right.

Mr McKenzie —And I do not hold it against myself. I have seen it happen. I had someone walk into my office yesterday. She sat down and talked with me and accorded me all the power in the relationship. I had to do whatever I could to empower her to ask. I told her some of the things that maybe she should have asked questions about. I could see that because she did not understand what we were talking about, despite my best efforts—

CHAIRMAN —So it is really up to your integrity. It is up to your standards.

Mr McKenzie —Absolutely.

CHAIRMAN —It is very personal.

Mr McKenzie —Absolutely.

CHAIRMAN —Just to explain that power a little bit further, it is not just a relationship power. Is it a contractual power in terms of people signing over authority to superannuation, authority over shares and mortgages?

Mr McKenzie —They might do that but I would never accept that. That is crazy.

CHAIRMAN —No, you would not but—

Mr McKenzie —When I go to a builder and I say, ‘I want you to build me a house,’ I do not just leave a blank cheque there and say, ‘Tell me when it’s finished,’ and fill in the cheque. That is the other extreme, isn’t it, of this sort of thing? We have to accept that when somebody comes to an adviser with half a million dollars, they are 65 and they have 25-odd years of life left—and that half a million has to last that time—they are making a huge commitment. They are trusting someone or they are looking for details that will convince them that what they are hearing makes sense. The adviser has to be the sort of person, I believe, who will recognise the huge fiduciary responsibility that is accorded him.

CHAIRMAN —Do they actually have a fiduciary responsibility?

Mr McKenzie —I do not believe so, according to the legislation. I think that is one of the things we might fix up!

Senator MASON —I will touch on both the issues the chairman has raised because they are both central. I do not come from a finance background at all, but one of the things that has interested me over the last week and a half, whilst hearing the testimony of many people who have been very seriously affected by the global financial crisis and by advice that they received, is that people often spend weeks searching for a home and deciding upon their new house, certainly days looking for a new car and hours looking for the new CD player, yet they will instantly hand over the power to someone else to spend half a million dollars. That has struck me over the last few days that people’s life savings can be given to someone and with the stroke of a pen—you look after it. It is an enormous trust, isn’t it, to financial advisers? Yet as you say quite rightly there is not a fiduciary duty at all. In relation to designing a better professional platform for financial advisers, you mentioned you could divide it into people who sell product—and there is nothing wrong with that—or giving independent financial advice, if someone is giving independent financial advice you say they should be fee-for-service and they should be subject to a fiduciary duty; is that right?

Mr McKenzie —Absolutely, yes.

Senator MASON —And if you are selling a product they get a commission based payment; is that right?

Mr McKenzie —If the separation is 100 per cent.

Senator MASON —Assuming the separation is clear, is that right? And the duty would not be as fiduciary as the current duty is at the moment, that is, do the right thing by your client?

Mr Forsyth —I would still have reservations about the commission on that simply because of the tendency. We have seen it before if you go back to Westpoint, and back to the 1980s with Rothwells. There was the same sort of thing there because people were being paid a much greater than usual commission.

Senator MASON —The committee will recognise we are going back to where we started early last week. In other words, commissions in a sense nearly operate as an inherent conflict of interest; is that your point?

Mr Forsyth —Yes.

Senator MASON —Thank you.

Senator McLUCAS —Can I go back to what you were saying is the root cause of the problem which is the need for separation between a fee-for-service advice model and products on shelves being sold at another place. The Financial Planners Association gave us evidence, which you may have seen, saying that they are moving towards that as a preferred system. They identified a number of problems with existing relationships that may have to be grandfathered or something like that, for example. I would like your comments on what do you do with existing relationships between investors and advisers. It was not from financial planners but it was on the same day of evidence. We were alerted to the fact that, if you do a separation like that and separate out advice and product, you potentially run the risk of the advice being a seemingly expensive piece of work that low- and middle-income families and people who potentially have the most need for good advice will be priced out of the market. It is a dilemma for me and I would seek your input.

Mr McKenzie —I think it is overstated, frankly, and I think it is the downside of the Financial Services Reform Act that concentrated on the form rather than the substance of advice. As a result of the FSRA, advisers feel they have to construct 80- to 120-page statements of advice. You know as well as I do that 95 per cent of the words are already in the computer. It is just an absurdity that a few extra words and numbers are typed in and out comes a 120-page report that is meaningless to most clients.

My belief is this: if somebody comes to me with a $50,000 inheritance I can, in half an hour, figure out the best thing for them to do with the money, write them a letter of a page and a half that advises them about that and maybe bill them $150, not give them a $3,000 statement of advice, which is an absurdity. I think the industry has been propelled in the direction of these big statements of advice because of the FSRA, the Financial Services Reform Act.

Senator McLUCAS —You would be aware of the work that is currently underway to come up with a one- or two-page summary document?

Mr McKenzie —Yes.

Senator McLUCAS —You would support a move in that direction?

Mr McKenzie —I have done it. That is what I do.

Senator McLUCAS —Do you also complete another statement of advice that you give to people to put on their shelf, to cover yourself legally?

Mr McKenzie —No, because I have a series of meetings with people and we progress through stages. I just document the stages we go through. It is fortunate that most of that was some years ago. I am semiretired.

Senator McLUCAS —Is another way to skin this problematic cat to improve the disclosure of trailing commissions or fees in general? Is it possible to get to a point where disclosure systems are well understood by the investor and can be relied upon and not abused by more unscrupulous individuals? Is disclosure an answer to the problem?

Mr McKenzie —No.

Senator McLUCAS —Unequivocally?

Mr McKenzie —It has not worked so far, has it?

Senator McLUCAS —I suppose my question is: have we got disclosure right and, if we got it right, could it be the answer?

Mr McKenzie —We have had four or five years to try to get it right and that has not worked. I can tell you that the layers of fees that exist between the investor and the product manufacturer via the licensee are so many that, even if you disclosed them, all the client would be is shocked; he would not understand it. I am talking about shelf fees and all manner of fees that you would come across. I do not think disclosure is the answer. I think fiduciary responsibility is the answer.

Senator McLUCAS —Coming to fiduciary responsibility: have you had an opportunity to read the submission from SICAG?

Mr McKenzie —No.

Senator McLUCAS —Then I will not ask the question. The other question I have is: what do we do about improving financial literacy in this country?

Mr Forsyth —That goes back to the education system. I think it is really something that the Minister for Education should be looking at very hard in terms of what we do overall. We started off with compulsory superannuation, and it is going to get bigger and bigger. Under those circumstances, the only place you are going to do it is in schools. That is where we need to have the school curriculum changed to include some lessons on financial literacy.

Senator McLUCAS —Mr Forsyth, I am a former schoolteacher. Whenever anything is wrong in society, we tell our schools to teach more. Can I put to you that if you sat in front of a 16- or 17-year-old person and talked about margin lending or what nine per cent of their superannuation might turn into when they turned 82, that 16-year-old person would not be paying attention. I think we probably have to look at a whole-of-life education event. Who knows what the 16-year-olds of today are going to be dealing with when they are coming towards their retirement? I would be interested in any comments that your association has about whole-of-life education. It is something we need to do on an ongoing basis, but the way to make people interested in these difficult and complex financial matters is something that I think we are struggling with.

Mr McKenzie —I am an ex-teacher too, Senator.

Senator McLUCAS —We tend to defend our profession, don’t we?

Mr McKenzie —Yes. I have got involved with developing curriculum at a state level and I understand the notion of putting stuff into the curriculum. It is overcrowded already. I do not think the answer is there at all, unless one makes a huge change to the education system and makes it education for life rather than for employment, but that is another matter. I think Senator Mason has it right—there is a cultural problem here. We have to acknowledge the fact that people come to a financial advisor from a totally disempowered perspective and that it is down to the professional across the other side of the table to acknowledge that and to respond appropriately, knowing that he has a fiduciary responsibility—that is the enforcement bit. If we can take a 20-year perspective on that and develop down that trail, I think we will have the beginnings of a solution to this problem; otherwise, I believe it will be terribly difficult. That is all I will say, other than giving a plug for the Australian Investors Association, where you will get all the knowledge you need to deal with that fella cross the table.

Mr ROBERT —Gentlemen, I am not a teacher. I have a business background. How many members does the Australian Investors Association have?

Mr Forsyth —About 2,000.

Mr ROBERT —And how long has the association been going for?

Mr Forsyth —It was founded by Austin Donnelly, and I am not sure whether that was in the late 1980s or the early 1990s. We were talking about it earlier this morning and I did not get the answer, I am afraid.

Mr ROBERT —Who are your competitors in the market in terms of association, advice and so on?

Mr Forsyth —There is the Australian Shareholders Association, but we tend focus far more on education. Our motto is ‘Investors Helping Investors’. I believe the Australian Shareholders Association tend to be far more interested in getting their people to go to annual general meetings and getting their members to give them their proxies and to raise questions at board level on that. I believe we are much broader in that we cover not just shares but property, managed funds and superannuation—the whole lot.

Mr ROBERT —What percentage of your members have been impacted by the spectacular collapses of Storm, Opes Prime and others?

Mr McKenzie —We did a survey of this and only one member put his hand up as being affected by the Storm situation.

Mr Forsyth —We sent a survey via email to everybody for whom we have an email address, which is the vast majority of our members, and we have been getting a response rate of about 25 per cent, which I think is pretty good compared to most other surveys.

Mr ROBERT —Let’s just say one member, or a minimal number, had exposure to the Storms and Opus Primes—why do you think, out of 2,000 members, only one decided to invest in Storm and other areas?

Mr McKenzie —They understand risk. We talk about risk, we look at what has happened in markets over 100 years and we have material going all the time that suggests that right now our market is vastly undervalued, but we also have material going out that says there could be a big correction, starting yesterday.

Mr ROBERT —Can I take it, from the statement that your members understand risk, that you believe that the Storms and the Opes Primes—in this case, Storm—did not manage risk well?

Mr Forsyth —They were going into a policy of double-gearing. You were borrowing money on your house and then getting a margin loan on top of that. The risk associated with that has to be extremely high.

Mr ROBERT —Mr Cassimatis, when the committee asked him questions as to who was responsible, laid the responsibility clearly and squarely at the feet of the banks. Do you have a comment in that respect?

Mr McKenzie —That is ridiculous. Who is the advisor? Who is sitting there suggesting strategies for wealth creation, for whatever purpose?

Mr ROBERT —I am just cognisant that, as two executives in the association, you are the largest representative of investors across the broad spectrum—hence my question as to who else you are in competition with in that respect. When I asked Mr Cassimatis why he did not know that margin calls were coming in—he knew his investors had a loan-to-value ratio approaching 90 per cent and he knew the market had dropped by 50 per cent—his response was that the banks’ systems were not up to date and he was not informed. Is that a responsible thing for an investor to do—just wait for the banks, knowing full well what their clients’ position is?

Mr McKenzie —Is this privileged?

Mr ROBERT —It is.

Mr McKenzie —That is the most nonsensical thing I have heard for a long, long time. With an LVR of 90 per cent and a market heading downwards rapidly, it is nonsensical to suggest that one, having set up that situation with clients, is not actively managing the process.

Mr ROBERT —We took an enormous amount of evidence from a range of affected people who indicated that there was constant pressure to put more money into Storm products; indeed, there was some evidence where people said, ‘I actually hid money so Storm wouldn’t know I had it,’ which I find staggering in itself. Your submission, No. 5, says:

There is a culture of ‘selling’ pervading much of the financial advisory services industry that pretends to be ‘professional service providing’. It is crucial that we find a way of separating these two functions.

How do you recommend separating those two functions?

Mr McKenzie —As I indicated before, I think the starting point is to create a class of professionals called ‘registered financial planners’ or ‘registered financial advisors’, who charge a fee and have a fiduciary responsibility. The product of their work would be a statement of advice, and then someone else would have the task of implementing that. This is simplistic, I know, and there are a lot of things to be worked out, but, just as I take a prescription from my doctor to my chemist and get it filled, so one might take a statement of advice about investment from an advisor to an investment consultant or salesman and get it filled.

Mr Forsyth —When you go to the chemist, the chemist will ask you, ‘Do you want the specific product written on the prescription or a generic equivalent?’ So the person who is providing the investment products can not necessarily say, ‘You’re going to put this money into BHP’, ‘You’re going to put it into Rio Tinto,’ or, ‘You’re going to put it in that managed fund.’ There will be options there. That is why I do not like a commission being paid at that point in time—because the tendency of the person providing the product is going to be to push people into those that are going to pay them the highest commission.

Mr ROBERT —What do you believe is the minimum qualification a professional in the financial services industry—that is, a provider of advice—should have?

Mr McKenzie —A bachelor’s degree in financial services.

Mr ROBERT —You believe that is the absolute minimum?

Mr McKenzie —Absolutely.

Mr ROBERT —We took advice in the MIS inquiry about providers of MIS who had done a nine-day course and were then qualified to provide advice into MIS. Do you believe that is too short?

Mr McKenzie —If the person who has done the nine-day course is just selling and explaining the features of one particular product, I have no problem. But, if they are dealing with somebody who walks in off the street and says, ‘I’ve got a quarter of a million dollars here and I don’t know what to do with it,’ that is obviously a problem. We are talking about the last 20 to 30 years of someone’s life. For that sort of money to go into the hands of someone who is flogging products is criminal. I know it really is hard, but this is such a serious matter that we should begin at the beginning and say, ‘Let’s set aside a class of people who, by virtue of education, experience, personal characteristics—

Senator MASON —And legal duty.

Mr McKenzie —and fiduciary responsibility hanging over them, are the people we are going to trust to give advice about how people use their money.

Mr ROBERT —If that were the case, do you believe that that class of professional should charge commissions or up-front fees for their advice?

Mr McKenzie —No—an hourly rate, like other professionals.

Mr ROBERT —Like an accountant or a lawyer, heaven forbid!

Mr McKenzie —That is right—or a doctor.

Mr ROBERT —Is there a place for the nine-day product selling wonder?

Mr McKenzie —Yes, if he is selling one particular product that has very few characteristics.

Mr PEARCE —I thank you both of being here this morning and for taking the time to chat with us. At the end of the day, our job is to come up with a report that looks at the issues in and around some of the collapses and make recommendations about how the law may be changed. I would like to ask you a series of questions as the devil’s advocate, if you like; I want to quiz you, if you like. I am not divulging any particular position, in my way of thinking. You have spoken a lot about the idea of having a fiduciary duty. Mr McKenzie in particular, I am interested to know: if you woke up tomorrow and you had fiduciary duty, what difference would it make to you?

Mr McKenzie —Personally, I do not think it would make any, because I have always regarded myself as being under fiduciary duty for whichever clients I deal with in whatever financial circumstances.

Mr PEARCE —What difference would it make to the industry?

Mr McKenzie —We operate at the moment on the basis of: know your client, know your product. That is just not strong enough, really. Fiduciary duty means that I have to be able to demonstrate that any advice I give is in the best interests of the client.

Mr PEARCE —How long have you been in the advisory business?

Mr McKenzie —About 10 years.

Mr PEARCE —So you are experienced. In your experience, what practical difference do you think it will make? Is every adviser in Australia going to wake up the next day and say, ‘I’ve got to change the way I do my job’?

Mr McKenzie —I really cannot speak for them. I can speak for the people who work for Storm, Opes Prime and so on. Obviously something went wrong there.

Mr PEARCE —Do you think that they would wake up the next morning and do their job differently?

Mr McKenzie —They would not go to work!

Mr PEARCE —So, in other words, you cannot tell me that you think it would make a big difference?

Mr McKenzie —It would make a huge difference.

Mr PEARCE —I have asked you: how would it make a difference?

Mr McKenzie —Everybody would have to think—to make our first point: what is the best action for this person in this circumstance?

Mr PEARCE —And everybody would, if that became the law?

Mr McKenzie —If the alternative were being sued and having to defend one’s position—absolutely.

Senator MASON —You could focus the mind.

Mr McKenzie —There is nothing like law enforcement to do that.

Mr PEARCE —Let’s go back to the comments you made about the core problem: the need to separate advice from product sales. Mr McKenzie, I think you said something like: ‘Disclosure hasn’t worked.’ You have been an adviser for 10 years. Have you sold product to people throughout those 10 years?

Mr McKenzie —I would not have used those words, Senator.

Mr PEARCE —I am not a senator; I am from the House of Representatives. Please don’t call me a senator!

Mr McKenzie —What I do, and what I believe quite a significant number of my colleagues do, is look at the financial situation of the person presenting—

Mr PEARCE —Yes, but my question was: have you sold product?

Mr McKenzie —I recommend to them that they invest their money in a certain place, which you are calling a product.

Mr PEARCE —Have you received commissions as a result of selling those products?

Mr McKenzie —I have indeed.

Mr PEARCE —And you disclosed that?

Mr McKenzie —Yes.

Mr PEARCE —But now you are telling me that that has not worked for your clients.

Mr McKenzie —I did not say that at all. Perhaps I ought to say that I am here as a representative of the Australian Investors Association, not as a financial adviser. I am quite prepared to defend the way I behave.

Mr PEARCE —I am not asking you to defend it. Remember, I am asking you as the devil’s advocate. You said disclosure clearly has not worked. However, it has worked for you and your clients, hasn’t it?

Mr McKenzie —I would have thought so, and I am sure it works in some circumstances/

Mr PEARCE —You said disclosure has not worked, but now you are saying that disclosure has worked in some circumstances. Are you prepared to say that it has worked in some circumstances?

Mr McKenzie —Yes. For example, anybody who deals with me knows exactly the firm that I am a director of. It is a small, tiny, little firm. But somebody who goes into a certain named advisory firm does not perhaps realise that it is owned by a certain big bank or big insurance company.

Mr PEARCE —I understand. I think what you are saying to me is that you pride yourself—by the sound of it—on ensuring your client is fully abreast of all of the circumstances, all of the arrangements and so forth?

Mr McKenzie —Yes.

Mr PEARCE —So you have completely disclosed everything?

Mr McKenzie —Yes.

Mr PEARCE —And that has worked.

Mr McKenzie —I believe so.

Mr PEARCE —So, to get back to what you see as the core problem: in your particular experience, that has not been a problem, because it has worked. True or not?

Mr McKenzie —Yes.

Mr PEARCE —This is the issue for us. This really comes to the nub of the problem. When you are talking about the system, do you think there is something wrong with the system or is there something wrong with the way people have promoted the system? They are two different things, aren’t they? In your case, you are telling us that the way that you have worked with the system and promoted it has worked for you and your clients. So, therefore, by definition, the system is not broken. Is that fair?

Mr McKenzie —I am not quite sure how to answer that. I do not think one case, two cases or 10 cases make a general principle. More to the point, we have seen in the last 18 months in Australia a whole lot of people let down very badly because, fundamentally, they were dealt with by salespeople, who are paid by commission.

Mr PEARCE —That is my point. Is that the fault of the system or is that the fault of the fact that they work like you—because you have played in the same system? That comes back to this issue about the core problem, does it not? This is the challenge that we have as legislators. We have to come up with a series of recommendations which will affect the law in relation to how we can ensure that all of us—all of our friends and our family and everybody else in Australia—are protected.

CHAIRMAN —Mr McKenzie, in your experience, if we were to change some regulations and place more fiduciary responsibility or other responsibility on individual advisers, do you think that would change their behaviour?

Mr McKenzie —Absolutely.

Mr PEARCE —He answered that before. I will go back to the core problem. What you are saying is that disclosure has worked in some cases but not in other cases. If the law was tighter or stronger in the area of disclosure and transparency, do you think that would improve protection?

Mr McKenzie —It might. I am not proud of what I have had to say about the way I operate a business. I am talking about a dozen clients, and I have struggled for some years about the fact that I ought to change the way I operate. But the alternative is a difficult one. I am very uncomfortable with us generalising on the basis of a tiny, little bit of experience that I have had—that I am not happy with actually.

Mr PEARCE —Do you think that your members would like to see a strengthening in the area of disclosure and transparency and more information in terms of the structures of commissions et cetera? Do you think that is what your member base is looking for?

Mr McKenzie —I am sure they would like anything that improves things. But, at root, we would like to see commissions from people giving advice disappear.

Mr PEARCE —Thank you very much.

Mr Forsyth —I would just add that we surveyed the 200 people that we had at the national conference which was held in July on the positions that we have put to you. In the ‘strongly agree’ column, the lowest recording was 62.2 per cent, which was for ‘require payment for services to be initiated by the client’, going up as high as 83.9 per cent for ‘remove the inherent conflicts of interest at present in the financial advisory industry’. I do believe that we actually sent a copy of this to the chairman.

Senator WILLIAMS —Mr McKenzie, you talked about your advice and what product to buy et cetera. You seemed to infer today that the Storm advice was very wrong. Was that what you were inferring—that you thought the Storm thing was a bad plan, bad advice? If I were selling cars and I talked you into buying a car that was not suited for your needs, even so, you would expect the car to have brakes, wouldn’t you?

Mr McKenzie —Yes.

Senator WILLIAMS —I just wanted to make that point. Someone is giving advice to people out there on a regular basis and the products that are for sale are there, and the people who actually putting those products together should also be aware that the ‘cars’ they sell should have brakes—just like in the finance world, the products are put together by the people who manufacture them and they should also have an obligation to ensure that their product is not just a time bomb. Would you agree?

Mr McKenzie —Yes.

Mr Forsyth —I recall reading in the paper a statement by Cassimatis that all of his advisers were operating on exactly the same principle. To the Australian Investors Association, that is a fundamental breach of what they are supposed to do. They are supposed to take everybody’s personal considerations into the advice that they given. But the advice that they were giving was: ‘Take out a loan on your home and then add another margin loan to that’—double gearing.

Senator MASON —When I questioned Mr Cassimatis on that, Senator McLucas gave him a medical analogy—a very good one—of someone who comes in with a cough and a cold. He said that everyone who came in was exactly the same. I said to him, ‘So a mid-30s executive or an independent retiree with millions of dollars of assets or a 70-year-old pensioner?’ His response was, ‘They are the same.’ Do you have a comment on that at all?

Mr McKenzie —Part of the Financial Services Reform Act says ‘know your client; know the consumer’. What he says just flies in the face of that.

Senator MASON —So one size does not fit all?

Mr McKenzie —If one size fitted all, there would be no need to have the ‘know your client’ rule that we work under.

Senator WILLIAMS —Isn’t it vital, as we move forward, for Australian public to regain confidence in the financial planning industry, that people in the industry must adhere to that very regulation and treat every person they give advice to on their individual circumstances? This surely must be essential for future confidence in the industry?

Mr McKenzie —Yes, I agree.

Mr ROBERT —If an investor is not happy with what is happening with their investments or are not happy with their adviser, what can they do at present?

Mr McKenzie —The can make a submission to the Financial Ombudsman Service—if it is under, I think, $100,000 at the moment, heading up towards $280,000, I believe, in the future..

Mr ROBERT —What if you are a sophisticated investor—you are over half a million?

—Sue.

Mr ROBERT —That’s it?

Mr McKenzie —That is all I can think of.

Mr ROBERT —Do you believe that is appropriate?

Mr McKenzie —No.

Mr ROBERT —So what would you recommend to the committee—being a bunch of legislators? What would be more appropriate for people, across the spectrum—from unsophisticated to sophisticated investors—to do if they believed they were being screwed?

Mr McKenzie —There are only two possibilities. One is to go to court and one is to go to the Financial Ombudsman Service, and it is a matter of—

Mr ROBERT —Think outside the square a little. In your professional opinion—you guys are the big end in representing investors—do we need something different? Do we need something new?

Mr Forsyth —Thinking outside the square, I was talking to my son a couple of nights ago and he made the suggestion—to some extent with tongue in cheek—that, if these people who provided that advice got a 10 per cent commission on the money that was invested, perhaps they should also be forced to pay 10 per cent of the losses associated with that investment.

Mr McKenzie —There is only one additional thing. I was thinking about this yesterday, actually, and I was wondering what happened to the small claims tribunals that used to exist. I have not read about this and I do not know if they still exist—

Mr ROBERT —It still exists. If you have something under $7,500, you can go to small claims at the magistrates. I am not too sure that will help people who are investing.

Mr McKenzie —No, we need something bigger than that. I think the Financial Ombudsman Service needs to go up to half a million or something like that.

CHAIRMAN —To summarise, you are saying that while the FSR may have served us well, and certainly some reform was needed at the time and everyone welcomed that, perhaps it is time for some further improvements and efficiencies, now that we have learnt over a period of time that there may be deficiencies. It is not a perfect system—I am making that assumption. Maybe we need to look at the rules that govern how people behave and how they act towards others and perhaps make it clearer to them what their responsibilities are.

Mr McKenzie —Yes, I believe so. To me, that act concentrated more on the form, the way things looked, rather than the substance. Many of us felt at the time that this was all about the way we write things down, the way we defend the advice that we are giving under the ‘know your client and know your product’ rule. The end result was reams of paper and no sufficient responsibility for the advice per se. So it was a matter of disclosure, a lot of documenting research and where it comes from, documenting the features of the person’s situation. But, ultimately, whether or not that advice was the best advice for the person did not seem to be the point, and I think that is what we want to have—a situation where the advice that is given to anybody who seeks advice is the advice that is most appropriate for them.

Mr Forsyth —Can I add one thing. When Senator McLucas was asking questions she mentioned that the Financial Planning Association were trying to move their members to get away from commissions. That particular move was strongly applauded by the Australian Investors Association.

CHAIRMAN —Your association members would obviously have been impacted by the downturn in the global financial markets. Can you generalise, or can you be specific about that?

Mr Forsyth —I can be specific about my own.

CHAIRMAN —Where have they ended up today? Are they in similar positions?

Mr Forsyth —I am happy to tell you that the capital value of my investments in shares and in property trusts, or REITs, halved from when the market reached its peak to when it reached its nadir, and I am glad to say that over the recent rally it has come back by $100,000. But that is all it has come back. I am still well below where I was. My passive investment income has gone down by 36 per cent.

CHAIRMAN  —Was your investment covered by debt?

Mr Forsyth —No. Goodness gracious me, no! My wife was a real estate agent at one stage and I talked her out of ever advising anybody into negative gearing on an investment property.

CHAIRMAN —There are lots of products in the market. It is almost impossible to list them all, there are just so many. Do you think it is the products that fail, or is it strategies that fail?

Mr McKenzie —That is an interesting one.

Mr Forsyth —I think it is the strategies more than the products.

Mr McKenzie —It is interesting. If any of our members who were at our conference in July 2007 took notice of one of our prime speakers they would have been out of the market in September. And, of course, the market fell in November. That particular fellow had cashed up completely, well before November 2007. So his strategy was what saved him. He would be waiting in cash to see what happens.

Mr Forsyth —He is going back into the market at this point in time. That is what he told us at the 2009 conference.

CHAIRMAN —Gentlemen, thank you very much. We really appreciate your time, your submission and your evidence today.

[12.21 pm]