Australian investors – and advisers – get some excellent advice

The Deputy Governor of the Reserve Bank, Ric Battellino, says Australians should be prepared to pay for independent advice on investment.

Addressing a banking seminar in Sydney, Mr Battellino admitted that this has not always been the case in Australia.

“There appears to be a general reluctance on the part of retail investors to pay for financial advice on a fee for service basis,” he said.

That won’t surprise anyone in Australia’s investment advice industry.

“Instead, there has been a preference for commission based advice, despite the conflicts of interest that can arise in this situation.”

“This reluctance to pay for advice upfront appears to be a form of money illusion,” Mr Battellino said.

“…investors may feel that they are somehow paying less for financial advice if the cost is buried in reduced earnings for the future.”
Mr Battellino said relatively unsophisticated Australian retail investors have been taking big slices of quite sophisticated financial products, from the shelves of investment advisers, without properly assessing the risks involved.

Naturally, this is worrying the authorities. It should worry the investment advice industry, as well.

Mr Battellino noted that the Australian regulatory system relies heavily on financial literacy, rather than restrictive rules.

While this has advantages, it carries risks as well.

Mr Battellino said unsophisticated Australian investors were taking bigger shares of high return investments than people in other countries.
“One of the reasons for this higher participation by Australian retail investors in these markets is that the regulatory regime in Australia does not restrict access to any financial products as long as the provider meets certain disclosure requirements,” Mr Battellino said.

“This approach has been beneficial in terms of providing investors with a greater range of wealth creating opportunities, but it does raise some important challenges.”
Mr Battellino said some investors might not be financially literate, a comment which might well prove to be the understatement of the year.

The deputy governor said these investors might well have been tempted into apparently high return investments, without appropriately assessing the risks involved.

Recent experience with collateralised debt investments in the United States is salutory. CDOs with undisclosed, but high levels of shonky sub-prime mortgage assets, have already proved disastrous, on many fronts. And investors caught out this way, will be all too ready to blame anyone, but themselves.

A few cowboys, in the investment industry, who can’t see past their own commissions, when making recommendations, can do a great deal of damage, to others, as well as themselves.

Never assume that the illeterate are inarticulate. Mum and Dad investors, who believe they have been robbed of their hard earned savings, through reckless invesment advice, can always find a sympathetic reporter, somewhere in the media. Investment advisers, generally, are easily tarred, when that happens. Guilt or innocence doesn’t count. Solid reputations can be destroyed overnight.

for more see www.rba.gov.au