Even if you've read many of the stories
about banks and financial advisers selling dubious products to clients at
dubious prices, the problem of opportunist greed in the financial advice
industry may be worse than you think, given that about $1.8 trillion is sitting
in Australian superannuation funds.
Some thunder from
on high was delivered recently by the world's most powerful bank regulator,
Janet Yellen, chairwoman of the US Federal Reserve, in her public commentary on
March 4. She was scathing:
"We expect the
firms we oversee to follow the law and operate in an ethical manner. Too often
in recent years bankers at large institutions have not done so, sometimes
brazenly.
Wealthy donkeys:
According to Warren Buffett, investment bankers give 'asinine' advice 'with a
straight face'.
"These
incidents, individually and in their totality, raise legitimate questions of
whether there may be pervasive shortcomings in the values of large financial
firms that might undermine their safety and soundness."
This is scorching, and Australia
is little different. In the past three years, financial planning scandals have
afflicted three of our financial giants – Commonwealth Bank, Macquarie Bank and
NAB. It is part of a systemic problem of high fees for poor advice.
An even more damning observation
about the lax values of bankers was given by Warren Buffett in his most recent
annual letters to shareholders, on March 16. Buffett is the most successful
capitalist in history, building a company, Berkshire Hathaway, with a market
value of $456 billion (US$346 billion).
His depiction of the financial
services industry is withering. Discussing the high cost of moving capital,
Buffett wrote: "Even tax-free institutional investors face major costs as
they move capital because they usually need intermediaries to do this job. A
lot of mouths with expensive tastes then clamour to be fed – among them
investment bankers, accountants, consultants, lawyers and such
capital-reallocators as leveraged buyout operators. Money-shufflers don't come
cheap."
Buffett is even more cynical
about investment bankers, after 50 years of dealing with them in hundreds of
transactions: "I've yet to see an investment banker quantify the
all-important math [of calculating intrinsic share value] when presenting a
stock-for-stock deal ... Instead, they focus on … an absolutely asinine way to
evaluate the attractiveness of an acquisition.
"Investment bankers, being
paid as they are for action … tell the buyer that the premium is justified for 'control
value' and for the wonderful things that are going to happen once the
acquirer's CEO takes charge." He writes that such advice is presented
"with a straight face", even though it is nonsense.
The cynicism towards financial
companies by the top bank regulator, and by the world's most respected
corporate executive, is echoed by the most influential market analyst in the
United States, Jim Cramer, a successful fund manager with a national cult
following as a TV pundit on CNBC:
"What market isn't rigged?"
Cramer asked in the wake of Yellen's comments. "Look at the scandals.
LIBOR. FX. Mortgages. Mortgage securities. Gold. Laundering. We all kept
waiting [in vain] for someone to go to jail … It is pervasive. Yellen is
right."
If there are pervasive shortcomings
in the values of large financial firms, then those shortcomings sit at the
heart of the Australian economy. Of the five biggest companies in Australia,
four are banks. Of the 20 largest companies, by market value, eight are what
Buffet would call money shufflers: CBA, Westpac, ANZ, NAB, Macquarie, AMP, QBE
and Suncorp.
As of Friday, these eight
companies have a combined market capitalisation of $566 billion. By way of
contrast, only three of the top 20 Australian corporations are resource
companies. This says something about where the real power lies in the
Australian economy.
The growth engine of this sector
has been in providing financial advice and planning, and here the culture of
self-interested fee churning has proved to be pervasive.
In addition to serial banking
scandals involving toxic financial planning schemes, last October the
Australian Securities and Investments Commission issued a report on the life
insurance industry, which found that over-pricing and poor financial advice in
the $40 billion industry was systemic. ASIC found that about a third of the
advice given did not even comply with the law.
On Saturday, it emerged that the
financial planning industry has still not provided an adequate response to the
ASIC report, six months after it was published.
Also on Saturday, it was revealed
that the Commonwealth Bank has agreed to make another $50 million in discreet
payments to investors damaged by toxic financial advice and products. It is the
latest in a series of financial settlements and apologies by the CBA, which was
once owned by the public, for the public.
Nor is NAB exactly embracing the
idea of cleansing transparency. As NAB whistle-blower Jeff Morris wrote in
Business Day on March 13, when the bank was sacking or moving on 41 financial
planners and secretly compensating 900 clients with $14.5 million, it did so
while attaching gag orders.
The financial planning industry
is the subject of a Senate inquiry, sparked by the plethora of scandals. It
would be fair to describe that inquiry as sceptical and hostile.
It being Easter, is worth noting
that, in the New Testament, the greatest fury exhibited by Jesus was when he
encountered money-changers operating inside the temple in Jerusalem. He set
about them with a whip. He knocked over their tables. He drove them out.
That's what I wanted to do to my
accountant last year when he presented me with a bill for $2500 for doing my
annual tax return. When my protestation was met with obfuscation about his
"legal obligations", I paid the bill, told him he was sacked, and
dispensed with his services. No whips were involved, regrettably.
Paul_Sheehan_SMH
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