When it comes to money-shufflers, it's time for the whip

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.

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