Stock Market News: Royal Commission
I don’t need to rewrite all the Royal Commission recommendations for you, so I’ll take those as understood. That said there are a few interesting observations this morning:
- Bank executives with the wrong culture will be trying not to laugh at the recommendations. Some are calling it a waste of time. I think not (see below).
- There is no separation of banking from financial advice which was the worst case scenario for the sector. The sector has escaped material road blocks to "business as usual".
- The short positions in the banks are likely to unwind - there is a good chance that the publication of these recommendations marks the bottom of bank sector sentiment - I am hoping so anyway. These are important investments for many investors, particularly retirees, and they should benefit from the relief. The Hayne recommendations will not materially disturb their profitability and the new 'certainty' should lift sentiment.
- In hindsight the Hayne Royal commission was never going to have the time needed to forensically investigate the sector to the satisfaction of everybody and they haven’t. There is some criticism that they missed a lot of issues and spent too long focusing on “fee for no service” and the sales/profit culture and in so doing missed a host of other issues such as (this list is off Cuffelinks) performance reporting, detailed scrutiny of industry funds, bank product pricing, the fee structure of IPOs, fee calculations, rates paid on cash, the valuation of unlisted assets, performance fees, index-hugging by active managers, risk, the definition of defensive assets, bid-offer prices...to name a few.
- The bottom line is that this has been a bit of an anti-climax for those looking for some sort of public retribution against the sector. Andrew Thorburn and Ken Henry at the NAB were both named by Hayne and for those who want to see somebody ripped to shreds in the streets, someone to blame, these two (along with 24 other individuals and companies that have been referred breaches of the law) will have to do.
- Financial planning gets a bit harder - fee arrangements must now be reviewed annually by the client, the services that the client will be entitled to have to be recorded in writing, as do the total of the fees to be charged, and a financial planning business may only ask for the payment of fees that have been agreed with a client's express written authority. I know an insurance salesman who says he is leaving the business because he doesn't have time to contact the clients every year - decades of receiving free money for a product sold years ago has created a very lazy industry - the sooner they are gone the better.
- Grandfathered commissions will also disappear from 1 January 2021. This really is one of the industry’s greatest rorts, selling products and receiving a lifetime income for doing no work. It also creates the situation that means a financial adviser doesn’t want clients to ever sell a product even if it’s inappropriate, because they lose the trail. No wonder the "Buy and hold" culture is so developed - it is in the industry's interests not the clients.
- Fake independence - The law should be amended to say the financial advisor would contravene the corporations act by assuming or using any of the restrictive words or expressions including independent, impartial, and unbiased, and must, before providing personal advice to a retail client, give them a written statement explaining simply and concisely why an advisor is not independent impartial and unbiased. "Independent" financial advisers revealed at last.