The education paradox
While a greater focus on education for consumers may be warranted, it should be looked at far more carefully and sympathetically for advisers.
It was a bit of a revelation to me when I read Fortune Strategy in 1995, the first book written by investment guru Arun Abey, one of the founders of IPAC.
It pointed out something so beautifully simple that many people missed it and still do - there is a difference between investing and trading.
Abey pointed out that investing is a long-haul process that relies on the power of compounding and the refusal to be spooked by the occasional blip in the markets. Trading is a short-term focus that requires considerable understanding of the markets and how they work and is something that only serious professionals should engage in.
Problem is, as he pointed out, most Australians want to go for the big play. They say, “I’ve got a tip about some shares that are going to double in a year or two. My father-in-law says they’re a sure thing. You better get on. You wouldn’t want to look like a mug and miss out.” Or how about, “Put your money into real estate. This place will go gang-busters in a few years, no worries.” This is investing in the manner of betting on a horse – it even shares some of the same parlance.
Of course it is not investing at all. It is actually trading – without the skills – kind of like rodeo riding for people who’ve never ridden a horse before.
Which brings me to the point: we don’t need masses more legislation and regulation to better protect the consumer – we need those consumers to be better educated about financial markets so they can tell the difference between valid financial advice and bulldust.
If consumers better understood what they were trying to achieve, how those goals could be effectively attained and the processes and realistic costs of doing so, they’d be so much more able to assess what was on offer and to realise that what they were being offered or were receiving was wide off the mark. The shonks would wither on the vine for lack of bunnies to scam.
The NSW Crimes Act includes separate crimes for destroying or damaging property, destroying or damaging property with intent to injure, dishonestly destroying or damaging property, destroying or damaging property with intention to endanger life, and threatening to destroy or damage property. These are five related offences which could have been encompassed in a single general crime but are the result of legislators responding to public outcry by creating a new offence every time there was a specific high-profile crime.
Politicians must be seen to “do something” about an issue. Woe betide the pollie who stands before the cameras and says, “we don’t need to create any more offences we just need to ensure that the current offences are enforced properly”. The shock jocks would have a field day.
So it is with the current scandals arising out of the banking royal commission. Creating yet more and more red tape and paperwork that nobody reads might seem to be a good idea - at least it’s “doing something” - but in reality, it does little or nothing to address the underlying issues and to create a culture that won’t countenance this sort of behaviour.
At the risk of being accused of lacking sympathy, I often find it extraordinary when I hear the tales of the poor beggars who’ve lost all their money as a result of poor financial advice. Have they never heard of the caution against putting all your eggs in one basket? Did they not understand that rates of return many times the norm should be very carefully investigated, because they were so extreme? Did they not consider for a minute that a bank jockey telling them to put their money in a bank product might have a conflict of interest?
Education is available. For example, ASIC operates MoneySmart which has masses of no doubt great resources for better understanding your financial situation and even for teaching it to school kids at all levels. More power to them. Hopefully, this will result in a generation a lot more intelligent about their money and their investments than their parents or grandparents.
The site covers things like banking, budgeting, income tax, debt management and saving; compounding gets a mention which is great, and there is a section on investing that contains a lot of excellent warnings. But the site appears to suffer from information overload. My guess is that most people find it too daunting.
It’s all there – maybe all that’s needed is a re-write to focus on priorities and for it to be promoted better to the world at large. Maybe reading it should be required before making certain investments? Perhaps basic financial literacy should be a core subject in all high schools and a pre-requisite for graduation?
Then there’s the problem with offer documents – the paperwork. I’d be richer than Warren Buffet if I had a dollar for every time someone had said to me “no one reads that stuff”. You think?!! Of course, no one reads it. There have been cases where even the judge has said he tried to read it but didn’t understand it. Until we get our offer documents simplified and presented in a consistent manner that even relatively inexperienced investors can comprehend, we are going to see repeats of the current woes.
We’ll see much better outcomes in the financial advice industry if our consumers were better educated about financial advice. Aye, but here’s the paradox (did I just say ‘aye’?) – while consumers need more education, demanding more education for financial advisers is deeply misguided. Go back and look at the issues raised by the royal commission and tell me what percentage of wrongdoing was the result of the adviser not understanding the issues. Any? The problems that arose did not come out of a lack of adviser education or knowledge but out of Gordon Gecko’s favourite subject: greed.
Again, we’re back to the politicians “doing something”. The US responded to 9/11, an attack by 19 Saudis, one Egyptian, one Lebanese and two from the Emirates, by invading Iraq. George W. had to be seen to be doing something - to let the American military “off the leash”.
We now seem intent again on “being seen to be doing something” by introducing draconian educational requirements in response to system failures that had nothing to do with a lack of education. Not only that but we are effectively gutting the financial advice industry for years to come while we wait for a new generation of bright young things to graduate with masses of book learning and not the first idea of how to deal with people and their financial needs and fears.
Meanwhile, decades of great experience, the vast majority of which is unsullied by any crisis, crime or controversy, goes to waste. What is the loss of a third of the advising industry in the next few years going to do to the accessibility and cost of quality financial advice?
The education paradox is this – we need to focus on more of it for consumers but introduce it much more carefully and sympathetically for advisers. We need to get that balance right and not add to the 2,788 pages of legislation and regulation in my copy of the Corporations and Securities laws in the name of “doing something”.
Peter Townsend, principal, Townsends Business and Corporate Lawyers