Protecting investors from themselves

An Australian Crime Commission report into investment scams has underscored the role financial planners have in protecting investors from themselves.

Last week’s release of an Australian Crime Commission (ACC) report revealing the degree to which Australians had fallen prey to investment scams should be strongly noted as underlining what can, and too often does, happen to self-directed investors.

Over much of the past decade, financial planners have suffered a good deal of collateral damage from the collapse of groups such as Westpoint and Timbercorp , even though there has been widespread acknowledgement that many of the affected investors were either self-directed or seeking tax breaks on the advice of their accountants.

There needs to be an acknowledgement that changing remuneration models and imposing best interests tests will not protect investors from blatant acts of criminality.
 

Indeed, it is fair to say that had any one of the victims of the scams referred to in the ACC report sought the advice of a financial planner, they would have either avoided or minimised the losses they ultimately incurred.

Notwithstanding the fact the ACC report suggested the most common victims of the frauds tended to be men aged over 50 who were highly educated and financially literate, the millions of dollars lost suggests these people were nonetheless naïve to the realities of the investment markets.

It is also worth noting that the trustees of self-managed superannuation funds were noted as being particularly exposed to such scams.

Nor, it seems, did the traditional Australian Securities and Investments Commission admonition that “if an investment seems too good to be true, then it probably is” appear to have resonated with the victims of the scams – or at least, not until after they had been burned.

What often seems to be overlooked by the critics of the financial planning industry and those who would seek to ‘industrialise’ the planning process is the value of the close, personal relationships often forged between planners and their clients.

Also often overlooked is the educational element of those relationships and, perhaps most importantly, the development of trust.

Simply put, it seems highly unlikely that an investor who had a longstanding and consultative relationship with a financial planner would have exposed themselves to a scam investment if they had sought the advice of their planner.

Amid all the debate around the Future of Financial Advice (FOFA) bills and the continuing discussion around formulating the consequent amendments, there needs to be an acknowledgement that changing remuneration models and imposing best interests tests will not protect investors from blatant acts of criminality.

Indeed, if one thing has not been discussed enough in the debate around FOFA, it is that very often one of the most valuable skills a financial planner can bring to a relationship is saving clients from themselves.