Practice management expert Dani Peer has spoken out about “serious systemic weakness in our industry” at a time when he believes the industry’s credibility is at a crossroads, with ratings houses unable to provide certainty.
The systemic weakness Peer refers to is “the industry’s futile attempt to create certainty, or at least the appearance of certainty, where there is none”.
“It’s now glaringly obvious that the ratings agencies and research houses are glorified thumb suckers,” Peer said.
“We are all familiar with the fate of Basis Capital. It was highly recommended by various research houses until it dropped dead, costing investors millions.”
Peer also points to cases such as Westpoint and America’s Enron as examples of the failure of ratings agencies to identify company weaknesses and the reliance of the financial services industry on those recommendations.
“Senior bank managers are currently undergoing a crash course in the value, or lack thereof, of rated debt,” Peer said.
“The chief executives of both NAB and ANZ are still trying to understand how triple-A rated paper can behave like toxic sub-prime.”
Peer’s argument is that as an industry, “we cannot assume responsibility for an outcome that is not under our control”.
“Ratings agencies try to sell certainty to debt holders. Research houses try to sell certainty to advisers. And advisers try to sell certainty to clients,” Peer said.
“If things are as random as they appear, then what we are all selling has little value. We need to educate our clients to fully understand that we operate under conditions of uncertainty.”
Peer said that while working with financial planners provides clients with “a much greater chance of achieving success”, this is not because financial planners are able to forecast the future in any way.
Peer argued that financial planners must educate clients that their value lies in technical skills that will minimise a client’s tax, identify the level of insurance required, and ensure that assets are protected from creditors and reach intended beneficiaries in the correct way.
He said clients must also understand that financial planners add value by managing investment volatility, employing diversification and appropriate asset allocation, and meeting compliance requirements (among other skills), rather than claiming responsibility for outcomes outside of their control.
