1 00:00:03,960 --> 00:00:08,580 Sean Aylmer: Welcome to the Fear & Greed Business Interview. I'm Sean Aylmer. We have some great listeners to this 2 00:00:08,580 --> 00:00:11,639 Sean Aylmer: podcast across a whole range of different jobs, and sometimes 3 00:00:11,639 --> 00:00:14,160 Sean Aylmer: those listeners get in touch to share their thoughts on 4 00:00:14,160 --> 00:00:16,320 Sean Aylmer: stories or to bring our attention to issues in the 5 00:00:16,320 --> 00:00:19,350 Sean Aylmer: sector. Last week we received an email from one of 6 00:00:19,350 --> 00:00:24,210 Sean Aylmer: our listeners, a financial advisor named Andy Darroch. Andy's email 7 00:00:24,210 --> 00:00:27,989 Sean Aylmer: said quite simply that financial advice is broken in Australia, 8 00:00:28,050 --> 00:00:30,809 Sean Aylmer: and here's what it'll take to fix it. This is 9 00:00:30,809 --> 00:00:33,779 Sean Aylmer: of course, general information only and doesn't take into account 10 00:00:33,780 --> 00:00:37,890 Sean Aylmer: your specific circumstances. Andy is the director of Independent Wealth 11 00:00:38,040 --> 00:00:39,990 Sean Aylmer: Advice. Andy, welcome to Fear & Greed. 12 00:00:40,290 --> 00:00:41,940 Andy Darroch: Thanks very much for having me. Sean. 13 00:00:42,330 --> 00:00:45,418 Sean Aylmer: Let's jump into it. Why is financial advice broken? Where's 14 00:00:45,420 --> 00:00:45,989 Sean Aylmer: it gone wrong? 15 00:00:46,830 --> 00:00:50,339 Andy Darroch: Look, it's a really, really simple issue. It's broken because 16 00:00:50,340 --> 00:00:55,470 Andy Darroch: it's 90% sales and 10% advice. You hear all these things, the problem 17 00:00:55,470 --> 00:00:59,430 Andy Darroch: isn't overregulation, it's not a lack of advisors. The problem 18 00:00:59,430 --> 00:01:02,099 Andy Darroch: is the way the industry operates. And the way the 19 00:01:02,099 --> 00:01:06,239 Andy Darroch: industry operates, in my opinion, is fees first and clients 20 00:01:06,240 --> 00:01:11,190 Andy Darroch: second. Now, this doesn't just provide bad outcomes for clients. 21 00:01:11,490 --> 00:01:14,940 Andy Darroch: It means that industry directs all its energy not to 22 00:01:14,940 --> 00:01:19,050 Andy Darroch: giving advice and helping clients, but generating fees. And this 23 00:01:19,050 --> 00:01:22,200 Andy Darroch: in turn means it's just a radically inefficient use of 24 00:01:22,200 --> 00:01:23,490 Andy Darroch: time and resources. 25 00:01:23,730 --> 00:01:28,230 Sean Aylmer: Okay, so how do you change that, given that you 26 00:01:28,230 --> 00:01:30,060 Sean Aylmer: say it's not regulation, but there is a lot of 27 00:01:30,060 --> 00:01:32,760 Sean Aylmer: regulation on financial advisors. There's a lot of paperwork for 28 00:01:32,760 --> 00:01:35,790 Sean Aylmer: them to do. There's a lot of continuous study to 29 00:01:35,790 --> 00:01:40,319 Sean Aylmer: do for them to make enough money to make it 30 00:01:40,319 --> 00:01:43,679 Sean Aylmer: worth their while. How do you change things? How do 31 00:01:43,679 --> 00:01:47,459 Sean Aylmer: you actually make it so that advisors can think more 32 00:01:47,459 --> 00:01:49,170 Sean Aylmer: about advice rather than fees? 33 00:01:49,980 --> 00:01:54,180 Andy Darroch: Yeah, and that's a really challenging question. And in reference 34 00:01:54,180 --> 00:01:57,690 Andy Darroch: to what you say there, how do they make enough money? Well, that's a 35 00:01:57,690 --> 00:02:03,089 Andy Darroch: valid question. Do VCR salesmen still exist? Do you still 36 00:02:03,089 --> 00:02:05,609 Andy Darroch: go to a Rabbit Photo to get your things developed? 37 00:02:05,609 --> 00:02:08,730 Andy Darroch: So I think in some ways, shape and form advisors 38 00:02:08,730 --> 00:02:12,150 Andy Darroch: are, their business models are definitely stuck in the past 39 00:02:12,150 --> 00:02:15,960 Andy Darroch: and a bit dinosaurish. But yeah, with respect to that, 40 00:02:15,960 --> 00:02:18,660 Andy Darroch: I think they make money by changing their business models. 41 00:02:18,690 --> 00:02:22,288 Andy Darroch: And again, that comes back to actually working and providing 42 00:02:22,288 --> 00:02:24,960 Andy Darroch: advice. So I always say to people, you should pay 43 00:02:24,960 --> 00:02:27,210 Andy Darroch: for financial advice in the same way that you pay 44 00:02:27,210 --> 00:02:30,150 Andy Darroch: any other professional, be it a doctor, a lawyer, or 45 00:02:30,150 --> 00:02:32,910 Andy Darroch: a plumber. You should get paid when you do work. 46 00:02:32,910 --> 00:02:36,809 Andy Darroch: Now, again, the industry is just fixated on seeking out 47 00:02:36,809 --> 00:02:39,720 Andy Darroch: ongoing fees and commissions and that kind of thing. So 48 00:02:39,929 --> 00:02:42,329 Andy Darroch: I think what you might find is that if an 49 00:02:42,330 --> 00:02:45,480 Andy Darroch: advisor were to focus and practition in a similar vein 50 00:02:45,480 --> 00:02:48,960 Andy Darroch: as again, any kind of medical professional, a lawyer, an 51 00:02:48,960 --> 00:02:52,440 Andy Darroch: accountant, that they might find that they're able to serve 52 00:02:52,440 --> 00:02:56,190 Andy Darroch: a greater number of clients and in turn give profits 53 00:02:56,190 --> 00:02:58,200 Andy Darroch: not to just their clients but themselves. 54 00:02:58,529 --> 00:03:01,620 Sean Aylmer: Okay, but isn't part of the problem there is the 55 00:03:01,620 --> 00:03:06,270 Sean Aylmer: upfront fee. So if I go to a financial advisor and I pay three or 56 00:03:06,270 --> 00:03:10,019 Sean Aylmer: four thousand dollars upfront versus a commission after 12 months, 57 00:03:10,020 --> 00:03:12,660 Sean Aylmer: that just slowly seeps away out of my balance of 58 00:03:12,660 --> 00:03:15,360 Sean Aylmer: three or four thousand, I'm actually more likely to pay 59 00:03:15,360 --> 00:03:17,400 Sean Aylmer: that latter rather than the upfront thing. 60 00:03:17,940 --> 00:03:20,820 Andy Darroch: Yeah, definitely, definitely. And that's what makes it such a 61 00:03:20,820 --> 00:03:24,630 Andy Darroch: magnificent business model for advisors. And it's not just the 62 00:03:24,630 --> 00:03:26,549 Andy Darroch: sticker shock of, what do you mean you want to 63 00:03:26,550 --> 00:03:29,430 Andy Darroch: charge me three thousand bucks to fill me up with 64 00:03:29,669 --> 00:03:33,299 Andy Darroch: insurance and some third rate super fund? It's the fact 65 00:03:33,299 --> 00:03:36,449 Andy Darroch: that a really excellent sales tool of the industry is 66 00:03:36,449 --> 00:03:38,760 Andy Darroch: the whole notion of percentage based fees. If I sit 67 00:03:38,760 --> 00:03:40,770 Andy Darroch: in front of you and say, look, you'll pay me 68 00:03:40,770 --> 00:03:43,350 Andy Darroch: 1% of your balance, you think, okay, that sounds fair. 69 00:03:44,309 --> 00:03:48,059 Andy Darroch: I win, they win, I lose, they lose, et cetera. But suddenly when you put 70 00:03:48,059 --> 00:03:51,509 Andy Darroch: those numbers into dollars, they hit home a lot more. 71 00:03:51,509 --> 00:03:55,740 Andy Darroch: So it's intentional strategy that things are sold in that 72 00:03:55,740 --> 00:03:59,310 Andy Darroch: fashion. And again, with respect to the upfront versus the long- 73 00:03:59,310 --> 00:04:02,760 Andy Darroch: term, you can read a product disclosure statement of anything 74 00:04:02,760 --> 00:04:07,170 Andy Darroch: in Australia, an ASIC mandate, that the impact of 1% in 75 00:04:07,170 --> 00:04:10,109 Andy Darroch: fees over a 30- year period can be something like 76 00:04:10,109 --> 00:04:14,010 Andy Darroch: 20% of the balance. Now, that's presuming an exact rate 77 00:04:14,100 --> 00:04:17,580 Andy Darroch: of return, but the long- term impacts of these fee 78 00:04:17,580 --> 00:04:22,020 Andy Darroch: arrangements are nothing short of enormous. And again, going back 79 00:04:22,020 --> 00:04:26,610 Andy Darroch: to that example of getting paid upfront versus retainer, well, 80 00:04:27,270 --> 00:04:29,549 Andy Darroch: if you buy a mortgage from someone or an insurance 81 00:04:29,549 --> 00:04:32,490 Andy Darroch: policy from them, are they doing any work for the 82 00:04:32,490 --> 00:04:34,979 Andy Darroch: next 18 months? If I put you in just a 83 00:04:34,980 --> 00:04:39,809 Andy Darroch: simple portfolio of ETFs or investment funds, are they actually 84 00:04:39,809 --> 00:04:43,049 Andy Darroch: doing any work? If you are seeing a lawyer for 85 00:04:43,049 --> 00:04:46,979 Andy Darroch: whatever reason, do you continue to pay them ongoing a 86 00:04:46,980 --> 00:04:49,529 Andy Darroch: retainer? Do you pay a commission to the gentleman or 87 00:04:49,529 --> 00:04:52,738 Andy Darroch: person that sold you your car? Probably not, I would 88 00:04:52,740 --> 00:04:55,380 Andy Darroch: say. So I think financial advisors have got themselves a 89 00:04:55,380 --> 00:04:58,860 Andy Darroch: little bit of a cushy moment where they're just at 90 00:04:58,860 --> 00:05:01,829 Andy Darroch: the end of this kind of arrangements, which don't really 91 00:05:01,830 --> 00:05:04,320 Andy Darroch: fit anymore in the 21st century in my mind. 92 00:05:04,889 --> 00:05:06,810 Sean Aylmer: Stay with me, Andy. We'll be back in a moment. 93 00:05:12,930 --> 00:05:16,380 Sean Aylmer: My guest today is financial advisor, Andy Darroch, Director of 94 00:05:16,380 --> 00:05:22,320 Sean Aylmer: Independent Wealth Advice. So how do financial advisors then, if 95 00:05:22,320 --> 00:05:25,589 Sean Aylmer: they should be paid upfront, so I get that, how 96 00:05:25,589 --> 00:05:31,740 Sean Aylmer: do they convince people like me to pay them the $3,000 upfront? 97 00:05:32,099 --> 00:05:34,859 Andy Darroch: Well, yeah, and that's a good question. By the way. 98 00:05:34,860 --> 00:05:38,309 Andy Darroch: I think you'll find that an overwhelming majority advisors still 99 00:05:38,309 --> 00:05:40,709 Andy Darroch: do charge that upfront fee as well. It's just that 100 00:05:40,709 --> 00:05:43,890 Andy Darroch: there's an ongoing component as well. And they should do 101 00:05:43,890 --> 00:05:47,430 Andy Darroch: it on the basis that anyone seeking out advice presumably 102 00:05:47,430 --> 00:05:50,309 Andy Darroch: wants an answer to a question. Is my super working 103 00:05:50,309 --> 00:05:53,130 Andy Darroch: hard enough for me? Do I need insurance? I've got 104 00:05:53,130 --> 00:05:55,229 Andy Darroch: something that I need to invest. How should I go 105 00:05:55,230 --> 00:05:57,570 Andy Darroch: about doing that? I'm wondering if I'm on track for 106 00:05:57,570 --> 00:06:00,779 Andy Darroch: my retirement, are there manners in which I can reduce 107 00:06:00,779 --> 00:06:04,620 Andy Darroch: my tax? All these kinds of questions. So any advisor 108 00:06:04,620 --> 00:06:07,020 Andy Darroch: should be able to say, " Look, in order to answer 109 00:06:07,020 --> 00:06:09,870 Andy Darroch: that question, Sean or Mr. And Mrs. Client, we're looking 110 00:06:09,870 --> 00:06:12,210 Andy Darroch: at X, Y, Z worth of work. In order to 111 00:06:12,210 --> 00:06:14,159 Andy Darroch: do that, we've got to produce what is got to 112 00:06:14,160 --> 00:06:17,490 Andy Darroch: be the most monotonous creation in humanity, which is called 113 00:06:17,490 --> 00:06:20,310 Andy Darroch: a statement of advice, et cetera, et cetera. It will 114 00:06:20,310 --> 00:06:23,760 Andy Darroch: answer these questions in that fashion." Again, the problem that 115 00:06:23,760 --> 00:06:27,539 Andy Darroch: comes from that is that again, everyone thinks, all right, 116 00:06:27,809 --> 00:06:30,779 Andy Darroch: excellent. I've got myself a little client now, now for 117 00:06:30,779 --> 00:06:33,330 Andy Darroch: the gravy train element, which is as a part of 118 00:06:33,330 --> 00:06:36,928 Andy Darroch: answering that question, Sean, let's get into 1% of the 119 00:06:36,930 --> 00:06:39,839 Andy Darroch: balance paying me in perpetuity. And again, one of the 120 00:06:39,839 --> 00:06:43,680 Andy Darroch: kind of noxious side effects of that is that really 121 00:06:43,680 --> 00:06:48,118 Andy Darroch: that doesn't just disadvantage the client from a fee perspective, 122 00:06:48,270 --> 00:06:51,389 Andy Darroch: it also kind of pushes the industry in one direction. 123 00:06:51,389 --> 00:06:54,659 Andy Darroch: So you'll find, for example, if I sit down with 124 00:06:54,660 --> 00:06:56,910 Andy Darroch: a client and I've got an opportunity to put them 125 00:06:56,910 --> 00:06:59,520 Andy Darroch: in a portfolio that I manage, let's just say that 126 00:06:59,520 --> 00:07:01,890 Andy Darroch: they've got a million dollars in their super or investment 127 00:07:01,890 --> 00:07:05,219 Andy Darroch: portfolio. If I direct that to something like an industry 128 00:07:05,219 --> 00:07:07,800 Andy Darroch: fund, I'm never going to see another dollar of that 129 00:07:08,070 --> 00:07:10,319 Andy Darroch: versus if I direct it to one of the many 130 00:07:10,320 --> 00:07:13,890 Andy Darroch: advisor kind of practitioner and operated products, well look at 131 00:07:13,890 --> 00:07:18,000 Andy Darroch: that I've got myself a $10, 000 retainer for an indefinite 132 00:07:18,000 --> 00:07:22,079 Andy Darroch: period. And that kind of ties into another big issue, 133 00:07:22,080 --> 00:07:25,950 Andy Darroch: but also incredible opportunity for Aussies, which is that you 134 00:07:25,950 --> 00:07:30,510 Andy Darroch: can look globally and everywhere's got a retirement system, but something that 135 00:07:30,510 --> 00:07:34,950 Andy Darroch: really is standalone is industry funds. And specifically it is 136 00:07:34,950 --> 00:07:39,929 Andy Darroch: the unbelievable investment performance they deliver year after year after 137 00:07:39,929 --> 00:07:43,559 Andy Darroch: year for their clients. So fees aside, we've got this 138 00:07:43,559 --> 00:07:45,719 Andy Darroch: issue where you're kind of getting a lot of the 139 00:07:45,719 --> 00:07:49,200 Andy Darroch: advice clients getting out of the best investment products for 140 00:07:49,200 --> 00:07:50,400 Andy Darroch: the wrong reasons. 141 00:07:51,090 --> 00:07:54,660 Sean Aylmer: Okay, I'm going to take this from a different tact 142 00:07:54,660 --> 00:07:57,870 Sean Aylmer: here. So we're big advocates of everyone getting good, independent, 143 00:07:57,929 --> 00:08:01,709 Sean Aylmer: professional financial advice. Why does it matter so much that 144 00:08:01,710 --> 00:08:03,630 Sean Aylmer: people do get professional advice? 145 00:08:04,980 --> 00:08:06,930 Andy Darroch: Simply for the fact that you don't know what you 146 00:08:06,930 --> 00:08:10,560 Andy Darroch: don't know? Right. So again, financial advice is not all 147 00:08:10,560 --> 00:08:13,920 Andy Darroch: that difficult to craft. It's not something that requires a 148 00:08:13,920 --> 00:08:18,150 Andy Darroch: tremendous amount of education traditionally, and good advice can make 149 00:08:18,150 --> 00:08:21,660 Andy Darroch: massive differences. So again, that might be saving tax, it 150 00:08:21,660 --> 00:08:25,980 Andy Darroch: might be preparing for someone's retirement. There's trigger points and 151 00:08:26,640 --> 00:08:30,660 Andy Darroch: catalysts for seeking advice. And again, if I'm planning for 152 00:08:30,660 --> 00:08:34,559 Andy Darroch: someone's retirement, it's typically a plan as in it's a one- 153 00:08:34,559 --> 00:08:37,468 Andy Darroch: off thing. There might be catch- up meetings and annual 154 00:08:37,469 --> 00:08:40,109 Andy Darroch: reviews in the future. But for the most part I 155 00:08:40,109 --> 00:08:43,439 Andy Darroch: would say that the majority of people subject to their 156 00:08:43,440 --> 00:08:47,910 Andy Darroch: circumstances and the relative complexity of them, then an advisor 157 00:08:47,910 --> 00:08:50,700 Andy Darroch: is someone that you should see every 10 or 15 years or 158 00:08:50,700 --> 00:08:53,130 Andy Darroch: every five years once you've got a plan in place. 159 00:08:53,130 --> 00:08:56,670 Andy Darroch: Because once you've got that retirement set up at 65, 160 00:08:56,849 --> 00:08:59,069 Andy Darroch: do you think that they're going to make radical wholesale 161 00:08:59,070 --> 00:09:03,210 Andy Darroch: changes at 67? I would argue no. And particularly if 162 00:09:03,210 --> 00:09:06,420 Andy Darroch: you're selecting a really top of the pops investment solution, 163 00:09:06,420 --> 00:09:09,900 Andy Darroch: which I would typically go for an industry fund, well, 164 00:09:10,200 --> 00:09:12,960 Andy Darroch: I'm not too concerned whether Credit Suisse have got themselves 165 00:09:12,960 --> 00:09:16,170 Andy Darroch: in hot water or Silicon Valley Bank is having a 166 00:09:16,170 --> 00:09:19,620 Andy Darroch: moment or the Yuan or whatever it might be because you've got someone 167 00:09:19,650 --> 00:09:23,010 Andy Darroch: with far greater resources and far greater expertise managing the 168 00:09:23,010 --> 00:09:25,110 Andy Darroch: money. So I can just focus on moving to the 169 00:09:25,110 --> 00:09:29,250 Andy Darroch: next client. But again, it depends on the person's circumstances. 170 00:09:29,370 --> 00:09:32,219 Andy Darroch: There's a lot of reasons too. Planning for retirement is the 171 00:09:32,219 --> 00:09:36,059 Andy Darroch: big one. Also for people who are starting families generating 172 00:09:36,059 --> 00:09:38,939 Andy Darroch: extra cash, looking to invest, all those kinds of things 173 00:09:38,940 --> 00:09:40,920 Andy Darroch: are all triggers for seeking advice. 174 00:09:41,220 --> 00:09:44,100 Sean Aylmer: Okay, so wrapping this up, what should a person expect 175 00:09:44,130 --> 00:09:46,140 Sean Aylmer: when they go and see a financial advisor? 176 00:09:46,679 --> 00:09:48,779 Andy Darroch: Well, this sounds like a pretty crazy thing to say, 177 00:09:48,780 --> 00:09:52,319 Andy Darroch: but they should expect advice, not sales. And again, I'm 178 00:09:52,379 --> 00:09:55,500 Andy Darroch: rather biased, but I'd accuse the industry of not delivering 179 00:09:55,500 --> 00:09:58,500 Andy Darroch: on that. So again, what they should seek is answers 180 00:09:58,500 --> 00:10:01,440 Andy Darroch: to those questions. Are you doing everything you can be 181 00:10:01,440 --> 00:10:05,338 Andy Darroch: doing to maximizing your wealth creation? Are you using superannuation 182 00:10:05,340 --> 00:10:09,598 Andy Darroch: effectively? Are your insurances fit for purpose? Are we reducing 183 00:10:09,599 --> 00:10:12,389 Andy Darroch: tax where possible? Et cetera, et cetera, et cetera. So 184 00:10:13,020 --> 00:10:16,679 Andy Darroch: financial planners are great at purporting to be this omnipotent 185 00:10:16,740 --> 00:10:20,160 Andy Darroch: presence on anything financial, when in reality we've got a 186 00:10:20,160 --> 00:10:24,478 Andy Darroch: fairly narrow bandwidth. We're generalists in the tax sphere, we're 187 00:10:24,690 --> 00:10:29,250 Andy Darroch: specialists in all things superannuation, insurance and retirement planning, and 188 00:10:29,250 --> 00:10:32,550 Andy Darroch: then further to investments as well. So what people should 189 00:10:32,550 --> 00:10:36,150 Andy Darroch: expect is answers to their questions and comfort that they're doing 190 00:10:36,150 --> 00:10:38,970 Andy Darroch: the right things, that they're on the right track, and 191 00:10:38,970 --> 00:10:42,570 Andy Darroch: that they've got clarity essentially on what their future looks like, 192 00:10:42,870 --> 00:10:43,980 Andy Darroch: financially that is. 193 00:10:44,490 --> 00:10:46,259 Sean Aylmer: Andy, thank you for talking to Fear & Greed. 194 00:10:46,859 --> 00:10:49,110 Andy Darroch: Excellent. Thanks very much for having me, guys. I love 195 00:10:49,110 --> 00:10:50,790 Andy Darroch: listening to the podcast every morning. 196 00:10:50,970 --> 00:10:55,078 Sean Aylmer: Thank you. That was financial advisor, Andy Darroch, Director of 197 00:10:55,080 --> 00:10:58,679 Sean Aylmer: Independent Wealth Advice. This is the Fear & Greed Business Interview. 198 00:10:58,679 --> 00:11:00,750 Sean Aylmer: Join us every morning for the full episode of Fear & 199 00:11:00,750 --> 00:11:04,410 Sean Aylmer: Greed, Australia's best business podcast. I'm Sean Aylmer. Enjoy your day.