The Problems with Investment Advice


Recently there has been considerable discussion revolving around a package of reforms to investment advice (FOFA or the Future of Financial Advice). This initiative reflects a considerable degree of dissatisfaction with the performance of the industry. It is the purpose of this paper to consider whether the reforms are adequate to deal with the causes of this dissatisfaction. The first step in this process is to outline the FOFA reforms. The second step is to identify the desirable characteristics of investment advising. The third step is to consider any further reforms which appear to be necessary. This section will also suggest an appropriate approach to the provision of financial advice.

This paper is limited to the financial advice given to individual clients and does not venture into the area of advice given to businesses. Of course, individuals vary in many respects, e.g. income, wealth, age, marital status, number and age of children, objectives, etc.

The paper may appear to reflect a very negative attitude towards the investment advice industry. However, it should be recognised that the industry provides a vital service to investors. This is particularly relevant in Australia where many investors run self-managed superannuation funds (SMSFs) as an important contributor to their retirement savings. Proprietors’ of such funds bear the investment risk they create. Also, defined benefit funds are becoming increasingly uncommon and contributors to industry or public superannuation funds also bear investment risk.

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This paper was presented in July 2013 at the 18th Melbourne Money and Finance Conference (MMFC), which explored the theme Financial Sector Evolution – Prospect and Determinants.

For more papers presented in the conference, please click here.