Ask These Hard Questions Before You Invest

Racing is big business. After all, it’s the sport of kings and queens.

Has a race ever been rigged? Has a horse ever been doped? Has a bookie ever been given an inside ‘wink’? Has a jockey ever ‘thrown’ a race? Absolutely.

Those on the inside rigging it against the mug punter…it’s a familiar theme.

Nothing corrupts like big money. The Clinton Foundation comes to mind immediately.

The RBA decided to leave rates on hold yesterday. The interest rate game is rigged in favour of the borrower. Banks make far more money from lending than they do from deposits.

Governments generate far more tax revenue from people who borrow to consume than they do from savers watching their budgets. The whole system is rigged in favour of debt.

The saver — the person who provides the foundation that makes fractional banking possible — is treated as a second-rate citizen. But very few people question this dismissive attitude.

The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternal life, of the marvellous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.

— Albert Einstein

Inquisitive minds are responsible for human progress.

Columbus questioned the ‘flat earth’ orthodox thinking of his day.

And so it has been down through the ages with progress in science, medicine, technology and a host of other industries that required someone to challenge established beliefs.

Asking questions is good. Asking good questions is even better.

The system relies on the masses being dumbed down. Accepting the ‘spin’. A compliant herd is easier to corral.

There was widespread belief VW’s ‘green’ credentials were the real deal…until a group of scientists at West Virginia University discovered all was not what it seemed.

Slick marketing campaigns — using falsified emissions data — generated VW billions of dollars in sales. It is deception on a grand scale.

Major corporations seem to know no bounds when it comes to making a dollar.

VW is driven by a ruthless, overweening culture. Under Ferdinand Piëch and his successors, the company was run like an empire, with overwhelming control vested in a few hands, marked by a high-octane mix of ambition and arrogance — and micromanagement — all set against a volatile backdrop of epic family power plays, liaisons, and blood feuds. It’s a culture that mandated success at all costs.


Hmmm, a culture that mandated success at all costs…sounds a bit like the financial services industry.

On 27 October 2016, the Australian Securities and Investments Commission (ASIC) released ‘Report 499 Financial advice: Fees for no service’. It notes:

The project covers Australian financial services (AFS) licensees that are product issuers or provide personal advice to retail clients, and that are part of AMP Limited, Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, National Australia Bank Limited and Westpac Banking Corporation.

The reason the Big Six were the subject of the ASIC investigation is that these institutions exercise control — directly or indirectly — over more than 80% of the financial planning industry.

What about the small percentage of the industry that’s not aligned with one of the Big Six? The report stated: ‘To date, we have no evidence of fee-for-service failures of a similar scale occurring in advice licensees outside of the banking and financial services institutions covered by this report.’

What did the ASIC report identify (emphasis mine)?

Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, “doing what is right” for customers, and acting with integrity. We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.

A culture that may have supported systemic failures. Platitudes of excellent service not translating into good outcomes.

The investment business, like the motor vehicle industry, is about selling products.

Planners tied to, aligned with or owned by institutions have sales targets to meet…dollars are expected to flow into their institutional masters’ funds.

From experience, I can tell you that institutions do not invest in financial planning businesses because they’re profitable to own.

The Big Six own financial planning firms as a means to an end. Planners are the conduit between the client and the institutional funds. They are a vital cog in the funds management machinery.

Funds under management is where the real money is at. Just how much money are we talking about? Billions of dollars.

Amongst the five largest retail and wholesale managers NAB recorded a 4.7 per cent increase to $152.5 billion, AMP a 7.3 per cent increase to $143.8, CBA a 4.1 per cent increase to $143 billion, and Macquarie a 23.1 per cent increase to $86.7 billion.

— Dexx & R, March 2016

All of these billions of dollars (in fact there’s well over $1 trillion in retail and wholesale funds) are ‘clipped’ by institutions for management, administration and trustee fees.

These are the rivers of gold for the institutions…the planners are the ‘Barrow Boys and Girls’ bringing the funds to the ‘mother lode’.

Here’s how the maths works.

The Big Six trade on price/earnings (PE) multiples of around 14-times. Every dollar of fee revenue (after expenses) is capitalised by a multiple of 14.

What does this mean?

$1 billion in net fee earnings equates to a $14 billion business, and $5 billion in earnings equates to a $70 billion business. As I said, funds management is big, big business.

It’s even bigger business in the US. Fees generated from the securities (investment) industry are estimated to be in excess of US$700 billion. Little wonder Goldman Sachs is keen to have their own people spend a few years as US Treasury Secretary…nothing like having someone on the inside to rig the rules in the ‘house’s’ favour.

When you consider the dollars involved for Australian institutions, paying one (or two) hundred million dollars in client restitution and ASIC fines is a mere ‘rounding error’…a cost of doing business.

The same goes for the Wall Street firms…a few billion in fines for bad advice and rigging the game is chump change.

Blind Freddy can see there’s an inherent conflict of interest in institutions employing and owning financial planning businesses. Who does the planner serve? The institution or the client?

In March 2016, ASIC released a report entitled: ‘Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry’…here’s an extract:

Vertical integration in banking and other financial products along the distribution chain will continue to pose challenges. For example, platform operators that are also advisory dealer groups are in a position to direct many clients to in-house products.

‘Vertical Integration’ is one of those new-age business terms. It simply means owning all the stages in the supply chain to ensure client money is directed to in-house products.

ASIC recognise the potential for a conflict of interest to exist when the person recommending the product is employed, owned or aligned with the product provider.

No kidding.

No amount of ASIC oversight and regulation will remove this conflict. The only way to genuinely remove the conflict is to ban institutions from any involvement in the ‘advice giving’ process. Any breach should result in an immediate jail term for the directors. Why so harsh? Because paying for the crime with your time creates a whole different mindset compared to paying a fine with shareholder money.

Back to reality…we know this is not going to happen. The legislators espouse all the platitudes of looking after the little guy and gal, but the big end of town dictates terms.

The lobby power of the institutions is far greater than the lone voices of the victims.

Which brings us backs to Albert Einstein’s quote from above: ‘The important thing is not to stop questioning.

When it comes to your money, you have to be more than a little curious…questioning motives (whose best interest is the advice serving?), industry myths (there are far too many to list here), fees (seen and unseen, percentage based or hourly rates), past performance being replicated in the future (using last year’s winners to sell you on a particular product).

Far better to ask the hard questions before you invest, rather than asking, ‘How could this happen?’ after the event. By then it is too late.

There are good planners out there; however, the majority are operating in a system that has an inherent conflict of interest…a bias towards selling product rather than providing advice.

You must ask questions.

My (soon to be released) new book, How Much Bull can Investors Bear? Seeing Through the Investment Industry’s Smoke and Mirrors, was written with the aim of asking better questions, in an effort to provide people with (hopefully) better answers.

In my opinion, we are approaching a historic inflection point in markets…one that could be as devastating as the Great Depression.

The central bankers are out of ‘asset bubble ammo’. QE doesn’t work. Interest rates have nowhere to go.

Markets may have a little bit left in reserve, but they are living on borrowed time. Sooner or later, the weak global economy will expose the artificially high market for what it is…a fraud.

The first question you need to ask is: Can I achieve my financial goals if I was to suffer a 50–80% loss of capital?

Ask this question of your financial planner and it’s a fair bet they’ll say: ‘Don’t be silly, won’t happen.’

This response is framed out of ignorance and/or conflict of interest (wanting to keep your ‘at risk’ dollars in their fee-paying product).

The questions you ask today are going to determine the quality of life you lead tomorrow.


Vern Gowdie,
For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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