Category : More than just Finance

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Knowing what it takes!

Want to know the secret to creating wealth? The answer is get rich slow! Probably not the answer you were looking for but it is the only guaranteed formula for success.

In this (yet another) nugget of Simon Sinek gold, Sinek uses logic to explain why this is a proven formula in so many aspects of business and life.

In his words “there’s no single big event, there’s no one thing I can tell you to do it is an accumulation of lots and lots of small steps that if done in isolation would be innocuous and useless – literally pointless by themselves. But if you do it consistently and in conjunction with a lot of other small steps you will get to your goal”.


Superannuation needs to modernise.

How did Australia, which rightly prides itself on having one of the most stable and resilient economies in the world, end up cleaning up the messy and damaging aftermath of a savage Royal Commission into our financial sector?

Financial services is – and has been for some years – the largest sector in our economy, bigger than mining, bigger than agriculture. We are a nation of suits, not hard hats and Akubras.

The exponential growth of our massive financial services sector all started with compulsory superannuation 27 years ago. Trillions of dollars of Australians workers savings have poured into super funds since 1992. This waterfall of money, compounding into larger and larger lumps every single day, kick-started a financial services sector that grew at a sustained and ever-increasing rate, like nothing we’ve seen before – a mining boom without the busts.

The unprecedented size, power and clout of our financial services sector is extraordinary. Only three other countries in the world have pension systems larger than ours – the US, UK and Canada – and their populations dwarf ours.

The upside of our strong super system is that it gives us a bedrock of financial stability, a pool of liquidity that protected us during global shocks like the GFC and the Asia market meltdown. Is it just a co-incidence that we’ve had exactly 27 years of uninterrupted economic growth – the same number of years we’ve had compulsory super?

The downside is that the system has outgrown its current structure – but the guaranteed inflows provided no incentive to reform outcomes for consumers. Those waterfalls of super money, now almost 10 percent of our wages – kept coming. Some got sloshed over the side of the bucket, but there was always more pouring in.

Amazingly, 80 per cent of Australians still default their super, meaning they make no choice of fund. Every time people move jobs, they are defaulted into yet another super fund. This has left us with the travesty unearthed by the Productivity Commission, the 10 million zombie super funds soaking up $2.7 billion of fees and insurance premiums every year. Reforms to deal with consolidation of this waste are still to pass our Parliament.

While light on super reform recommendations, Commissioner Hayne has sensibly echoed the Productivity Commission in suggesting we stop the problem at the source by making it easier for workers to default once. At last, people will be able to carry their account with them between jobs, like a tax file number, also allowing them choice to change funds if they wish.

This means that when people are defaulted for the first time, we need to make sure we get it right. The out-of-date ties between the superannuation and the industrial relations systems have ring-fenced the default system from market competition and efficiency for too long. The Fair Work Commission chooses which funds are listed in Awards. Today, many of these are poorly performing funds from which there is no escape.

The industrial relations system also encourages poor behaviour from super funds trying to win over employers to use their super fund. Commissioner Hayne called for a stronger framework to ensure funds aren’t “treating” employers with fancy meals or sports tickets to try to win business. Removing employers from the equation entirely is a much more effective way to ensure their choices don’t impact their employees’ retirement savings.

The answer is to create a strong safety-net for consumers, by raising the bar for all funds that want to be considered a MySuper default and letting individuals do the rest. Why shouldn’t individuals be able to choose from a list of all the funds that meet this standard, knowing that there is effectively no wrong choice?

Despite the size of the superannuation system it’s taken a Royal Commission and a Productivity Commission to highlight the fact that members best interests are not served by a system that’s not fit-for-purpose.

Commissioner Hayne’s recommendations, particularly on superannuation, must stiffen the spines of industry and politicians from both sides of the aisle to finally design a compulsory superannuation system that works for all Australians. If we fix super, we go a very, very long way to fixing financial services.

Author: Sally Loane, CEO of the Financial Services Council.
Original article:

Haynes Royal Commission: The trouble started decades ago…

The profitability of Australia’s Finance industry – dominated by our big banks – has trended down over recent decades.  The return on shareholder funds peaked in the early 1990s after the recession of 1991 and the crash of several banks.

The big players could see non-bank finance sectors growing much faster than banking revenues, and the exhibit below shows their concern eventuated.  These days, banking accounts for less than a quarter of the industry’s total revenue of over $700 billion.


So, the big players diversified into the growth and other finance sectors which they did not understand.  They became theme conglomerates and hoped that concentric marketing to existing customers would create greater profits.

They didn’t and, like all conglomerates, were difficult to manage.  The diversified sectors require different IP, different cultures, semi-autonomy and face different competitors.

The gains began going to the employees, especially C-suite execs, salespeople/BDMs and brokers more than the shareholders.  As competition grew, greed and cheating began and followed the apocryphal “boiling frog” syndrome over the past decade in particular.

Our regulators have been shown to have abrogated their responsibilities, making us wonder what the last $5 billion tax payers’ money has achieved over a decade or so.  Many if not most boards at the big end of town are red-faced.

The Haynes Royal Commission has been thorough, fearless and reformative.  The big financial institutions may now go back to more being more focused than conglomerates, more ethical, easier to manage, and more transparent to Boards.  Just in time to face the new challenge – which isn’t faster growth on the other side of the fence appearing to be greener – but digital disruption. These include online financial services, block chain and other daunting challenges.

Author: Phil Ruthven, Founder & Director IBISWorld

Good People Doing Bad Things – How Did We End Up Here?

It is a story that has made news headlines the world over. A story about culture and greed impairing the judgement of people who should have known better. While both sides of politics have been very vocal in the wake of Hayne’s interim report, no one has touched the vexed question of how did we end up here?  

The impact on the victims has been devastating. The behaviour of the financial services community despicable and unforgivable. The viewing has been a mesmerising blend of ‘can’t watch but can’t look away’.

But to understand how we got here we need to look back nearly 30 years to the remarkable and visionary reforms of the Hawke/Keating government. That is, not at any level to lay blame at their feet but to point to a moment in time where the first piece of a complex puzzle was laid. A puzzle that through the next 25 years would gather a trifecta of seemingly unrelated circumstances to form what has become the tsunami that is now known as the Hayne Royal Commission into Misconduct in Banking and Financial Services.

 The Rise and Rise of the Big 4

Through the late 1980s and early 1990s, including the “recession we had to have” Hawke and Keating, followed later by Howard and Costello introduced reforms that led to Australian Banks becoming the most robust in the world. Reforms that would combine with the rise of China to open up the economy to what has now become 28 years of consecutive economic growth.

Throughout this period the market capitalisation of these banks has increased ten-fold which given that they occupy 4 of the top 10 holdings in almost every Australian superannuation fund has meant that every working Australian has benefited profoundly from their unmitigated success.

Forward to 2008 and the GFC. The worlds banks imploded under the weight of the subprime crisis and the freezing up of the credit markets. Bear Stearns and Lehman Bros were the high-profile casualties but there were hundreds of others. Australia was not immune. St George lurched into Westpac, Bankwest was rescued by CBA and Suncorp was saved by the timing of the government guarantee. But our big 4 banks prevailed, in-fact before long they were stronger.

We were applauded the world over for the way that our economy survived the worst economic crisis since the 1930s depression with barely a flesh wound. There are those that claim dumb luck, but the strength and management of our big banks were in no small way responsible for Australia dodging a bullet.

To this end, over 25 years Australia’s big 4 banks had developed ‘hero’ status. “Best in the world”, ”pillars of strength and resilience”. Their leaders were held on pedestals and retirees dined out on their ever-increasing flows of franked dividends.

The Mutation

Another of Keating’s great reforms was the introduction of the compulsory superannuation system to deal with Australia’s soon to retire, Baby Boomer generation. In the banks effort to broaden their revenue base and continue with the exponential expansion of their balance sheets, the lure of a multi-trillion dollar pool of retirement saving made a lot of sense. Through the early 2000s each of the major banks made acquisitions to gain a foothold in the market. CBA bought Colonial, NAB purchased MLC, ANZ purchased Mercantile Mutual in a JV with ING and Westpac purchased BT and Rothschild.

In these deals were the beginnings of the mutation that would see these banks lose their way.

The acquisitions were ostensibly, old life companies. Sales based organisations where ‘agents’ were paid a commission for selling a product to a consumer. There was often advice involved but often not. The principle approach was ‘caveat emptor’ and the assumption that if the consumer saved something rather than nothing, then some good had been done. If advice was provided it was paid for by commission from the product manufacturer and effectively the public was trained to place no value on it. Advice became something that came with the product.

But the need for considered, tailored advice was growing. The industry needed to become a profession and move to a fee based model where the public valued the advice and was prepared to pay for it. This was met with an innate resistance, ingrained over many years. The banks did not rail against this but rather acquiesced to their more learned wealth management sales executives who told them “it ain’t broke! Advice is paid for by the product manufacturer because consumers don’t value it”.

The tyranny of the vertically integrated business model prevailed.

The money flowed in. Billions of it. Further acquisitions were made to gain both product advantage and the favour of an increasingly spoilt force of advisors who had come to realise just how valuable their favour was. Consciously and in some cases subconsciously, advisors were adopting business models that made them more valuable to their product manufacturing friends by leveraging the risk of a change in loyalty in return for a large cheque ensuring tenure.

Product manufacturers referred to the advisors in their sphere of influence as ‘distributors’ and acquisitions of distribution networks were made, making many owners of these networks unimaginably wealthy.

The very word ‘distribution’ (not advice) said it all.

 The Regulators Weigh In

This then brings us to the issue of the regulators.

Let us not fool ourselves about the intent of the legislation that has been brought into play over several regimes. Quite rightly, it has been installed to change the behaviours of the industry and to ensure outcomes are focussed on ‘people before profit’. However, through a lack of understanding of the history of the business models and the products that were already in place, the impact these new laws have had is a disappointment.

As each new wave of law failed to gain traction, the complexity of the laws increased and became so prescriptive that tick a box compliance was the only way to comply. Thoughtless, tick a box compliance. This was exacerbated by the constant cries of foul play by the Industry Fund movement who refused to accept that the retail offerings may in fact have offered a reasonable alternative to the moral high ground claimed by the Union backed Industry Fund regime.

For every change the industry adapted, ‘the spirit’ of that change was compromised on both sides of the Retail/Industry fund divide. Thinking was dedicated to how to comply with the law without giving up the behaviour that the law was designed to change. As a result, consumer outcomes only ever improved marginally.

In defence of the self-licensed advice movement, there has always been a constant pressure on the product manufacturing community to improve features and reduce the price of the end superannuation products to the consumer. But this cause was lost in the politics of the broader campaign because advisors need product solutions to execute their advice and the institutions controlled the product and the margin.

War Rooms

When the major institutions were caught out they arrived with armies of lawyers from the top end of town to defend their position and ultimately negotiate on outcomes that were private, less costly and less damaging for the provider. The regulators could not afford to throw the same legal talent at the issue as they did not have the same budget or the internal talent to brief the legal team. It was a case of ‘bows and arrows against the lightening’. The regulator could not afford to lose for fear of loss of reputation or costs being awarded against them and so the ‘enforceable undertaking’ regime began.

This, in a world where the Banks were still harbouring hero status and had an air of invincibility about them. Who were the regulators to question their integrity?

Inside these institutions there was the ongoing pressure to improve dividends to the plethora of shareholders including the superannuation funds that most Australians were members of. There was a sense of untouchability that came with the fact that folklore had seen these institutions save our Nation from the full force of the GFC and that the senior management of these organisation was seen as the epitome of success in the corporate world. Geniuses who were to be revered at all costs and were never questioned or challenged.

Is it any wonder that a mutation in the moral code was let loose at some stage in this journey and went undetected and unmanaged until the blow torch of the Hayne Royal Commission? It was a culture where the unjustifiable became more justified each time the behaviours, the decisions, the mutation went unchallenged.

This Royal Commission has highlighted some heinous behaviours and the recommendations need to seek to ensure that we never find ourselves in this situation again, however it is worth reflecting on the 28 years of history that came together to all but justify the collapse in values that led to the outcomes that have been exposed.

A combination of hero status, invulnerability, shareholder pressure, cultural misalignment and in the end dumb luck led the management of our most revered organisations to turn a blind eye to the social responsibility that is at the core of their existence. Much like the leadership of Australian cricket after a similar period of invulnerability.

“Things are so bad that new laws might not help” Justice Kenneth Hayne

Let us hope that in the fall out we are not burdened with another wave of crippling regulation but laws that need to be thought about. Laws that challenge participants to ask ‘what is the spirit of this law and how do I need to interpret it?’. Tick-a-box compliance leads people to think about what they can get away with. We need new laws that acknowledge the role that these organisations can play in shaping a positive society and a positive economy and a code of conduct installed that all participants embrace as a way forward in the enhancement of a better financial community.

In the words of Commissioner Hayne:

“The law already requires entities to do all things necessary to ensure that the services they are licensed to provide be provided efficiently, honestly and fairly. Much more often than not, the conduct now condemned was contrary to law… Passing some new law to say, again, ‘do not do that’ would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

What is needed is better enforcement in order to ensure that banks and other financial institutions apply basic standards of fairness and honesty by obeying the law, not misleading or deceiving, acting fairly, providing services that are fit for purpose, delivering services with reasonable care and skill, and, when acting for another, acting in the best interests of that other?”

There’s No Crystal Ball and that’s OK

When the history books are written, they leave out the bits that didn’t matter and line up in orderly rows what is now seen as significant, even if it was overlooked at the time. With the benefit of hindsight, it’s clear what was and what was not important. In real time, of course, it is far harder to see what is going on.

I am enjoying a podcast series at the moment on Watergate, which for obvious reasons is resonant today. What is fascinating about Slow Burn, however, is its attempt to bridge that hindsight gap. It focuses on the things that gripped America at the time but subsequently got left out of the scandal’s defining narrative, which for most of us is All the President’s Men.

The first episode tells the story of Martha Mitchell, wife of John Mitchell, the former Attorney General and head of Nixon’s re-election team in 1972. As such, she had both a front row seat as the story unfolded and a reckless desire to share what she knew in late night calls to her friends in the press. She was living dangerously and she paid a heavy price, hounded by the White House and discredited as an unstable drinker. She was right about the President and her husband, but only Watergate geeks remember her today.

There is a danger that as this Saturday’s ten-year anniversary of the collapse of Lehman Brothers approaches, we try to tie up this episode, too, into a neat morality tale. Boiled down to its essentials, it actually is a simple story but it didn’t seem so at the time when we didn’t know how it ended. And oversimplifying the financial crisis makes it all the more likely that we will not learn its lessons and will relive it.

Here is the short version that will be retold this week. In the years before 2008, banks forgot their basic business of taking deposits and making loans. Instead, they started dealing in the loans themselves, packaging them up into fancy new instruments on a false prospectus that this would make the financial system safer.

This snake oil didn’t wash for two reasons. First, because it was now unclear where the risk lay in these opaque and complex securities, now far from their originators. Second, because in order to feed the banking machine’s hunger for the profitable new products, more and more loans of lower and lower quality had to be made. An old-fashioned credit bubble lurked within a shiny new wrapper. When loans to people who should never have had them pressed on them inevitably turned sour, no-one knew where the bad smell was coming from. And a system built on the quicksand of broken promises crumbled.

To test the Martha Mitchell view of those times, what we actually thought as we lived through them ten years ago, I dug out a previous column written in early 2008. It was written in the week that Bear Stearns collapsed. Lehman was still a pillar of the financial establishment, far too big and important to fail.
Like Bob Dylan’s Mr Jones, we knew there was something going on but we didn’t know what it was. We only knew it was bad. As I wrote then: ‘for the first time since the economic anarchy of the 1970s, sensible people are seriously considering the possibility that the machine might actually grind to a halt.’

That might sound prescient but in the same breath I was clinging onto the wishful thinking that Bear Stearns was the cathartic moment that would mark the bottom. ‘The whiff of capitulation hung over some of the breath-taking share price falls yesterday’, I wrote. I was a year too early.

Too early, but not wrong. The market did recover from Lehman, and it did so surprisingly quickly. Even if you had been unlucky enough to invest in a collection of global stocks on the last trading day before the bank collapsed, you would have recovered your money within a year or so. In the ten years since Lehman imploded, the FTSE All Share has more than doubled if dividend income is included in the total return. That’s more than 8pc a year – and if anyone had offered me that as the bankers carried their boxes through Canary Wharf I would have taken it.

The biggest investment lesson for me over the past ten years, however, is that the fog of uncertainty in 2008 has never lifted and never will. As long as we operate in real time, without a crystal ball, we will never know what the next six months, let alone the next ten years, holds for us. And that’s fine because there is a solution.

Investment diversification is the free lunch that sliced-and-diced collateralised loan obligations pretended to be. In the decade since Lehman there has not been a single year in which the best-performing asset class has been the same as it was in the previous 12 months. There has also never been a year in which each of the main investment assets has fallen at the same time.

Putting your eggs in a variety of baskets is a lot less exciting as an investment philosophy than the apparent risk dispersion used to justify the weapons of mass destruction launched by the banks in the years before 2008. The difference is it works. Unlike the historians, we have to compose our investment stories out of the bits that matter and the bits that don’t. In the here and now, we cannot know which is which.

Source: Tom Stevenson, Investment Director Fidelity International

Tread Lightly, Collaboratively Post Banking Royal Commission

Reverberations will continue to be felt across the mahogany boardrooms and expansive top-floor executives suites of Australia’s admonished banking and financial services giants, as the royal commission claims more scalps while others jump the proverbial ship.

The revelations exposed by the royal commission have been nothing short of appalling. As members of the profession – and as people who are proud to call themselves financial advisers – We find it jarring and disappointing that these are the circumstances in which the industry finds itself.

Finding the ‘right time’ to comment has proven difficult.

A pervasive “make-money-at-all-costs’’ mentality and systemic culture of cover-up within certain institutions has cast a dark shadow over the industry – and left a nation of now-sceptical investors wondering just who they can trust.

They say sunlight is the best disinfectant.

But in our rush to clean up the industry, it’s important we don’t simply create a set of different problems. Collaboration and consultation is needed to ensure we don’t trade one conflict of interest for another.

By year’s end, with the sector purged of its sins amid the white-hot glare of political and media scrutiny, attention will soon turn to commissioner Kenneth Hayne’s recommendations and what legislation the Government will introduce in response.

The recommendations will almost certainly centre around the banning of vertical integration and the removal of grandfathering of old remuneration models. Trailing commissions are now illegal for new products but are protected in old products still held. Changes we support as long as they don’t compromise a person’s access to advice in the process.

The corporate watchdog, Australian Securities and Investment Commission (itself under scrutiny for being slow to investigate persistent concerns of misconduct in the industry), and Treasury have been highly critical of vertically integrated financial players, raising the pressure to break up Australia’s largest banks by splitting their financial advice and wealth management arms.

Both ANZ and National Australia Bank are in the process of cutting their respective financial advice businesses and have already offloaded their life insurance operations.

Commonwealth Bank is also in the process of considering offloading its Colonial funds management business and has sold its life insurance business. However, Westpac chief executive Brian Hartzer has said while stories of poor advice were “confronting’’ his bank was committed to keeping its BT Financial Group division.

It’s believed there will be recommendations centred around asset-based fees and the separation of advice into a profession in its own right, the latter we would argue is the only way forward and only achievable with the removal of vertical integration.

Take the family doctor, for example.

When we visit the doctor, we expect they’ll recommend a treatment plan that is best for our wellbeing, ensuring we make the best recovery. We don’t expect the doctor will only recommend certain manufacturers’ drugs, or medical organisations’ facilities. We expect our health won’t be compromised by doctors being driven by their own remuneration.

Financial advice as a profession should be no different. The core measure should simply be whatever improves a client’s financial welfare. Until real advice is distinguished from product-selling by legislation or self-regulation, how can anyone confidently accept undistinguished advice?

While it’s eminently clear some legislative change is necessary – for example the recent recommendations by the Productivity Commission with regard to super funds and their ‘not so’ innocuous fees – the government must tread lightly when it comes to the size and scale of new reform it imposes on an industry that is arguably heavy in this area already. The on again off again… and on again Future of Financial Advice (FOFA) of 2013/15 addressed many of the issues in question. For those in the industry who embraced the changes and adhere to the compliance rules it dictates, we have already incurred significant and ongoing operational costs as a result.

The oxymoron here is that constant and increasing industry regulation adds to the price of advice but undermines its value at the same time. In our view the real problem is business cultures blind to conflicts of interest on the basis that ‘everyone else is doing it’ – this is as much an enforcement issue as anything.

Any knee-jerk reaction without due consultation with the industry and consideration for the (often complex and significant) flow-on effects to customers will only serve to further increase the net cost of advice and, we fear, drive clients and good advisers away at a time when they are needed most.

And that would be the worst possible result.

Bitcoin and The Basics Of Cryptocurrencies

Three years ago Bitcoin was $250AUD. With a 10,000% increase in price since then, it is starting to generate significant buzz with the everyday investor, as is the underlying technology driving it, “blockchain”. But what are digital currencies and should you be investing in them? We asked renowned technologist and futurist, Mark Pesce to take us on the bitcoin / blockchain journey.

“Never invest in a business you don’t understand.” A simple bit of advice from the Sage of Omaha, Warren Buffet, largely responsible for turning him into the most successful investor in history.

Very few people understand cryptocurrencies, but many see the meteoric rise in the valuation of Bitcoin – over AUD $20K as this is written – and feel as though they should be investing. But why? What is it – other than the pile-on of investor interest – that makes Bitcoin or any other cryptocurrency worth investing in?

The qualities of cryptocurrencies mirror the qualities of ‘normal’ currencies in two key features: they’re difficult to counterfeit and you can’t spend the same currency twice. In subsequent articles we’ll look at the mechanism making all of this possible – the blockchain – but for now it’s enough to know that every cryptocurrency fulfills these conditions.

The original cryptocurrency, Bitcoin (symbol: BTC), for many years looked like a solution in search of a problem, but as it found uses and gained users, its exchange value increased. Investors began to think of it as a store of value. The first Bitcoin price spike accompanied the ‘haircut’ Cyprus imposed on bank deposits, as depositors used Bitcoin to spirit funds out of the country. The acceleration in the value of Bitcoin began there, as more investors came to appreciate Bitcoin as both a store of value, and as a mechanism to avoid currency exchange fees.

If Bitcoin retains its status as the ‘store of value’ cryptocurrency, it could evolve into a role similar to that of gold, which possesses an intrinsic less than its exchange value. (As to whether Bitcoin can maintain this role indefinitely, that’s a question to ask a psychic – not a futurist!)

Together with Bitcoin, there are three more cryptocurrencies that are interesting because they follow Warren Buffet’s rule – you can understand them.

Ethereum (symbol: ETH) is the next most valuable cryptocurrency after Bitcoin, but it’s unlikely anyone will use Ethereum simply as a store of value. Ethereum is ‘smart money’ – a cryptocurrency that’s also a computer program. This means you can use Ethereum to create ‘smart contracts’ – for example, a simple escrow contract that automatically transfers funds from one party to another when a particular condition is fulfilled. That contract can be written into Ethereum, rather than on paper – and it allows parties to enter into contract relationships with great ease. Ethereum may find its greatest value enabling international trade finance, and for that reason it’s viewed as a cryptocurrency with a bright future.

Ripple (symbol: XRP) was originally created to provide a settlement mechanism between banks. That’s happening – but very slowly, as that is both a very conservative and very carefully regulated area of banking. More recently, the Gates Foundation selected Ripple to be used in a project that enables billions of unbanked and underbanked people to have access to an advanced set of mobile banking, payments, credit and investing services. That should give Ripple billions of users, and create a fair bit of demand for the cryptocurrency.

Finally, the Basic Attention Token (symbol: BAT) allows Web users (that’s all of us) to pay publishers directly for their content, rather than forcing those publishers to rely on advertisers. It’s a new model for funding content on the Web, and it also means advertisers can pay Web users directly for putting ads into our Web browsers. We’ll get paid for surfing the Web – and can pass those payments along to our favourite websites.

Bitcoin, Ethereum, Ripple and the Basic Attention Token all do things that are easy to explain – and understand. The same can not be said for many of the 900-plus other cryptocurrencies flogged by speculators. Be like Buffet: if you can’t understand it, why would you invest in it?

Mark Pesce is a futurist, inventor, writer, entrepreneur, educator and broadcaster with 35 years experience working in technology, He holds honorary appointments at the University of Sydney and UTS.

Original article courtesy of Adviser ratings, December 2017

Yes, Virginia, There is a Banking Royal Commission – Unfortunately

In a matter of days, Santa will be putting the finishing touches on his “Naughty” and “Nice” lists and it remains unclear on which side of the ledger the banks will sit.

It’s an understatement, of course, to suggest the big four (CBA, Westpac, ANZ and NAB) won’t be expecting an outpouring of festive cheer and goodwill from their 17+ million customers this year.

Despite holding around 2.5 trillion of our money, collectively – (and 80% of the nation’s loans) – it’s become almost a national sport to criticise the banks. And, it’s got to be said, with some good reason.

Concerns involving the banking sector date back at least three years, when a Senate committee recommended a royal commission into the Commonwealth Bank’s financial planning scandal. Last year, more wrongdoing was uncovered at CBA’s insurance arm (CommInsure) as well as allegations made against the other majors – ANZ, NAB and Westpac.

But – without trivialising the impact of those scandals on the industry and, more importantly, the individuals and families affected – an expensive and lengthy royal commission is NOT the answer.

The sector is already one of the most highly regulated in the world. Since the financial crisis banks have cooperated with 37 separate reviews, investigations and inquiries, leading to a raft of reforms from FoFA to Professional Standards to name a few.

The current commission – which will run for 12 months, delivering a final report in February 2019, at an estimated cost of $75 million – is unlikely to unearth anything new.

Let’s not be fooled.

This is nothing more than a quick political fix, hastily thrown together by an under-pressure Government at the eleventh hour, to appease disgruntled Nationals senator Barry O’Sullivan and other backbenchers who were prepared to cross the floor and side with Labor and the Greens to pass legislation for an inquiry.

It was inevitable. They knew it. The PM knew it.

Despite spending a year and a half categorically, unequivocally ruling out a royal commission – an inquiry former PM John Howard warned would be “rank socialism’’ – the only option left was to make the best out of a bad situation and set its terms of reference and try to control the mandate.

Malcolm Turnbull, already deeply bruised from the Dual Citizenship fiasco (at the time of writing the Opposition is now in damage control itself over the issue with several of its members potentially being referred to the High Court) appeared weak and out of touch with both his party and the electorate.

Perception is everything in politics and the Prime Minister still appears to be in the pockets of the banks, because the backflip came precisely the day after the banks themselves signed the “permission slip” gifting the PM political cover.

Politics has trumped economics yet again.

On the positive side, the commission has promised a deep dive into more than just the banks and it looks like industry funds could be subjected to some unwelcome scrutiny. In its infamously titled “Rivers of Gold” report released last month, the Institute of Public Affairs found monetary links between a number of industry super funds and the Labor movement, with more than $18 million flowing to trade union organisations over a three-year period. Needless to say it has people talking.

The problem is, there’s always a bigger picture. The risks of staging this inquiry in the full glare of the public spotlight is that you diminish the standing and strength of the banks, and undermine our economy with it.

Granted, the big four are corporate powerhouses, earning billions in profits, but let’s not forget the old State Banks of Victoria and South Australia which collapsed, robbing thousands of customers of their life savings. A strong financial and banking sector provides a significant and crucial buffer to protect us all if the economy experiences a downturn, or worse. It was one of the key reasons Australia was able to withstand the GFC crisis, which forced the closure of 465 banks in the United States alone.

Secondly, some will argue the Tall Poppy Syndrome is alive and well in Australia. We do seem to have a propensity to go after anything that is successful. Look what the mining tax did to the resources industry – our mining companies stopped investing in Australian projects and retreated overseas.  The carbon tax hamstrung the automotive industry, with utilities costs an enormous burden.

Thirdly, banks are the highest taxpayers in Australia – injecting around 14 billion into the government’s coffers each year.

Finally, we simply can’t afford for world markets to lose faith in the big four. The flow-on effects would be disastrous, fuelling potential interest rate rises, asset contraction and a slowing economy.

Even David Murray who led the last extensive review into the financial sector agrees. He has hit out at politicians and regulators fearing that “if the commission forces banks to grant widespread forgiveness of soured loans, it could undermine the entire system”. The Australian Financial Review, 6 December – Bank probe ‘threat to the system’.

It’s a sobering thought.

This may not be a royal commission we had to have, but we’ve got it. And only time will tell what lasting impact it will have, both financially and politically.

As we hang our stockings and trim the tree this time next year, Chief Commissioner Kenneth Hayne will be close to wrapping up the inquiry, putting the finishing touches on the final report for public consumption.

The proof, as always, will be in the pudding.

Bitcoin: the very definition of a bubble

Legend has it that Joe Kennedy, father of former President John F Kennedy, avoided the stock market crash of 1929 by selling his entire portfolio just days before prices collapsed. He did this, the story goes, after receiving a share tip from a shoeshine boy. When taxi drivers, lift attendants and young lads on the sidewalk are speculating in stocks, he concluded, “the market is too popular for its own good”.

The stock market is riding high today but I’d be amazed if your next cab ride results in a share recommendation. This unloved bull market has failed to generate much excitement. It’s quite unlike the explosion of interest in shares in the late 1990s when everyone knew someone who had made a killing in some obscure internet stock and fear of missing out was intense.

So, if Joe Kennedy were having his shoes polished today he would not be talking equities. What he might well be steered towards, however, is an investment in bitcoin, the crypto- currency which is tracing the classic parabola of every bubble in history, from tulips to internet incubators.

Two years ago, you could have bought a bitcoin for $300; today, it would set you back $7,000. Its price has doubled in six weeks. It’s not just the price of bitcoin that is increasing but the speed of the gains is accelerating. The chart is turning left and heading straight up the page as asset prices always do in the final stages of an irrational mania.

Perhaps unsurprisingly, the exponential rise in the price of bitcoin is setting alarm bells ringing. Tidjane Thiam, the chief executive of Credit Suisse, said this week that the speculation around the alternative currency is ‘the very definition of a bubble’. As he observes, the only reason to buy or sell bitcoin is to make money, ‘which is the very definition of speculation and has rarely led to a happy end’.

His comments echo those of JP Morgan boss Jamie Dimon who recently described bitcoin as a ‘fraud’. He said that anyone ‘stupid enough to buy it’ will pay the price for it in future.

I don’t know whether Thiam and Dimon are right. In fact I don’t really know much for sure about bitcoin and it’s this lack of clarity that makes me think they are both right. I’ve been trying to get my head around bitcoin for a while and I’m frankly none the wiser.

I’m not even terribly sure what bitcoin is: a currency or a commodity? It sounds like the former but it fails to exhibit the essential characteristics of money.

It can hardly be viewed as a store of value. That requires at least a modicum of stability. Unlike the pound in my pocket, however, I can have no idea what a bitcoin will be worth tomorrow or in a year’s time. That, in turn, reduces its value as a unit of account. Why would another individual be prepared to accept my bitcoin for a good or service when its future value is so uncertain; for the same reason, why would I want to spend my volatile bitcoin rather than hoard it in the hope of further appreciation.

So bitcoin is a poor currency. But neither is it really like gold or any other physical commodity. Gold may not generate an income – it’s value is only what someone else is prepared to pay me – but it does at least have some decorative and industrial uses.

When it comes to bitcoin, people really are buying it solely because they expect other people to take it off them later for an even higher price. There is no better definition of the ‘greater fool theory’ than this.

As with every asset price bubble, of course, it is not wholly groundless. Ever since President Nixon broke the link between paper currencies and gold in 1971, dollars, pounds and euros have been little more than an act of faith. The value of a bitcoin is no more illusory really than a currency that depends on our collective trust in political leaders and central banks. Like gold, crypto-currencies are free from political interference, regulation, confiscation, inflation or debasement.

It may be that, as electronic commerce becomes the norm, cryptocurrencies will become viable mediums of exchange. The blockchain technology that underpins them may well be the future.

But I’m prepared to wait and see. I will not be risking my savings on what looks remarkably like the tulip mania of the 1630s. By the peak of the madness in 1637, the price of a single bulb was worth ten times a craftsman’s annual income. In three years, bulbs had soared in value sixty-fold.

Like all bubbles, Dutch tulips ended badly. A default on a bulb by a buyer in Haarlem was the bubble-popping catalyst and the implosion was savage. Within a matter of days, prices had fallen to a hundredth of their previous levels.

Peter Lynch said he would only invest in companies if he could ‘draw their business models with a crayon.’. Warren Buffett also famously warned against investing in businesses you cannot understand. If ever there were an investment that fits this description, bitcoin is surely it.

While bitcoin is soaring, the greater fools look like those of us refusing to follow the siren calls of the latter-day shoe-shine boys. Like Joe Kennedy, however, I’m pretty relaxed about who will have the last laugh. What goes up like a rocket comes down like a stick.


Article Source: Fidelity Australia – Tom Stevenson, Investment Director

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Powerful data reveals strong link between our nation’s happiness and financial planning

People happiest with their lot in life are most likely to have a financial plan, according to the FPA Live the Dream report. The national research of working-age Australians also includes insights into the regrets, dreams, and attitudes to matters of money and life across generations, genders and geographies.

Almost one in four Australians (23%) surveyed believe they are living the dream. These enviably content people who dream big and are prepared to act of their plans are nearly three times more likely to seek the advice of a financial planner (24%) than those who describe themselves as not yet living the dream (9%).

Not everyone is content, however. The research also shows 80 per cent of working-age Australians are stressed about money and finances, with 1 in 4 indicating acute stress levels. Gen X and Gen Y are the most stressed about money and finance, and are the generation most likely to struggle with planning. Half of Gen Y (53%) finds planning their life hard. Two in five Gen X Australians feel the same way (44%), while Baby Boomers are the most likely to find planning easy to do (25%).

Read the full report here.