By Don Stammer
Dr Stammer, the non-executive chairman of Præmium Limited, is writing here in his personal capacity.
Around the world, the financial crisis has eased and even the global recession seems to have passed its low point. It's a good time to consider the ways in which investment flows and the structure of the Australian financial services industry will be changed by the experience of the global financial crisis and the other factors shaping it.
The regulation of financial institutions and investment markets changes after every financial crisis. This time around, the regulatory reforms in Australia are likely to be less extreme than in the United States and Britain, which were the epicentres of the global financial crisis. Nonetheless, changes will occur here across a broad front.
The Reserve Bank will be required, I expect, to accept responsibility for dampening booms in asset markets before these booms gain too much momentum. Capital requirements on banks and banks' processes for assessing and managing risks will be tightened. "Responsible lending" laws will be imposed on banks, financial planners, mortgage providers, retailers and others who lend to, or arrange finance for, the public. Financial institutions creating "securitised" products are likely to have to maintain some continuing responsibilities for them.
One of the most significant changes is likely to be in the way financial advisers are remunerated, particularly for superannuation products. There's been a good deal of recent criticism on the payment of commissions by fund managers to financial advisers. These concerns relate to possible conflicts of interest that commissions could create between the adviser and the client. The role that sizeable commissions had played in directing funds to groups such as Storm Financial, Timbercorp and Westpoint brought the spotlight onto these matters.
Commissions paid by fund managers to financial advisers on superannuation products are to be phased out. The outcome is that, in a move supported by the Financial Planning Association and the Investments and Financial Services Association, though with the Government threatening to legislate against the use of commissions "as a last resort", commissions paid by fund managers to financial advisers on superannuation products are to be phased out.
In the place of commissions, financial advisers will need to derive their income from fees charged for the advice and fees relating to investment services provided to their clients; these fees are likely to be mainly asset-based. As the new regime of charges comes into being, the services Praemium supplies - our V-Wrap, separately managed accounts and p-Desktop - will become even more important to the business plans of financial planners, stockbrokers and accountants.
A very different change within financial markets will be the return of a large market in government securities. While government borrowing in Australia is projected to be modest relative to that of other western countries, we'll nonetheless see the biggest increase in the volume of government securities on issue outside of times of war.
To finance the large budget deficits, the federal and state governments are likely to offer investors a wide choice of government securities, including issues specifically designed for retail investors, and inflation-linked bonds which will appeal to superannuation funds. And we're likely to see active trading in government securities on the Australian Securities Exchange.
Some other changes will be more the more familiar changes experienced at this stage of each cycle. Every severe downturn in investment markets is followed, for a time, by investors acting very cautiously: savings are increased; less debt is taken on; and low-risk investments are preferred over higher risk investments. The next year or two will see a lot of emphasis on the "back-to-basics" of investments.
Also, share market slumps in Australia are usually followed by a plethora of advice to investors to stick with the "bricks and mortar" of houses rather than the "risky and volatile" share market. This reaction, while understandable, is dangerous. History tells us that share prices move over a wider cycle than housing - but also generally give better returns over the longer-term. Given that share prices are depressed and average prices of investment housing have only fallen slightly, prospects are that the share market will deliver better results than from investment housing over the coming decade.
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