If you’ve got tennis elbow and your doctor suggests cutting your arm off, you’d seek a second opinion. So why wouldn’t you do that with questionable financial advice?
That’s the argument put forward by Dr Dennis J. Maddern, independent financial adviser and founder and executive chairman of Maddern Financial Advisers.
Dr Maddern told the Nest Egg podcast team that the barriers of entry to becoming a financial adviser are too low in Australia and, as the royal commission is revealing, Aussies are being stung.
“They then should have confidence in that care. There should be no Storm Financials. There should be no Four Corners programmes,” he said.
“There should be no royal commissions. There should be no conflicted advice. The general public must be horrified at what they're seeing and hearing at the moment.”
He also spoke to the team about:
· Why Australians shouldn’t be afraid of seeking second opinions on financial advice
· How to spot a truly independent financial adviser
· Why even self-styled “Warren Buffetts” shouldn’t be afraid of seeking advice
Thanks Dr Maddern, for sharing your insights with the Nest Egg podcast team!
You can stay up-to-date with what Dr Maddern and Maddern Financial Advisers are up to here.
David: Good day and welcome to the Nest Egg Podcast. Today it's joined with Lucy, Lucy welcome back.
David: And of course myself David. You'll know me by now I'd hope. Also with me today, I've got a very special guest. We're in the midst of having a dial in at the moment. So we actually have Dr Dennis J. Maddern who is the founder and executive chairman for Maddern Financial Advisors. Dennis, welcome to the show.
Dr Maddern: Thank you David. It's a pleasure to be here.
David: Thanks for coming on board. Dennis, we’re going to have a discussion around a few things today but I think the main topic that our listeners are going to be chiming in for is a real discussion around independent financial advice. And that's a mixed bag of emotions for a lot of investors and it's also, some are more familiar with it than others. So we're going to talk about that but I think it's definitely worth credit just to give them an idea of your stature and your background as well. So Dennis, I'll reel off a few things that I know but you can fill in the gaps here.
Of course we were just discussing off air your achievements in sport. So you're a huge, huge sport, not just a fan but avid player as well and a pretty good one I hear.
Dr Maddern: Thanks for saying that. My daughter says I'm a legend in my own mind. That's pretty good but yes. I do, I've played Lincton Cup, Junior Davis Cup all that sort of stuff; member of the Davis Cup team when I was younger. Went away to the US on a tennis scholarship, played professionally and then now in recent years as a seniors tour. I must say the seniors tour begins at age 35 and above so there's age groups of 35 to 40, 40 to 45, all the way up to 85 plus. So it's real, it's international rankings, the rankings are run out of London and it's the same place, the ITF International Tennis Federation that looks after Federer and Nadal and these people. Runs the ITF/Seniors.
I take it seriously but it keeps me fit, it keeps me sharp, it keeps me alert. It's a lovely balance between work and sport so I'm constantly refreshed in both areas so work never becomes dull. When I see a client, I'm at my peak, I'm physically fit, I'm healthy, I'm eating well etcetera, etcetera. So I find it’s a lovely blend and I couldn't have a better lifestyle at the moment so it's very … Life's good.
David: No, that's great. What you just said there is probably the most important thing, lifestyle and that's something which we at Nest Egg we talk about a lot for investors, people in that space who want to really optimise the lifestyle they want. And the fact that you're leading by example is great and is interesting to hear that. A good point as well just to bring it back to the professional side of things, you are by all means one of, I want to say the number one of 78 truly or wholly independent financial advisors in Australia. A lot of people are thinking, okay what does that mean? I think you can give us a bit of an idea in terms of what achievement that is for yourself as well.
Dr Maddern: It's very important and we couldn’t be speaking I think then at a better time namely with the banking and financial royal commission currently underway. Over the past few days, you've just had the AMP through their wealth management division, namely their financial planning have been billing people that are no longer clients. And I see the chief executive of the AMP has resigned today.
David: He has.
Lucy: Yeah, he's out.
Dr Maddern: And the news is that's the case. And of course the Commonwealth Bank have been, with their financial planning arm have been billing dead people for 10 years after they're dead. So it really points out that this field needs to become a proper profession. With proper qualifications, there were virtually no barriers to entry. If I was a failed mechanic, I could go into a place like the AMP, do a course, complete a diploma and the next minute I'm a financial advisor advising people about their wealth and their strategies.
The barriers to entry were just virtually nonexistent.
And also I think what the royal commission will probably come out with is and we've known it for a long time is that there's a conflict, there's a building conflict. If I'm a salary planner working for say a bank Westpac for example, then I'm going to promote bank product. And then if I do a really good job of selling you and Lucy and others the bank product, I'm going to win a trip to Honolulu or St. Petersburg. And so it is built in conflict.
Now this is an absolute nonsense. If doctors were doing this, if lawyers were doing this, if civil engineers were doing this, if chemists were doing this and they were getting commissions and kickbacks and soft dollar trips to the Grand Prix or to the national tennis with Federer and these people then there'll be a massive scandal. But you're giving me drugs as a pharmacist because you get a trip to Melbourne to watch the Australian Open. So it just would not be tolerated and yet it's tolerated within financial advice.
So there's also been a lot of misunderstanding too about whether you are independently owned. You can still be conflicted but be independently owned; namely to have your own AFSL, your own Australian Financial Services Licence. When I talk about being independent, there's only one of 34 of us within the Commonwealth of Australia that are truly independent and are members of the IFAAA; The Independent Financial Association of Australia. And that's not 34 firms, that's 34 people. There's only 34 advisors out of many thousands of advisors that are truly independent.
Independent means that you have no affiliation, links, ownership structures whatsoever with any bank or insurance company or any product manufacturer. Secondly, you take no commissions of any kind. You don’t take soft dollar, you don’t take a margin lending trail, you don’t take insurance commissions. And this is interesting and very important because if you had a life cover, you were paying $1,000 for that life cover, in reality I'd be clipping the ticket mainly taking $250. And really the wholesale cost to you would be $750.
But I'm clipping the ticket. My nose is at the trough taking $250 from you of which there is no tax deduction for you, you're probably not even aware of it as well. And we rebate all of those and we will charge you a fee that you are aware of that is fully transparent to you that is tax deductible to you either whether you want to pay it through super, at the taxing rate of super or whether you want to pay it as an individual or via a trust at a much higher tax rate which means you get a bigger deduction. But we would give you, following that same example, we would give you that insurance for $750. We would rebate the commission, we would not even accept the commission. So that's very important, that there are no commissions, no incentive payments, no conflict, no soft dollar trips to the Grand Prix, trips to the tennis etcetera, etcetera from any product manufacturer.
And finally that we are hourly rate. That we charge by time and hourly rate as it's not linked to any funds under advice and so forth and we don’t have some sort of cookie cutter approach. And that means that when we sit down with you David, we can then do a bespoke, a proper financial analysis where we really can pull from every source imaginable without fear nor favour, pride nor prejudice, the best product or the best opportunity or the best facility for you to go into rather than being constrained because of commissions or kickbacks etcetera. And what we find now is that when clients contact us and ask us, how did you file? We Googled independent financial advice.
So the real discerning purchaser now is not even Googling financial advice. That's a thing of the past. They are now Googling independent financial advice. And one of the first series of questions is, are you truly independent? You're not just playing wordsmithing games with me like you're non-aligned, you're independently owned, you're independently intended. No. Are you truly under ethics definition, independent; yes or no?
David: There's a lot of a fluff around that too.
Dr Maddern: That pleases me no end David because that means that these purchases, these clients are now becoming much more financial savvy and I'm thrilled by that.
Lucy: These clients becoming much more financially savvy. How many clients do you think get caught up in that kind of those fluffy words; like non-aligned, people saying that they are independent but they are not really? How many people do you think are being reeled in?
Dr Maddern: I think there is an enormous number because you see under the current government arrangement, I could go out under, I could be Maddern Financial Advisers. But you've got to ask the question and the question is, do you then have your own AFSL or are you a corporate authorised representative under one of these brand names that the banks have? For example I'll just pick the National Australia Bank; they have three brand names. They have Apogee, they have Godfrey Pembroke and they have Gavin.
So I may be a Gavin advisor, Dr Maddern's a Gavin advisor, he's independent. No. What that means is that he's 100% linked to a company that's 100% owned by the National Australia Bank. Well, then I'm going to move bank product, I'm going to move MLC Insurances, I'm going to move bank manage funds and etcetera. So that's the stuff that's got to be clarified and it needs to go further with the government where you need to have on a business card Lucy, that if I hand you a business card, it says Dr Dennis Maddern is affiliated 100% with the National Australia Bank through an entity called Gavin but he happens to call himself Maddern Financial Advisors.
So how you word that and actually can come up with ways to make that simple on a card but at the same time transparent because things like that are not transparent. So something like 85% to 90% of all financial advisors are conflicted.
Lucy: I imagine that if the general public heard that, they would be stunned. I'm stunned to hear that because you go to people for the advice assuming that it will be independent. So as soon as you hear that the majority of it won't be it's a staggering number I find. Why do you think I suppose the path of being truly independent has only been followed by around 34 people?
Dr Maddern: The reason I think simply is that it's been beneficial to an advisor to have a guaranteed payout. So let's say I reached a certain retirement age, I've got a guaranteed payout because my fees will be bought by the bank and then shot across to another bank planner somewhere. And again if it’s a Gavin or an Apogee or Godfrey Pembroke or whatever, so you've got an exit strategy built in. And I think you've got a degree of support but the support comes with a price, they want your soul, namely your independence.
And it's because a lot of these folk haven’t had a lot of qualifications. They haven't thought deeply about their business model.
And perhaps they also lack the confidence Lucy to where yes I can actually stand up in the market place without a sugar daddy standing behind me and state that I am in fact truly independent and I am here for Lucy and exclusively Lucy. And the only person that will pay me will be Lucy. So there are many reasons for that but I think you'll actually, if you watch this royal commission, all of these stuff will come out. At the moment, they are invoicing for 10 years plus dead people. So it's just extraordinary and they're not acting in the client's best interest.
Lucy: They've admitted that in some cases.
Dr Maddern: Couldn’t be a perfect time right now for you interviewing me and this topic being on the table with the fact that the royal commission is literally undressing these banks and insurance companies.
David: I think you've hit the nail on the head there Dennis and I generally admire your passion for providing honesty and that being your main policy. And I think going back to what we were discussing earlier; we're talking about people's lifestyle here. We’re talking about people's retirement income and wealth creation and that alone is something which needs to have full transparency across the board. Not just by advisors but the bank should be doing this as well. And the whole thing now of what's coming out with everything and all these scandals that will be coming over the coming weeks is alarming.
It's almost where people who don’t know where to turn, where do they turn now? And I think the biggest thing is to just lean on the people that you know best and lean on the people that are going to be honest in this sense. Because it's a very important investment which is retirement let's be honest.
Dr Maddern: It's not just retirement and I agree with you David, I think it's beyond that. It's school fees, it's like a lot of clients will come in, they'll say look I'm renting and I want to save up money for a house deposit or I want my children to go to Xavier or Genazzano or Our Lady of the Pink Pineapple or something. That was a joke by the way. And so therefore those things are important. They are saving for very real and substantive things in their life of which retirement is that very, very important one as you've already noted.
And I think it's absolutely a tragedy that the person is really not aware that there are major differences between a linked, a conflicted I would say advisor namely conflicted in the sense that they're owned or banked with a bank or insurance company or they're affiliated or they take insurance commissions etcetera. And the client doesn’t even know that 25% of their insurance for life and income protection etcetera is being paid to the advisor. And of course that again means that if one insurance company is going to pay me a slightly higher rate instead of that $250 that I gave an example before, they pay me $400. I'm probably going to use their product because of the $1,000 that the client pays, I get $400, I'm probably going to do that.
So we think again, that's all conflicted and we think hopefully the royal commission brings out a lot of transparency. But as far as the independent side of things concerned, there is 34 and there is 34 of us. You don’t always have to come to Maddern Financial although you can. But there's others and I think if you go there, it's just accepted that you'll get independent advice, you'll get the insurance commissions given back to you etcetera, etcetera. And whether it is, I want my kids to go to these schools or whether I want to try and get an investment property or I want to try and have a luscious retirement or I want to try and help my daughter out who's got this issue or this issue or whatever it may be, you're in a position to do so.
And so that's our mandate. That's what we do and very pleasingly we’re getting two or three new clients a week that are coming here and when we ask them why; "Oh, it's independent. We are searching and looking for independent. We just refuse to go to anybody that's not independent." And that's great news. Great news.
Lucy: Yeah. It's a good point that you make that there are more people coming to you and I think it's something that we are going to see as this royal commission unfolds. People watching it happen and thinking, oh God, now I'm questioning the advice that I have received. I'm getting bad feeling about this advisor. What would your advice be for people going through that; starting to question the people that have been advising them?
Dr Maddern: There's always no different to if I went to a doctor and the doctor said, "Look Dennis, that tennis elbow of yours, we better operate and we better cut it off." I'd get a second opinion basically.
David: Yeah I would too.
Dr Maddern: I think that's okay. I think you can take your financial plan, your statement of advice that you will have got when you first became a client of these people and you can take it into a firm such as ours or somebody up in Sydney or whatever and you can find an independent advisor on the IFAAA site or super guide and they'll give them out. And I think you can just go in there and you can say, "I just want you, just to review this statement of advice with a view to whether I have been truly independently placed in products and services and do you think they're in my best interest?"
Now there will be a cost to that to benchmark you but I think that that cost is well worth it. And again if I had a surgeon recommend me an operation, I will definitely get a second opinion. Now whether it's not covered by bulk billing, I couldn’t care less, I'll pay for it and get that second opinion. But that to me is absolutely important and Lucy I would do the same. Whether this is a hypothetical or a real example, I would definitely do the same because this is really just like your life and what you're trying to accomplish. And if you've got a … It's like when you play tennis. If you don’t get coaching early, you get into a bad habit, it doesn't matter how many balls you hit, you're really never going to have that exponential improvement because you've had flawed form early. And you just don’t have the correct form.
So if you can get the correct form in your tennis game early or get the correct form within your statement of advice and your financial strategy early, my goodness gracious me, you will flow and prosper. But if you've got a flawed advice or flawed form then you'll have intermittent falls and gains and it just won't be as smooth and it won't be as successful at the end I don’t think.
Lucy: Yeah, you want to be the Roger Federer in retirement.
Dr Maddern: In your case it could be the Maria Sharapova.
Lucy: Yeah. Yeah of course. Steffi Graf.
David: And that's a good point as well Dennis and I think the hindsight of this is and the elephant in the room is I see probably around talking about latest figures but not more than 20% of Australians seeking financial advice. And I think that's a common misconception because a lot of people think they don't need it. But the fact is we're coming into a day and age where cost of living is more expensive, property is more expensive, your SMSF is growing and that's been booming for a long time now. And the fact is I think there's a lot of people that don’t seek advice because they just feel like they don’t need it or they don’t have the money to do it or it's too complicated or sometimes they don’t want to seem vulnerable or stupid going out there and asking someone for an opinion.
The reality is now and I think you can share on this as well, is that advice doesn’t come in packaged form. Like you said, it's bespoke, it's different for every single person. What would you say to the 80% of Australians that haven’t got advice or maybe are even thinking of jumping on to find or seek advice?
Dr Maddern: I think they should very clearly seek it and particularly independent advice there's no question of that. And again I think the reasons you gave why they may not seek it are very, very valid. I'll give you a couple of others and that is they think they know it and when I meet the Warren Buffett of Melbourne and he or she comes in and I know this and I've chose that share and it's gone through the roof and I've done this and I've done that; then that's fine. We don’t try and say, we're going to do ASL, what's called a screamer over the pack. We're going to do it all for you. No; we'll partner with you. We'll work with you. We might be if you like amused for you that you can just test some ideas because after all you're the Warren Buffett of Melbourne.
That's okay so again you've got different people who have got different motivations but I do think it's better if you're really wanting to play at a high level and maximise. It's really good to seek advice. Now whether that's accounting advice in an accounting sense, whether that's state planning advice to get your will and enduring power of attorney correctly done rather than a will kit for $10 at the local news agency which you're not sure how to complete. Or whether it really is financial advice.
It's worthwhile having this 80% really consider getting proper professional care. But they then should have confidence in that care. There should be no storm financials. There should be no four corners programmes. There should be no current affairs. There should be no royal commissions. There should be no conflicted advice. There should be no billing of dead people for 10 years after they've died. The general public must be horrified at what they're seeing and hearing at the moment. I feel for them.
Lucy: Yeah I think we all do.
David: Yeah. 100% and we’re all keeping our eyes on this as well and to have these announcements come out on a daily basis at the moment is enlightening but at the same time it is scary. And I think that's a huge thing where … And yeah we are talking to you in opportune time but I think the huge thing is I think people just need to be aware that there are avenues and there are people out there that are in the industry to help and support and build up lifestyle. Yes you can do on your own, you can be self directed but at the same time just like a personal trainer, you go to a gym or something, you're always going to get that extra 10%. And I think that's something which personally as well speaking but I think across the board it's always worth looking at.
It's always worth having an idea or a discussion with yourself about what options are better and keep all doors open on that sense.
Dr Maddern: True. Very true.
David: I think as well, just as of going across past the royal commissions and all that stuff that's going on, people think financial advice and they think okay, were we looking at independent or non? There's a lot more in it to the name as we've discussed already. Like Lucy touched on earlier, do you think there's people out there who are already in advice at the moment who are aligned to a bank for example and now they are thinking or they are getting a niche going? I'm not sure if my advice is ranked where I want it to be. I don’t think people should panic and change over but I think people should be aware of what's going on in the industry.
Dr Maddern: Absolutely and I think some advisors already. I know that some of the banks and the AMP have sent out an all points bulletin to some of their advisors to say, please don’t leave, please don’t desert the ship, please stay. And very sadly I think they'll probably offer them incentives to stay which means they'll lock them in even further which means they'll be even more loyal to AMP product or Westpac or Commonwealth or whatever. And I think that defeats the very purpose. But yeah, they'd be worried that a lot of the better ones and it'll always be the better ones that will say, I think we need to go out and enter the independent space and so forth.
So I think there's a scramble now because if you work for the Commonwealth bank as a planner, can you imagine what your friends are saying and probably even worse, what your clients are saying?
David: Oh yeah.
Dr Maddern: Dear Jack, does this affect me? Jack, what does this mean? Do you think the bank will lose its licence Jack? What's going to happen to all of my investments because I've got AMP superannuation? I've got AMP insurances or I've got Commonwealth bank this or I've got that and I've got Commonwealth Bank managed funds and I'm in a Commonwealth bank platform and I've got Commonwealth bank education funds and I've got this and I've got that and I've got this. What's that all going to mean to me?
So I think that yes, I think it's a double edged sword for the banks. Do they write out to these people? Do they tell them to relax and so forth? The bank's going to sort it all out. The fact is, the royal commission will take at least another six months so this is going to be and they're going to move on to mortgages, they're going to move on to everything to do within the walls of the banks. And so as a consequence of that, these planners, some of them are going to get spooked. I don’t think it would hurt if some of the better ones were to leave and genuinely enter the independent space. Not just independently owned or not just being non aligned as it's called which by the way you can't use that term anymore. You've got to be independent or not. You either are or you aren't. Apply tennis, the ball's either in or out. It's not halfway. So it's the same sort of thing.
It's a double edged sword for the banks at the moment but my concern centrally is for the client and I just think very simply, very clearly, the client is going to get superior advice from an independent advisor than he or she will through a conflicted advisor. No question about it.
Lucy: I think it's a good point that you made towards the end of that comment there and it was one that I wanted to ask you actually; do you think that there will be more independent advisors? People who might be at CBA or AMP or ANZ Westpac thinking, oh God, I'm proud of what I do but I'm being tied with the same branches or the dodgy ones. Do you think you're going to have more competition?
Dr Maddern: Yes Lucy. Competition as it is and would Federer be as good without Nadal? Would Sharapova be as good without Serena Williams? I don't think so. You need somebody breathing down your neck and we welcome competition because we just take their clients.
David: Yeah I know. Yeah you're laughing.
Dr Maddern: And so the more the scandals in there … There are just phones ringing hot at the moment so it's really very good and we're very excited by that. But bottom line, the consumer needs a lot of choice in Melbourne alone, there is like four and a half million people, there's plenty of work to go around. It's not that if someone goes to someone else then I miss out. No there's four and a half million people, there's heaps of opportunity and I'd like to see some of the best bank planners and some of the best that are in these hybrid halfway houses still conflicted or fully conflicted like being an employee of a bank or an insurance company.
I'd like to see some of the better ones come out and be genuinely independent. I think it'll be the best move for their business and their business model and most importantly I think it would be the best move their clients because the clients would then be receiving independent advice which is the best advice by far.
David: And Dennis I echo those thoughts as well. I think just to summarise this and I will say thank you for your time. But the three things I took from this was transparency, honesty and I think with the royal commission going on at the moment, also has risen some opportunity. A bit of a pun but I think you'll appreciate as well, I think the ball is in the Australian public's court here so let's keep an eye on it and let's see how this can then change and evolve wealth creation. I think there's going to be an interesting roller coaster going on.
Dr Maddern: I would agree David and thank you Lucy and thank you David.
Lucy: No worries.
All the best and speak to you soon.
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