Unintended Consequences
Last week the crew at burningpants was privileged to spend time with the Treasury heavyweights charged with the unenviable task of making the Rudd Government reforms a reality.
Contrary to popular belief these guys were sharp, engaging, and interested in outcomes but tasked with selling in a series of reforms they had not necessarily designed.
Right now the government has two big reform packages in place – one on the way that mines are taxed, and the other on the way that financial services products are sold.
In both industries Canberra has announced that change is coming – 2012 seems to be the popular timeframe – but that the Government doesn’t know exactly what the change will be and has asked treasury in both cases to sort it out.
This means that they have gone out to the market and in the process created a large amount of uncertainty – did they expect nothing to happen?
That’s not the way humans and businesses behave – they will try and pre-empt the changes to gain economic advantage and that’s going to lead to interesting decisions.
What is also curious about both these changes is not that they are seeking to change the playing field of Australia’s two most successful industries (it seems the only businesses left for the Government to try and pull some money out of are tourism and agriculture – given that manufacturing is buggered) but that they seem to have not thought through the consequences particularly well.
Ignoring the super profits tax on mining, lets take financial services – the goal here is apparently to make it simpler, get rid of commissions (except oddly on insurance) and to drive down prices .
Quietly, what the Government is saying but not writing down anywhere is that they are imagining a tiered system – like the medical industry – where you can self diagnose (I’ve got a cold) and buy drugs from a super market, get low level advice (this bloody cold won’t go away) and see, say a pharmacist, this cold still won’t go away, and see, say a GP, who tells you its not a cold, but swine flu and refers you to a specialist.
The Government seems to like that model – because transparently you pay for what you get – low level advice has low level cost – specialist advice has high level costs.
They like it too because you don’t need much training to sell Aspirin – but creating training hurdles like the medical industry ensures that the people charging big money have to invest time and understanding into what they do.
In what appears to have been an unintended consequence of this – the businesses with big distribution have woken up to the fact that the low hanging simple product and simple advice part of the equation is being dominated by industry funds and have started to compete.
AMP this week launched its first ad campaign targeted squarely at the industry funds – with its new product called Super Core
https://www.amp.com.au/comparefees/watch_tv.htm
The first time that one of the mainstream businesses has even dared mention the industry fund in its advertising.
However, I dare say it won’t be the last – research that CoreData is producing doing right now has shown us that the big four banks, can if they so choose, build simple products and get them to market efficiently and at a decent margin.
It appears all along the banks have had the ability to produce simple product with a decent return and still make a good margin.
Quite why they haven’t until this moment is something to be addressed in another article.
2 Comments on “Unintended Consequences”
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Allan Abrahams says:
The concept of charging a fee for service or commission is flawed, which ever one is chosen.
For instance, how much should the fee be?
Does someone with 3 University degrees charge at an hourly rate of 3 times more than someone with one degree or none? Does anyone think the quality of advice is going to be three times better as a result?
How do you verify billable hours? This is a problem both the legal and accounting industry have had to deal with. The maximum fee should have been set for a particular service.
What if, after agreeing to a fee, the client is unable to or chooses not to pay. Do you think financial planners are going to take their former clients to court for the payment of say a $600 fee for service? I think most unlikely?
Does anyone believe that those advocating a fee for service model think that they receive more or less than they did when they charged commission?
The answer is that government/industry/planning organisations should have set a fair and reasonable fee scale for each service provided to a client.
This would have allowed the client to determine the value of advice instead of the stupid legislation being proposed.
moped says:
I like the questions! Yes i’ve seen them other places but it’s cool you gathered them all up. Ooh and I don’t think I will slit my throat thanks for the suggestion though. NOT