Will your financial planner be here in 2025?

Dear Reader,

‘I’m done. It’s just getting too hard these days. Time to sell…if I can.’

That’s the gist of a conversation I had with a veteran financial planner the other day.

Compliance costs up. Professional Indemnity premiums up. Flatlining revenues.

Practices valuations down.

None of this comes as a surprise. The changes in the industry today were set in train more than a decade ago…which is why I opted to sell our financial planning practice in 2008.

At that time, Storm Financial was a $2 billion disaster in the making. Knowing that Storm was destined to blow up — and ruin many lives — meant the authorities would need to come down hard on the industry. Greater compliance was in the industry’s future.

Insurers would also need to increase premiums to cover massive compensation payouts.

Percentage based revenues (commissions) would be replaced by fee-based structures.

And, in time, the conflict of interest arising from institutional ownership of planning firms would need to be addressed.

The airing of the industry’s dirty linen at the Banking Royal Commission completed the transformational change that began all those years ago.

In the post-2008/09 world, the one saving grace for the industry has been the performance of markets.

Charging fees when performance is positive is a whole lot easier than when clients are losing money.

My veteran planner friend has been around long enough to know that an extended period of positive returns is inevitably followed by an equal and opposite period of negative returns.

‘Mate, if markets don’t deliver, then keeping clients is going to be tough and getting new ones even tougher.’

The issue of fees was a topic of discussion in my book How Much Bull Can Investors Bear?:

‘There’s a Fraction Too Much Friction — High Costs and Low Returns Don’t Mix

“Beware of little expenses. A small leak will sink a great ship.”

— Benjamin Franklin

‘In the good times, generosity abounds. Everyone gets to share in the spoils. The financial ship stays afloat thanks to the ballast of high returns.

‘Investors, fund managers and financial planners all get to make money when markets are performing well. It’s only when the good times stop, that a sharper focus is placed on the value derived from fees.

‘In tougher times, when returns are low and capital is lost, the question of “am I getting value for money?” is never far from the everyday person’s mind.

‘There are generally three layers of fees in the investment industry. The fees vary depending on the amount invested, services offered, type of investment recommended, and type of administration service. The following are indicative fee ranges offered by the industry:

‘The total level of fees can vary from 1.0% to 2.7%.

‘In my experience, the average bundled fee (whether calculated on a percentage basis and/or hourly charge out rate) for the average client tends to be in the 1.5% to 2.0% range.

‘Fees and taxes act like friction on your investments. They slow down the compounding rate of return you can achieve. Where possible, it’s imperative to minimise both.

‘When the share market is firing on all cylinders and returning 15% per annum, paying up to 2% per annum in fees is acceptable. It’s a different story when the market starts producing single figure returns or negative results. Clipping 2% from your ticket cuts a little too close to the bone.

‘Even if my negative outlook for shares is incorrect, it’s difficult to imagine markets providing an encore performance of the 15% per annum achieved from 1982­–2007. The record-breaking level of credit expansion that fuelled these returns is just not there.

‘In my opinion, it’s reasonable to assume an optimistic outlook would be one of a low-growth, low-return era in all major investment markets — shares, cash, fixed interest and property.’

That low-return era took a little longer than I anticipated to announce itself to the world.

But it is well and truly here now.

If you get nothing else from today’s Rum Rebellion, please, please, please realise the importance of this message…the returns you have experienced from your balanced fund ARE NOT necessarily what you’re going to experience in the coming years.

Yin and yang.

Being in a fund that has returned seven, eight or even 10% per annum DOES NOT mean it will deliver those returns in the future.

The conditions that created those returns are in the past. As an investor you MUST look to the future…what’s happening on the road ahead, not what’s in the rearview mirror.

John Hussman’s highly predictive forecasting model (with a 90% accuracy) provides us with an over the horizon view of what most likely awaits investors in the traditional balanced fund (60% shares, 30% fixed interest and 10% cash).

The blue line is the forecast 12-year return. The red line is the actual 12-year return.

As you can see, the correlation between what was forecast and what actually occurred is fairly tight.

Divergences — like at present — occur when markets are at extreme peaks. But eventually, the red line finds its way back to the blue line.

The model forecasts a return of MINUS 1% per annum for the next 12 years…that’s even less than the predicted return at the height of the 1929 market.

If we assume the forecasting model continues to be reasonably accurate, then the life of a financial planner in the 2020s is not going to be easy.

How long do you think clients are going to pay up to 2% per annum in fees for the privilege of losing 1% per annum?

Two or three years?

Let’s be generous and say five years.

What I’m seeing now is reminiscent of when the industry’s future became apparent to me in 2007/08.

In addition to an environment of lousy returns, further fee pressure is coming from robo-advisers and other fintech initiatives.

The exodus from the industry that began after the Banking Royal Commission is likely to increase in number.

In a few years’ time I expect we’ll see an industry that’s trimmed down to a core of professionals. Those who’ve adapted their business models to suit the challenging and highly competitive conditions that are in our future.

Planners are facing some tough decisions, but so too are their clients.

Will your planner still be in business in 2025?

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

A Shot in the Arm
By Bill Bonner

Bloomberg reported yesterday:

‘The University of Oxford and AstraZeneca Plc have restarted a U.K. trial of an experimental COVID-19 vaccine after it was halted over concerns about a participant who fell ill.

‘The U.K. Medicines Health Regulatory Authority recommended that the study resume after an independent review of the safety data triggered a pause on Sept. 6, Oxford said in a statement. It declined to disclose details about the volunteer’s illness.

‘While temporary halts are common in vaccine trials, the interruption to the closely watched Astra-Oxford study had raised concerns about the viability of one of the fastest-moving experimental shots seeking protection from the pandemic. The race to develop a COVID-19 vaccine has compressed what is normally a decade-long process into a matter of months, with data from final-stage trials expected as soon as next month.’

Help us! Save us! Oh, SCIENCE! Wherefore art thou?

Desperate measures

Poor Castor and Pollux. The two elephants from the Paris zoo were slaughtered in 1871. Help didn’t arrive on schedule. Desperate Parisians — after four months of a lockdown — ate them.

Fancy restaurants developed consommé of donkey head and kangaroo stew. The common people, though, had to make do with dog cutlets and rat sausage.

The Parisians were locked down by the German army — or, to be more precise, the armies of Prussia, Saxony, Württemberg, Baden, and Bavaria; Germany did not yet exist — besieging Paris.

Here in Argentina, we’ve been locked down for six months, surrounded by the COVID-19 virus.

We arrived in March and planned to leave in April. Then, the borders shut. We postponed our departure to June…then July. And now, we’re aiming for November.

Fortunately, we have hundreds of cattle, sheep, and goats; there has been no need to slaughter household pets.

Cut off

But last week, the noose got tighter. We’re no longer getting supplies from Salta City.

The strategy here was the same as in the US — keep the virus at bay by closing up shop, putting on masks, staying home, putting the economy on pause, and hoping a ‘vaccine’ is discovered soon so we can all go back to normal.

This has proven to be a popular strategy, but not a very effective one.

A virus can wait. Closing the doors leaves a vulnerable population, virgin to the virus, locked up inside…and ready to be ravished.

You can’t stay locked up forever. And as the doors open, in comes COVID…like the drooling Huns marching into Paris.

After opening up…gradually…hesitantly…and then all of a sudden last week, a rash of cases were reported in the regional capital city, Salta.

People went back into panic mode. Roads were closed again. In the city, you could go out…but only every other day. And here in our remote bolthole in the Calchaquí Valley, no visitors from the city are permitted.

Deadly visitor

Alas, the farms here depend on the city for fuel, tractor parts, seeds, chemicals…veterinarians — everything. Throughout the last six months, we were able to keep a crew working on our new barns…clearing fields…and putting in irrigation. But last week, the work came to a halt.

‘We need cement…and wire,’ explained the foreman. ‘And we’re not getting any deliveries from Salta.’

On Friday, a surveyor somehow slipped through the siege and showed up at the house. He was sent to prepare a map of the irrigation system.

The locals — who know from six months of non-stop TV coverage that the virus is a ruthless killer — went into a panic.

‘He’s got to leave,’ said one of the local women.

‘Well, he’s working out in the fields…by himself. He won’t cause any trouble,’ we replied.

‘Well, don’t invite him to lunch.

‘But we have to give him something to eat.

‘Maybe he could sit at a table by himself…outside.’

In the end, we compromised. He sat at a separate table, but within conversation range.

‘Oh…I know everyone is so scared of getting the virus, they don’t want me to come near them,’ the leper explained.

‘But I’ve already had the coronavirus. It was nothing. Just a cold.’

Same result

Colds come and go. And sometimes, they kill people. Vulnerable individuals can protect themselves — by staying away from other people. But for most people, life goes on.

The death toll in Sweden, which let life go on more or less as normal, is now at 578 per million.

And the US, with all of its lockdowns, lockups, and hysteria? About the same — now at 599 per million.

The death toll here in Argentina, whose lockdown was among the strictest in the world, is only half that level — 251 per million.

But now…having held the gates so tightly shut for so long…as soon as it opens them a crack…the virus comes to call.

Based on the data from the last seven days, the US average daily death rate from COVID-19 is around 750. In Argentina (with only one-seventh the population), 213 people die from the virus every day.

And in Sweden, which let the virus do its work already? Only one person per day dies from COVID-19…

So far, the best bet for a person wishing to avoid the virus was to move to Thailand, Vietnam, or Burundi. Almost no one has died from the virus in these countries. Or in Papua New Guinea. Or Tanzania. Have these countries followed ‘science’ with their state-of-the-art health systems? We doubt it.

Two of the most dangerous places — in terms of dying from COVID-19 — are Peru and Belgium. The two have very different public health services. And yet, the results are about the same.

American presidential candidate Joe Biden says he will shut down the whole country if that’s what the ‘scientists’ tell him to do.

But the UK, France, the US, and the Netherlands must have the best scientists in the world. And yet, their COVID-19 death rates are higher than those of Russia, Iraq, Egypt, Nicaragua, and Bangladesh.

All we know, after six months of viral attack, is that science is almost irrelevant. The virus does what it wants. And if the feds had done nothing at all, the results might be about the same.

Relief column

But many people believe that if you lock down…and stay locked down long enough, like Paris during the Siege of 1870, the relief column will arrive.

Yes, we are awaiting SCIENCE! to come to the rescue. Like an avenging angel, or the French Army south of the Loire, it is expected to slay the terrible COVID-19 and save us.

The subject is on every pair of lips. There are sightings reported in the press. ‘Pfizer is getting close.’ ‘AstraZeneca has renewed its trials.’

The president periodically informs the believers that a vaccine should be here by summer…no, by election day…no, by early 2021.

But how likely is that?

A vaccine is not impossible. But there’s never been a successful vaccine developed for a coronavirus. And those under development seem a long way from producing proven, reliable results.

Besides, even if they were proven to be safe and effective…how long would it take to give a shot in the arm to everyone who wanted it? Having misled the public into believing that we are all at risk, how could the feds restrict the new vaccine to only those who really need it?

High cost

Meanwhile, the cost of the siege is getting higher and higher. Rations are getting short. The natives are getting restless.

Government tries to hand out fake bread — like its money, made from wood pulp — but there’s no nourishment in it.

And most likely, like the Parisians in 1870, we’ll be eating the animals in the zoo before we get an effective vaccine.

Regards,

Bill Bonner,
For The Rum Rebellion