The financial planning industry could be forced into some major changes as a result of the government’s response to the financial crisis and the collapse of financial advice firms such as Opes Prime and Storm Financial. ASIC has recommended that the majority of remuneration practices currently used by the financial planning industry be abolished. This includes a ban on upfront and trailing commissions, volume based bonuses, soft-dollar commissions, and fees based on a percentage of funds under management. ASIC has also proposed that financial planners be given a fiduciary duty of care to act in the best interests of their clients in the same way as superannuation trustees must act. It is estimated that more than 95% of financial planners charge some form of asset based fee. This means that their earnings are in no way linked to the amount of time spent servicing a client needs but rather almost purely on the value of their clients’ funds under management (FUM).

The impact of these proposed changes will be enormous. Clients will discover the true cost of the ‘advice’ they have been receiving and will see just how much money their commission based financial planner has been able to milk out of them through these fees and commissions and how big a handbrake the commissions have been on their investment growth – a double whammy - through the loss of compounding. Naturally, the financial planning industry will go into damage control to try to ensure that these changes are minimised, and that their ‘golden goose’ is allowed to keep laying golden eggs.

The financial planning industry has enjoyed a massive cash cow through FUM fee generation from the accounts of time poor and uneducated investors. Investors have genuinely looked to financial planners for solid advice on how to manage their investments including their superannuation. They have looked for a short cut to manage their financial affairs without understanding the full cost.

The idea of someone being paid not for the work that is undertaken but for how much capital is under management is out of sync with the practices of society. You must remember that the basic investor that has exposure to managed funds is also paying their fund manager to grow their capital. Quite simply, there are too many fingers in the pie.

For years I have been encouraging people to become pro-active in the management of their share investing activities to allow them to move away from these commission based management structures and to educate themselves on the benefits of Active Investment. We are aware of investors who have paid up to $15,000 ($5,000 is a typical fee) for an initial Financial Plan which could almost be classed as a generic document. Other than the name and address, the other information in a Financial Plan document from a particular financial planner or firm is very similar. From the proposed list of managed funds in which to invest to an asset pie chart and the fee structure table the documents are almost identical. I have personally viewed multiple financial planning documents to be able to state this. I have no problem with a reasonable fee being charged for services based on time and expertise but there should be no link to the amount of funds under management.

One of the main reasons behind the similarity of Financial Plans is that trail fee based financial planners tend to limit their clients into the same funds that pay the planner a high commission and ongoing trail fee and / or have "jollied" them at exotic places. A conflict of interest undoutedly exists but for whatever reason investors grew to accept this as an industry standard. Until the GFC......

To quote Sally Patten of the Australian Financial Review, “it’s not just the financial planners that these new laws will affect. The major wealth firms, including the investment arms of the banks are poised to lobby the federal government to minimise any new investor-protection laws”. With financial planners filling the coffers of some of Australia’s largest funds and investment institutions their profits and processes will surely be affected if these laws come into effect.

The changes being proposed by ASIC will go a long way towards cleaning up the financial planning industry by allowing the clients to see what they are really being charged. Furthermore, the question begs whether the financial planning industry will be able to survive in its current form and, if so, whether many financial planners could be bothered putting up with revised compliance processes for far less income that is severely restricted to a time based fee that is nowhere near as scalable as they have enjoyed for many years. In short, the rivers of money that have been flowing from these asset based commissions will dry up if these proposed changes take effect and the really good financial planners will be able to differentiate themselves through how good their financial planning expertise is not by how good they are are at selling and networking.

It is ironic that in the 1980’s and 1990’s the government, through ASIC, built up the financial planning industry as a private sector compliance buffer in an attempt to prevent from occurring what has actually happened over the last 18 months with the likes of Storm Financial and many others. ASIC saw the financial planning industry as a middle ground between the investor and institution to protect the investor but the institutions saw the financial planner as a marketer of their funds or distribution arm to attract money under management. Now the government, through ASIC, is looking at pulling apart what they created to prevent a Storm Financial type scenario occurring again. It took the GFC to energise action to be taken despite many people over many years trying to publicise what was really going on. Finally it may be happening. But don’t hold your breathe; with so much at stake, expect a huge fight from the industry. In fact, testimony to how much they stand to lose as an industry will be the size of the fight that they put up.

As always, as another way of overcoming a bad experience, I urge you to become educated and learn the skills required to actively manage your own financial destiny. More and more people are waking up to the fact that they have been taken for a massive ride by the FUM commission based financial planning industry, and are learning that they can actively and positively manage their own financial destiny through the use of appropriate tools and coaching. The SPA3 system is one such tool.

The old saying about ‘making hay while the sun shines’ applies as much to trading and actively investing in the markets as it does to making hay in the spring time for farmers or other life endeavours, hence the saying. Farmers know that each year in the spring time is the ideal time to make hay and stack it away in haysheds for use in the winter time when pasture growth is slow to non-existent and their stock need additional feed. The seasonal cycles of nature are known and understood even though the conditions for each season are not exactly the same each year.

The farmers have ‘rules’, if you like, for this interaction with the dynamics of nature that are passed on from generation to generation. Their ‘set-up’ is the seeding season and their ‘trigger’ to act is the changing of the season. When the time is right they act. They don’t listen to the stories in the news or ask a broker for a hot tip or give over the decision making processes of haymaking to a fund manager. They use the rules and skills they have acquired as professional managers of their farming business and they act on these. Nor do they leave the pasture growing happily in the paddocks in the ‘hope’ that it will still be there in the winter time. They know that it won’t.

So it is with the markets which also have seasons. Markets are seeded, rise, reach maturity and are harvested. However, there is one major difference – the seasons of the market as not as definitive and timely as the seasons of nature. As managers of our own money we need to have a set of rules which allow us to engage the market with confidence and a feeling of certainty when the conditions indicate we must. We need to get synchronised with the seasons of the market and be able to act decisively when a call to action is triggered and not be concerned with the opinions of others.

This is our opportunity to ‘make hay while the sun shines’. Whilst others are dithering around trying to decide what to do, or listening to the gossip of others, or waiting on the sidelines whilst the market marches ahead, those with a plan of action do not hesitate and engage the market with clarity and decisive action based on the rules of their trading plan and trading system.

And, just as importantly, we need to recognise when the trend season ends. Our job then is to manage the trades and have a full set of rules for harvesting the profitable trades and weeding the losing trades. In this way we avoid the ‘hope’ mentality and get to preserve our capital so we can participate in potential money making opportunities when the conditions are once again conducive to our trading style or methodology.

The way to ensure this occurs is to have technical criteria that are unambiguous. This way you will be able to re-engage the market with confidence. Without knowing when to increase your exposure to the rising market you will be limiting your ability to make hay.

The sun has certainly been shining over the last five months. Have you been making hay?

This is an extremely important question and one to which the majority of investors/ traders do not give sufficient thought. Successful traders understand with absolute clarity why they trade.

Why you trade must be the subject matter of the mission statement in the trading plan you are going to write. Your purpose for trading is a powerful force that will keep you going during tough times and will keep your feet on the ground during the good times, thereby allowing you to rise above despair and euphoria which are emotional states that lead to the biggest trading errors.

Because most traders are not absolutely clear with themselves why they trade, a vacuum is left that needs to be filled. And filled it is—not by any thinking process that you go through, but by your current belief systems. It happens by default because you do not consciously fill the vacuum. Here are some of the purposes that may drive you to trade, some of which most people will not even be aware of:

• to prove to or impress somebody, usually family or friends, that you can make money in the markets. Sometimes, this person you are trying to impress may be long dead,

• to show your broker that you know how to come back from deep in the red and turn your losing account into a profitable one,

• to show people that you can be right about predicting what will happen in the future,

• to achieve freedom by placing yourself in an environment that is outside the rules and constraints of society,

• to experience the euphoria of catching big moves in individual trades—and the associated bragging rights over said friends and family, even the dead ones,

• to make lots of money,

• to satisfy an addiction for random reward,

• to beat the market, just as you have beaten your competition in business or elsewhere,

• to attempt to control the market in the same way that you control your managers, staff or business,

• to be a hero—to anyone who cares to take notice of you.

As you can see, most of these objectives are driven by ego. The ego pushes our natural intuition and abilities into hiding and sends us in the opposite direction to achieving liberation. The more we react to the needs of ego and pride, the more controlling and power hungry we will become and the less chance we have of being objective and carefree and thereby liberated from prejudice, envy, greed, and selfishness.

Ego causes us to force things. Ego compels, rushes, tries to impress, competes to beat, desires control, hates being wrong or losing or failing and operates from the perspective of what others may think of you when you act. The greater your ego, the lower the probability that you will be successful in the trading arena—and the many other games that you and most others play in life.

Abandon all those notions and look at it this way. I suggest that your overriding purpose for trading should be to use it as the medium to:

• learn what becoming free means and to achieve that freedom,

• continually acquire mental skills that are necessary to become free.

What is being free? I suggest that you are free when:

• you are not tied to the opinions and status of others,

• you have nothing to prove to anyone,

• you never force anything, not the smallest action,

• you refuse to listen to fear,

• there is no struggle, strain or pain.

“A man can be free without being great, but no man can be great without being free.” Kahlil Gibran, Lebanese born American poet, artist and writer.

When your actions are effortless and you pre-accept the result of any action that you take, regardless of the outcome, you will be free. Complete acceptance occurs when absolutely no conflict, mental or otherwise, follows any outcome that is achieved, and the outcome of any event does not cause any strain in executing the next event in your chosen environment.

If your purpose is to be free and you achieve a high degree of this state of mind, then you will be successful in all the ways you define and measure success in the environment of your choice.

Stating that achieving this state of mind is your purpose for trading means that to achieve it you will have resolved all the physical and mental conflicts required to ‘get there’.

Trading the markets is one of the best environments to use for personal growth and improving life skills. The more you grow and the better your mental skills become, the more money you will make from trading. Remember that we are tested the most during times of trouble, not when it is plain sailing on calm seas.

The paradox is that the more you focus on making money as your mission the chances are that the less you will make and the more you focus on your skills and processes the better your financial outcomes will be.

The ultimate goal for the trader and active investor is to reach the point where trading becomes automatic. At this level all trades are simply executed according to a plan and the rules of their system(s) have become internalised to the extent that they are adhered to flawlessly, consistently and objectively without hesitation or reservation.

There is no emotional attachment to the outcome of any trade as the trader is at peace with all outcomes. The trader has reached a level of acceptance and understanding where their trading processes are completely and utterly trusted. Fear is overcome; the fear of losing, being wrong or missing out does not cause mental conflict of any sort at any time on any trade. This is inherent to the Unconscious Competent because they know that trust and fear cannot co-exist simultaneously, only one can be dominant in any given moment. They trust and are hence carefree yet not careless in the moment.

Winning trades, losing trades, break-even trades, winning and losing streaks, drawdowns and new equity highs are all accepted as the probabilities of their edge playing itself out in the market, in real time, just as the back-tested and historical trading results of the edge indicated they would. Essentially, trading their edge has become an automatic subconscious activity – just like reading a book, writing or driving a motor car, all of which were once conscious activities. Trading has become a habit. A habit that is founded on functional beliefs that are in harmony with the environment in which decisions are executed – the market.

At this level the individual has had so much repetition and practice with a skill it becomes ‘second nature’ and can be performed effortlessly without struggle, strain or pain. Perhaps it can even become ‘first nature’.

The process of being empathetic with market price movement becomes habitual and a part of the individual’s personality. At this level the individual’s subconscious has been programmed, through repetitive execution of mechanical edge trades, to operate with a market paradigm.

Although it is not necessary to achieve Level 4 to make consistent profits in the market and outperform the market indices, (Level 3, Conscious Competence, will achieve this) it is a worthy ultimate goal whilst on the lifelong journey of improving one’s active investment skills. If ever attained, it will affect performance very positively. If never attained, the endless journey towards the goal will still be sufficient to massively outperform the market indices and alternative investment avenues.

At this level, the framework of the individual’s trading system(s) has become a part of who they are; it is entwined with their life in the same way as cleaning one’s teeth or walking.

It is estimated that only 5% of active investors achieve either Level 3 or Level 4 of Competence when it comes to trading in the market! Astonishing! The other 95% remain ‘below the line’ in either of the two levels of Incompetence. The main reason is that achieving consistency, that is, sustained active investment success with a steadily rising equity curve, requires a major paradigm shift that most individuals have great difficulty making. The shift is typically prevented by current dysfunctional beliefs expressing themselves through self sabotage of the trader in the form of counter-productive thoughts, feelings, statements and actions.

It takes desire followed by conscious effort to step into a process of change to overcome the sabotaging beliefs. Ongoing discipline is required until the process of transition, that is dysfunctional beliefs are de-energised and new market paradigm beliefs are energised, is completed. “If you always do what you’ve always done you’ll always get what you’ve always gotten.”

Transition to Level 3 and then possibly to Level 4 can be achieved through the repetitive use of a researched, proven and robust mechanical trading strategy that has an edge. Mechanical edges emanate from the market and can be used as a cornerstone tool to create beliefs that are functional for engaging the market. Dysfunctional beliefs that are in conflict with the way that market communicates emanate from our time spent in society. A societal paradigm conflicts directly with a market paradigm. Stated another way, we are programmed to fail in the market unless we undergo a paradigm shift in our mental framework.

Reaching Level 4, Unconscious Competence, is the ultimate goal in any activity, however to outperform the market indices, Level 3 will do.