A prominent US economist believes an expanded -and government subsidised - role for financial advice may be part of the long-term solution to the global financial crisis.
Professor Robert Shiller is an economics professor at Yale University in America and author of a number of books on economics and behavioural finance including Irrational Exuberance and his latest book titled The Subprime Solution: How Today's Financial Crisis Happened and What to Do About It.
Professor Shiller, speaking at a major investment management conference in the US this week, highlighted the similarities between the latest financial crisis and the speculative bubble that built up in the 1920s that led to the Wall St crash in 1929 and subsequent depression. Recovery from the 2008 financial crisis Shiller argues will require a combination of short-term solutions such as the bailout of various institutions and economic stimulus packages and then longer run initiatives that will fundamentally address what he describes as "psychological contagion" where the equivalent of a "social epidemic" drives enthusiasm for a particular type of investment. In this case he is talking about the speculative bubble that built up in the US residential housing with devastating effect where estimates now are that 12 million households are under water on their homes in respect of owing more on the mortgage than the property is worth.
Professor Shiller believes that innovative thinking particularly around ways to manage risk will be the ultimate outcome of the financial crisis - just as many of the modern financial developments both in terms of regulation and product innovation were spawned by the depression years and other severe market shocks.
"We need to think about how we make a better financial system. Even though we can't control psychology we can manage risks,' Professor Shiller says.
"The more liquid we can make markets the better," he says. His blueprint involves creating a better informed investment infrastructure which is where he believes financial advisers have an important role to play.
Professor Shiller would like to see financial advice provided to the mass market in a similar way to health care provided by a local doctor. That is "a subsidised service for the common man".
He argues that while wealthy people typically seek and get financial advice the average person does not. "We want people to have a trusted adviser who is not selling anything," Professor Shiller says.
This raises an interesting opportunity for the Australian superannuation system. Our system makes it mandatory to contribute to super as an employee and while many funds offer some - typically limited - advice service super funds are in an ideal position to be the broad provider of financial advice Although the type of advice Professor Shiller is describing would be much broader than just superannuation. For example it would go to the basic needs of financial literacy and cover issues around risk, debt management and even basic financial budgeting.
Professor Shiller's push is to build a better informed financial system and a key theme from the conference attended by fund managers, advisers and pension plan trustees was the need for greater transparency within the system particularly around products like hedge funds and the development of new tools or products to help investors and fund managers measure and manage risk more effectively than they have been able to in the past year.
The unprecedented intervention by the US government is aimed at overcoming the seizure within the financial markets in the short to medium term. Professor Shiller is advocating a re-engineering of the system to try and avoid the speculative asset bubbles occurring in the same catastrophic way in the future.
Given the level of government intervention in the financial system around the world regulators and policy makers probably have a once in a 100 year opportunity to take risk out of the system.
15th-December-2008 | 
