Diana Crossan: Official advice - Don't trust the advisers

Diana Crossan is taking a "keen interest" in new regulations governing the financial sector.

Opinion

Poor analysis, unclear costs, financial advisers portraying themselves as independent when they're not - these findings from Consumer NZ on the advice New Zealanders are getting from some financial advisers will further undermine the confidence of investors.

Consumer NZ's research concludes the advice from some financial advisers is "scandalously poor". The Retirement Commission helped to fund the study to get a snapshot of the quality of advice given to investors and to identify key issues.

I have been concerned for some time about the public's loss of confidence in the financial services sector. People tell me they don't know who to trust with their money.

A series of high-profile investment failures have raised questions in New Zealanders' minds about the whole financial advice industry. Yet being able to invest with confidence is a critical part of saving for retirement and managing your money in retirement.

This latest research reinforces the need for investors to do their homework. The Retirement Commission is about to launch a campaign telling people to investigate before they invest.

People need to know what questions to ask to make sure they understand what they are investing in and who they're investing with.

As an investor, you need to ask for explanations and keep asking until you understand. You need to be comfortable that the advice you're getting is right for your circumstances. Be very cautious about going to an adviser who is tied to certain financial products, unless you know you want that product. And don't buy if you can't clearly see the total fees for the product and service you're signing up for.

The Sorted website, sorted.org.nz, is a good place to go before you talk to a financial institution or an adviser. The website offers free information, including eight rules for investing, an advice checklist and risk and investment recommenders to help you work out how much risk you should take and what investments might suit you.

It is important for people to be aware, but securing good financial advice should not just be down to the individual investor. There is clearly much more work to be done with the financial services sector to improve the quality of service to the public.

I am taking a keen interest in the new legislation and regulation governing the financial sector, which is due to come into force next year. The Financial Advisers Act and the Financial Services Providers Act are designed to promote sound and efficient delivery of financial advice by requiring disclosure by advisers, improved competency and accountability.

Under the new framework, financial advisers will have to be authorised by the Securities Commission and registered with the Companies Office. Once authorised, they will be bound by a code of conduct which will lay down minimum standards of competence, knowledge and skill.

The Securities Commission will be responsible for regulating the financial advice industry and monitoring compliance with the code of conduct. And very importantly, for the first time, all financial advisers will have to belong to an approved dispute resolution scheme.

In its latest progress report, the Capital Market Development Taskforce says it expects the Financial Advisers Act will go a long way to fixing the sort of issues identified by Consumer. However, much will depend on how the standards are enforced and how advisers are held to account.

Next year, as part of my three-yearly review of New Zealand's retirement income policy, I will look at what is needed to ensure the legislation significantly improves the quality of financial advice to investors. In the meantime, financial advisers must improve their game. New Zealanders need better, clearer information about the financial products being recommended, why they are right for their circumstances and the total costs they are incurring.

The financial advice industry as a whole must look seriously at how it charges. Putting myself in the client's shoes, can I ever be sure I'm getting the best advice for my circumstances if my adviser is being paid commission on certain products?

The Consumer NZ research gives us a good benchmark of the state of the financial advice industry before the new legislation comes into force by December 2010. Future research will show us how well the legislation has performed and financial advisers themselves have responded.