KEY POINTS:
Kiwis wanting to get on top of money management need to apply their DIY attitude - not look to a financial fairy godmother to do it for them.
That's the word from investment manager Gareth Morgan, who told the Herald on Sunday he thought financial advisers had "destroyed" people's wealth more than they had enhanced it. He says the safest option is to educate oneself.
"How many of these so-called financial advisers have put people into finance companies left, right and centre and now have cost them all their savings?" says Morgan.
His call comes as Belgrave Finance last week became the 20th finance company to fail in the past two years.
Investors have more than $2 billion tied up in the finance companies that have either been put in receivership or have defaulted on loans.
But Simon Hassan, president of the Institute of Financial Advisers, says the IFA requires members to work in their clients' interests and stick to their areas of competence.
"Gareth is a financial adviser. If he really is committed to good outcomes for Kiwi mums and dads, I would encourage him to join the professional body and help us work for change, rather than sniping from the outside," says Hassan.
Morgan says the term "financial adviser" is a "misnomer". It implies they're acting in your best interests - but in the financial sector this isn't the case.
"People are getting conned here," he says. "They aren't working for you, they're working for the issuers. They might charge you, but they'll also get a commission on the product." He believes financial advisers are "conflicted".
Instead, Morgan recommends that people take advice from accountants, who will charge per hour.
Russell Hutchinson, a management consultant for financial services companies, says the situation is not so black and white. He draws a parallel with pharmacists, paid by the margin they make on the pills they sell.
"They are just as 'hopelessly conflicted' as any financial adviser," says Hutchinson.
"Yet, they are 'the health professionals' we see most often. Also, we like their fee model - being included in the product that they sell."
The IFA requires members to make effective disclosure of any remuneration, other reward, limitation of advice, or conflict of interests, says Hassan. "We certainly encourage our members to work for fees rather than commissions, particularly where investments are involved, but we don't know who does what in this area."
What's more, says Hassan, for many Kiwis - say, those with less than $50,000 as a lump sum to invest, or less than $500 a month to save outside KiwiSaver - fee-based investment and savings advice is likely to be too expensive.
This group will always have to get help from commission-based advisers, or salaried employees of the big institutions, he says.
Hassan says Morgan's suggestion that the better course for people is to use their accountant is "naive", as an accountant is "highly unlikely" to be competent as a financial adviser.
He says people should look for certified financial planners or chartered financial analysts.
However Hutchinson says fundamentally no advisers do "real, full-service" financial planning, in the sense of providing an investment plan allocating savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business or real estate.
"I don't know any businesses doing money management including budgeting, tax planning, insurance, and [investing for] retirement," says Hutchinson. "They couldn't have a business if they did."
From the user's point of view, Morgan says some financial advisers are "worse than useless. Some of them are financially illiterate anyway - they don't know what they're talking about in terms of investment markets."
Hassan says Morgan is correct about many who call themselves financial advisers, but there are strict rules for those who choose to be IFA members. The IFA has about 1450 members but membership is not compulsory. He suspects the biggest problems are with non-members.
Morgan has no faith that pending regulation of the industry will improve matters. "The changes to the legislation are a joke. They require advisers to disclose only whether they've been to jail, what qualification they have and whether they take commissions.
"The problem is there's so much incompetence in terms of the service the public wants from advisers.
"These guys are commission salesmen getting income from selling managed funds, so how can they give objective advice?"
Morgan lobbied unsuccessfully for the use of the word "adviser" to be abolished unless people are being paid by the hour and not taking commissions. He says that met opposition from the wealthy and powerful insurance industry.
"They have a sales force they've invested millions in and they don't want that compromised - that's their main channel.
"The sector is in disarray and the only way it's going to be disciplined is by the public educating itself and demanding better accountability."
Meanwhile, he sees no place for the industry, hoping it will come to an end and people will increase their own financial literacy.
* andrea.milner@heraldonsunday.co.nz
