Bernard Hickey: Get tough on advisers to win back trust

New Zealanders have lost faith in financial advisers.

That's the clear message in RaboDirect's Financial Confidence index for last month, which shows confidence dropping again from a year ago as the fall-out from the collapse of finance companies flows through to mum-and-dad investors.

Interest.co.nz's Deep Freeze list of failed finance companies shows that more than 200,000 investors now face losses worth more than $2.8 billion out of the $8.5 billion frozen in such finance companies during the past four years.

Many of these investments were recommended by financial advisers who received a commission from the financier. These advisers and those companies were not regulated and many did not fully declare the extent or the type of commissions they were paid.

Not surprisingly, given the experience, a whole new generation of investors is disillusioned with New Zealand's capital markets and the quality of their so-called independent advisers.

Sadly, many of the same investors in their 50s and 60s were the ones who lost faith in the sharemarket in the late 1980s and early 90s.

The Government has been grinding its way through reforms of the legislation around finance companies and financial advisers but I don't think they've gone far enough to win back the faith of investors.

Advisers will need to be accredited and trained, but they are still allowed to take commissions from finance companies, fund managers and insurers.

They do have to declare these commissions up front, but the very practice of taking commissions has been discredited by the actions of so many of those same advisers during the past decade.

Many made their fortunes by shuffling mum and dad's money into finance companies that offered the highest commissions without a smidgen of research or care for the outcome for investors.

They recommended that money be put into Strategic, Hanover, Bridgecorp, South Canterbury Finance, Dominion Finance, MFS Finance and others.

They had no idea these companies were lending second and third mortgages to speculative property developments or worse.

Now it's time for the Government to stand up for small investors and ban the practice of awarding commissions. Australia is planning to outlaw such commissions from July 2012 and the industry there has already started phasing them out.

Last month, AMP said it would also phase out commissions here from July and replace them with fees for advice. These could be hourly fees or a fee to build a savings plan.

The onus is on the adviser to choose what is best for the customer, rather than which provider offers the best tickets to the rugby.

Commerce Minister Simon Power is still considering whether to take the full step and ban commissions, including so-called soft dollar commissions where the finance company offers trips to resorts.

Financial advisers will have to earn trust back with good advice. They may have to pay for their own golf games in future. Fair enough.