Mary Holm: Commissions mar new rules

The new authorised financial adviser has to pass exams which are no walk in the park. Photo / Thinkstock

I am in my mid-30s and thanks to an inheritance own my own home with no mortgage and have $300,000 to invest. I am unsure where to go for advice as I don't know which financial institutions are safe. I would have thought Hanover was really safe.

I don't want to just leave it in the bank earning this low interest rate, but I'm very risk-averse. I don't know what I'm doing at all. Any advice would be helpful.

I don't think you're as financially ignorant as you make out. You've set yourself up with a mortgage-free home, which is a great first step. And you've put the rest of your money in a bank - the best place for it while you consider your options. Not everyone is that savvy.

So what now? Questions like yours used to be problematic. They're too broad to answer here, without knowing lots more about you. But I've been reluctant to suggest going to a financial adviser. Their advice has sometimes been worse than no advice at all, leaving people facing big losses.

Until now. As of yesterday, new rules are in effect that cover financial planners, brokers, people in banks offering financial advice and others in similar roles. And - despite one reservation that I'll go into in a minute - I think the rules might actually work, raising the standards of financial advice and the trustworthiness of advisers.

For some time now, advisers have had to give you a disclosure statement before they do any work for you. It outlines their qualifications, the fees and commissions they receive and so on. But now there's much more. For one thing, advisers have to be one of the following:

* A registered financial adviser, or RFA, who can advise only on the simpler financial products, such as insurance, bank term deposits and mortgages.

* An authorised financial adviser, or AFA, who can offer a much wider range of advice. AFAs have to pass exams about finance, which I'm told are no walk in the park - or perhaps we should say stroll to the bank. They are also checked for past criminal or other unprofessional behaviour, and have to comply with a code of conduct. If an AFA doesn't act in your best interests, there are several steps you can take, including going to an independent disputes resolution scheme that's free to you.

* An employee of a Qualifying Financial Entity, or QFE. QFEs include the likes of KiwiSaver providers, banks and insurance companies. Some of the people who work for them can give investment advice, but only on the products offered by the QFE - unless the person is an AFA.

An AFA would be best qualified to help you find the right investments for you - bearing in mind your total financial situation and how much risk you are comfortable with.

To check if somebody is an AFA, go to the Financial Markets Authority's website, www.fma.govt.nz, and click on "How to Invest" and then "Using an Adviser". There's a link to the list of AFAs, as well as other useful information.

An AFA's licence tells you which categories of advice they are authorised to offer. The categories are listed on the adviser's disclosure statement, which you can probably find on their website, or you could ring or email and ask them to send the statement to you.

Alternatively, you could look at the Financial Service Providers Register, at www.fspr.govt.nz. Search - at the top of the page - by either an adviser's name or their firm's name. The categories are in the financial services box after the words "Authorisation Status". I suggest you look for someone who offers "financial advice" and "investment planning services".

Another thing: some AFAs limit themselves to advising on products from only certain companies, while others cover a wide range - which is clearly better. Ask an adviser how many different companies' products they offer.

So where do you start in your search for the best AFA for you?

My reservation about the "new and improved" financial adviser regime is that advisers are still permitted to receive commissions or other incentives from a financial product provider as a reward for putting clients' money into that provider's products. This practice is being phased out in other countries, and I hope we follow suit. There's too big an incentive for advisers to recommend products just because they pay higher commissions.

Clients sometimes say they are happy with this, as they may be charged low or no fees, because the adviser receives enough commission income. But the quality of the advice they receive must suffer. Ask yourself: would you be happy if your doctor prescribed Drug A, even though Drug B was better, because the makers of A gave the doctor a bigger reward?

I far prefer advisers to turn down commissions, or pass them on to their clients, and then charge the clients fees. The adviser's only motivation is then to serve their clients as well as they can.

For more on this, see the "Info on Advisers" page on www.maryholm.com. The page starts with today's first three Q&As, but below that is a section titled "Fees-only Advisers", and a list of such advisers, all of whom are AFAs. The page also includes tips on how to select an adviser.

Different services

My wife and I are both 56. I anticipate working until I am 65 although my wife probably will not. We have no outstanding loans and combined earn gross $180,000. We have good superannuation plans.

We are fortunate to have in addition $250,000 in cash. What shall we do with it? Is it better to go with a financial adviser who will manage this actively for a fee of 1.5 per cent or put it with a passive fund manager whose costs are lower?

That's not really a valid comparison. The two offer quite different services.

An adviser will look at your particular situation, what other assets you own, any debts, your risk tolerance, when you expect to spend the money and so on.

A fund manager - active or passive - accepts many people's money and invests it according to their system. If it's passive, they might buy every share in a market index. If it's active, they select which investments to buy and sell. You decide if you want to invest with them, and they take no responsibility for whether you've made a wise choice. Usually they don't even know you.

If you know you want to put your $250,000 into, say, shares or bonds, and you understand the risks and expected range of returns, you could invest with a fund manager. And if you do that, it's good to choose a passive fund, which will charge lower fees.

However, it sounds as if you might benefit from personalised assistance from a financial adviser. They might charge a proportion of your investment, or by the hour, or they might charge you nothing because they receive commissions. But see the Q&A above.

It's well worth putting time and effort into finding a good adviser. And once you find her or him, it can be well worth paying them reasonable fees. Over the long run, you could end up considerably better off.

Tackle mortgages

My husband and I noted with interest your recent comment suggesting part saving in KiwiSaver accounts, to the level of maximum benefits, and saving with another provider for accessibility.

We're beginners in the personal investment side of things and my question to you is, where do we go to for trustworthy professional advice on this - and indeed for a professional to have a good look over the rather minimal assets and more significant liabilities we currently have - investment property, residential mortgages, retirement savings, etc?

The info above should help. And in your situation there's a great way to test whether a financial adviser is putting your interests first. A good adviser should always ask every client at the start if they have debt. If yes, and the interest is higher than mortgage rates, the adviser should always recommend repaying that before doing any investing.

Ditto, perhaps, for repaying a home mortgage. However, there are some advantages to also saving a little in shares, bonds and so on, for diversification and to learn about markets. And this argument is particularly strong if that saving is done in KiwiSaver. If you contribute just the minimum to get all the KiwiSaver incentives, that will almost always be better than putting that money into mortgage repayment. Beyond that, though, attack the mortgage.

What about the mortgage on your investment property? That's not quite so clear-cut because the interest on that mortgage will be tax-deductible so it doesn't cost you as much. Still, if you are fairly risk-averse, it wouldn't be silly to reduce that debt too.

You might be wondering whether you should simply repay debt and skip the adviser until at least the home mortgages are paid off. Possibly. But a good adviser should help to ensure you are handling the rental property optimally, and investing your KiwiSaver money wisely. They might also assist with mortgage choices, wills and so on. At an initial meeting, ask what they could do for you.

A quick point for other readers: You don't necessarily have to go to a different provider to do non-KiwiSaver savings. If you like your KiwiSaver provider, ask if they also have investments beyond the scheme. Many do. However, for our correspondents, with their mortgages, such saving isn't the best choice at this stage.

Age broadens choice

I have been in KiwiSaver since it began, and I turn 70 next year. I have a granddaughter starting university in a couple of years, and I wondered if I was able to withdraw, say, $3000 for that grandchild and keep contributing with the idea of giving other grandchildren a kick-start to university in the future.

Lucky grandkids. Your idea should work well. The normal concern about such plans around KiwiSaver - that the money is tied up - won't apply to you. When you joined, you were over 60, so your money is tied up for five years, which will expire next year. At that point, you can withdraw the money, add to it, or just let it sit there.

There's no particular advantage to leaving your money in KiwiSaver, as you will no longer receive tax credits - or compulsory employer contributions if you are employed. But nor is there any disadvantage. If you like the way your fund is run, stick with it.

Mary Holm Is a freelance journalist, part-time university lecturer, member of the financial markets authority board, director of the banking ombudsman scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm. com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.