Keeping tabs on investment advisers

By MARK FRYER

Most of us probably don't think too much about the law as we go about our daily business, but we'd like to believe it's there to help if anyone does us wrong.

But if you're seeking investment advice, that faith could be sorely misplaced.

The Securities Commission has suggested tightening the law as it relates to investment advisers, and this week sent its recommendations to Commerce Minister Paul Swain.

Whether he follows the commission's lead remains to be seen. For now, though, we're left with the law as it is. And a discussion paper issued by the commission last year makes it clear just how flimsy the law can be.

A case in point: investment advisers are legally obliged to tell you certain things. If they don't, they can be fined or you, the customer, can take legal action against them. But does that happen? No. As far as anyone is aware, no adviser has ever faced action for lack of disclosure.

Another case: if an adviser promises outlandish returns or offers a scheme that is downright illegal, their advertisements can be banned. But can anything be done to stop them doing the same thing again? Very little, apparently.

Until some of those issues are addressed, a hefty dose of scepticism might be a better safeguard than relying on the law when it comes to seeking investment advice.

New Zealand is unusual in the way it regulates investment advisers because, unlike many countries, we have no system of registration or licensing. Anyone can call themselves an investment adviser or financial planner.

What law we do have relies largely on disclosure - requiring advisers to reveal certain things to you, their prospective client (see "Telling upfront").

The aim is to allow you to make an informed decision about whether to hire that adviser.

The information which advisers must reveal is spelled out in the Investment Advisers (Disclosure) Act.

If you have received advice and can prove that your adviser has contravened the act in a significant way, a court can, in theory, order them to pay you up to $30,000.

But no person or regulatory body has ever taken action under the act.

Although the commission has not revealed what it has recommended to the minister, its discussion paper suggested changing those disclosure rules, to remove the present distinction between the things an adviser has to tell you, and the things they must tell you only if you ask.

The discussion paper also suggested that the information should be revealed before any investments are made, rather than giving advisers five working days as at present. In the meantime, it makes sense to ask for everything you're entitled to.

The commission's move this week was also a timely reminder that investment advisers often face a conflict of interest - while you may be the client, a lot of their income often comes from commissions paid by investment managers.

So does an adviser suggest you pay off the mortgage, for example, which will earn them no commission, or steer you towards a fund which will pay them 5 per cent of anything you invest?

As well as disclosure, the commission is also worried about illegal investment offers.

Its discussion paper suggests that it should be an offence to recommend an illegal investment, unless the adviser did not know the offer was illegal.

The commission also wants the power to suspend a disclosure statement for an investment, prohibit advertisements, and ban some people from giving advice at all.

Telling upfront

The law says an investment adviser must tell you certain things. It also says there are other things he or she must reveal - but only if you ask.

The Securities Commission has suggested doing away with that distinction but, until that happens, the two categories remain.

What they must reveal:

Before they give you any advice, or you give them any money, advisers must reveal whether, in the past five years:

* They have had any convictions involving dishonesty.

* They have been made bankrupt.

* They have been prohibited from managing a business.

They must also reveal:

* How they will be paid.

* If any money paid will be held in trust.

* What records they keep.

* Whether their accounts will be audited.

* If the adviser can use your money for his or her benefit, or the benefit of anyone else.

What you are entitled to know:

If you ask about any of the following things, advisers must answer all of them, within five working days:

* What organisations they have a relationship with and the nature of that relationship.

* What types of investments they advise on, and whether there are any restrictions on that.

* Their qualifications and experience.

* If they, or anyone associated with them, have a financial interest in giving you advice.

* Whether they will receive any money from anyone else, apart from you, in connection with the advice they give.

* Contact Mark Fryer at: NZ Herald, PO Box 32, Auckland; 09 373-6400, ext 8833; mark_fryer@herald.co.nz