Money: Advisers under scrutiny

By MARK FRYER

If your home's drains ever need seeing to, you'll need a registered drainlayer. Fair enough too - the consequences of a botched drain job can be unpleasant at best, downright unhealthy at worst.

But what if it's your finances that need attention? Can you make sure you're getting good advice, by dealing only with an adviser who is licensed or regulated in some way?

No such luck. There's nothing to stop people calling themselves a financial planner or investment adviser, regardless of their qualifications - or lack thereof.

While some might argue that the consequences of bad financial planning can be every bit as dangerous as some dodgy drainlaying, the business of giving financial advice remains largely unregulated, apart from some rules on the information that advisers must disclose (see below).

However, the organisation which bills itself as representing most of the country's financial advisers has taken a tentative step which could lead to greater controls.

The Financial Planners and Insurance Advisers Association (FPIA), which has about 1250 members, has decided to look into the whole question of regulation, whether more is necessary and, if so, what form it might take.

That doesn't imply that the association is in favour of more rules and regulations, says chief executive Phillip Matthews, just that the whole area is worth examining.

The issue of regulating advisers keeps on coming up, says Mr Matthews, so the FPIA needs to decide what its position is. "There are certainly instances of unethical and at times illegal advice, and that is an issue that has to be dealt with," he says.

The association hopes to have its position worked out by the end of the year.

The association's president, Paul O'Brien, had suggested a system under which advisers would have to belong to an organisation such as the FPIA but, says Mr Matthews, that was only a personal view, and just one of the options.

According to the Consumers' Institute, what is needed is "not more regulation but perhaps modification of the existing regulation," in the words of chief executive David Russell

While the law means advisers are obliged to reveal certain information, there's an arbitrary twist to the disclosure rules.

Some things they have to tell you. But other information - arguably the most important things, such as their qualifications and how they're paid - have to be revealed only if the customer asks. "This to us is just a nonsense," says Mr Russell.

"It presupposes that the consumer is going to be in a position of knowledge to know what questions to ask - the vast majority of consumers don't, so we believe that the disclosure requirements should be made mandatory."

Under that approach, there would be a list of items advisers would be required to reveal - without having to be asked first.

"If there is clear, up-front disclosure at the beginning then people should be able to make up their own minds," says Mr Russell.

The main issues that customers need to be aware of are whether their adviser has an obligation to sell certain investments, or a very limited range of investments, and how they earn their income, he says.

Greater disclosure should be the first priority, says Mr Russell, and only if that approach fails should there be more draconian action, such as compulsory registration for advisers.

Euan Abernethy, chairman of the Securities Commission, agrees on the inadequacies of the disclosure rules.

Speaking personally, he says, "the present disclosure regime, I believe, in itself does not work very well because the meaningful disclosure only has to be provided on request and some investors don't even know that they can request that sort of information."

And he sees plenty of room for improvement.

"We've come across numerous cases of advisers who have recommended totally inappropriate investments to investors and who themselves don't seem to have any appreciation of what it is they are selling."

We've had numerous cases of people who call themselves investment advisers peddling completely fraudulent and bogus schemes - those people just shouldn't be allowed to go around peddling those schemes, particularly to naive and unsuspecting investors."

Licensing advisers would be difficult and probably would not work very well, says Mr Abernethy, but he would like to see some body given the legal power to ban certain people from giving investment advice if they fail to meet some basic level of competence.

As the law stands, a court can ban someone from offering their services as an investment adviser, but only if that person violates the disclosure rules - merely giving awful advice is not grounds for a ban.

The Investment Savings and Insurance Association, which represents life insurance and investment companies, is also less than enthusiastic about any form of compulsory registration or licensing.

"In the UK and Australia, where they have very tight regulations and licensing, there's no evidence that the results there are any better," says chief executive Vance Arkinstall.

However he does see a need to look at more self-regulation, which could make consumers more confident about seeking advice.

* Contact Personal Finance Editor Mark Fryer at: Business Herald, PO Box 32, Auckland. Phone: (09) 373-6400 ext 8833. Fax: (09) 373-6423. e-mail: mark_fryer@herald.co.nz.