Money: Heat on financial advisers

By PHILIP MACALISTER

The Securities Commission's discussion document on regulating financial advisers is a timely piece of work because of the growth in the sector.

"There's a flight to advice," says AMP Financial Services' managing director, Andrew Mohl.

This flight has been fuelled by two major factors. First, markets have been in a bear phase for nearly a year and many investors have seen major negative returns for the first time in many years.

This problem has been exacerbated, Mr Mohl says, by the do-it-yourself attitude encouraged by the internet.

Many people have ended up holding quite muddled portfolios. "People are going back to advice to sort out the mess and restore their confidence."

Secondly, people are becoming time-poor while investing becomes more complex and time-consuming.

Professional financial advisers take an holistic approach and build portfolios of investments which fit together. Just as importantly, they build a relationship with their clients.

But who is a financial adviser and who do you trust?

There is no simple answer. On the one hand, it could easily be argued that advisers include groups like real estate agents, financial planners, bank tellers, accountants, overseas "sharebrokers", and even the people who go door to door selling fringe products.

All of these people are doing the same thing - trying to sell an investment.

The advisory industry in its broadest sense can be broken into three categories based on what the "adviser" sells.

At the top are the professional advisers. These are people who sell mainstream products from major financial services companies like Armstrong Jones, AXA, Tower and Royal & SunAlliance and Perpetual Investments.

They generally belong to an association like the Financial Planners and Insurance Advisers Association or the Society of Independent Financial Advisers, and in some cases are governed by high standards set within their organisation.

The second group sell what one could reasonably call fringe products. Generally these are not covered by any of the mainstream organisations, and in many cases offer high returns and high risk. These types of "investments" include car-parking spaces, agricultural investments, such as olives, and forms of real estate.

The third group, and the most problematic, is the "product" sold over the phone by brokers in places like Thailand and the Bahamas.

This is the area which causes the Securities Commission its biggest headaches.

The commission regularly advises people to steer clear of such investments. The main reason is that they are generally illegal because they don't have documentation like an investment statement or prospectus.

Early this year, the commission estimated that millions of dollars each year were sent overseas into dodgy schemes.

"In the past six months, the amounts people have told us they have sent overseas total almost $4.6 million," commission acting chairman Michael Webb says. "Only a few who call us mention the amount they have parted with and there must be many, many more people who have not got in touch with us."

Securities Commission chief executive John Farrell says this group is one of the two reasons the commission developed the discussion document.

The commission cannot prevent people overseas selling their wares here, but it proposes to crack down on people in New Zealand who are selling illegal investments.

The question the commission's document raises is: how bad is the standard of investment advice in New Zealand?

From the professional financial advisory community, the evidence suggests the standard compares well with countries like Australia.

In New Zealand it is rare to come across a court case which features an adviser on securities charges. Across the Tasman, where they have a highly regulated advisory industry, it is a quite different story.

Barely a week goes by without a story about an adviser being banned.

This led to the business magazine BRW running a cover story in February entitled "Scam and Scandal".

A salient point to come out of the feature was that fraudulent advisers often either told clients they were investing their money in high-returning overseas funds or were putting the money into the adviser's private "loan agreement" or "mortgage fund".

One of the problems in New Zealand is that the 1996 Investment Advisers (Disclosure) Act is not working.

While most other comparable countries have regulated advisory industries, which in some cases involves the licensing of advisers, we take a different approach.

It is built around disclosure. The idea is that if sufficient information is disclosed, investors can make informed decisions.

Economist Gareth Morgan says that a good disclosure regime enables high-quality advisers to differentiate themselves from poor-quality ones.

Taking the bad advisers out of the industry and shooting them isn't going to suddenly give advisers credibility, he says.

To be credible, advisers need to set high standards and earn the respect of consumers.

"You cannot legislate excellence. Excellence has to be earned.

"Bottom feeders are essential if you want to differentiate yourself. You need losers to make the winners shine."

Under the act, advisers have disclosure documents which they provide to clients or prospective clients. The idea is good, but the trouble is that it is a two-tiered process.

At the first level, it is compulsory that advisers give their clients information that includes whether they have any convictions involving dishonesty, have been made bankrupt in the past five years or whether they have been prohibited from taking part in the management of a company or business.

However, investors can request a whole raft of other important information, such as advisers' qualifications, how they are paid and whether they have an interest in the products they are selling.

The issue here is that investors have to request this information.

Mr Farrell says it is clear that this process is not working and people aren't getting sufficient information. The commission proposes all this information should be given to a client before he or she does business with an adviser.

The other key change proposed by the commission is that it polices the advisory industry. It wants to be able to ban advisers from operating, suspend their disclosure documents if they don't come up to scratch and prohibit advertising which breaks the law.

The quality of advice has constantly improved over the past decade and the professional financial advisers are moving to a model where they are offering investors a service, rather than just selling a product.

Many of the large financial planning organisations are working hard to make sure their advisers are well trained, and the Financial Planners and Insurance Advisers Association has high standards of disclosure for its members.

What people must remember when they are investing is that good advice is essential for sound, long-term investments.

There is nothing stopping people from hanging up a shingle and calling themselves financial advisers. If you end up in the office of one of these people, ask a few pertinent questions.

For instance, find out what sort of training the person has. Also check out the products in his or her sales bag.

If it is full of investments from mainstream companies, you can be reasonably well assured that the person is bona fide. Why? Simply because fund managers don't want to deal with dodgy advisers because their name gets tarnished if things go wrong.

Also, the mainstream fund management organisations generally belong to the Insurance and Savings Ombudsman or the Banking Ombudsman schemes, so there is a process for complaining if things go wrong.

There are some sayings in the investment world which cannot be repeated often enough. One is: "If it looks too good to be true, it probably is."

Don't be greedy and don't try to do your investing yourself. Get some professional advice.

* Philip Macalister edits online money management magazine Good Returns. His e-mail address is philip@goodreturns.co.nz