FMA report highlights financial advice inequality and raises questions around breadth of financial advice on offer to even those who can afford it

The financial knowledge gap reflects the wealth gap in New Zealand.

It is perhaps unsurprising that it’s those with money who have greatest access to information about how to manage their money (and debt).

Yet the Financial Markets Authority’s 2016 survey of all the country’s 1800 Authorised Financial Advisers (AFAs), highlights the potential pitfalls of some of the advice provided by even our most qualified professionals to usually our wealthiest people.

Advice gap

To begin with, the annual returns submitted by AFAs to the regulator, show there are only four AFAs for every 10,000 people in New Zealand.

At 5.1, Wellington has the highest number of AFAs per 10,000 people, followed by Otago, Auckland and Canterbury.

Wellington also has the country’s highest median weekly household income of $1,726. This is followed by Auckland at $1,682, Canterbury at $1,598 and Otago at $1,454.

At the other end of the spectrum, the West Coast of the South Island has the lowest income, at $1,286, as well as the lowest number of AFAs per 10,000 people, at 1.2.

It is closely followed by Gisborne, where the weekly median household income is $1,381, and there are 1.3 AFAs per 10,000 people.

It is worth noting that we’re just talking about AFAs here, who can give personalised financial advice on all categories of financial products and are licenced individually by the FMA. They are distinct from Registered Financial Advisers (RFAs) and Qualified Financial Entity (QFE) advisers.

Concentrated range of products advised on

Yet for the minority of New Zealanders who do get financial advice, the FMA’s survey indicates the quality of the advice they receive may not be that robust.

For example, 21% of non-QFE AFAs (AFAs who don’t work for a QFE like a bank or another business that takes responsibility for the financial advice provided by its employees and contractors), generate more than 50% of their commission or production bonuses from investment products from one product provider. This portion is on par with data collected in 2015 and 2014.

Accordingly, 41% of non-QFE AFAs only provide advice on one KiwiSaver scheme, when their clients seek to join or transfer schemes. This portion has crept up from 37% in 2014.

Fewer provide advice on two to four schemes - 45% compared to 51% in 2014 - while only 6% provide advice on five or more schemes.

Asked whether he’s concerned about this, the FMA’s director of regulation, Liam Mason, says when it comes to any financial product, the question is; does the client know that their adviser is only considering one product. If the answer is yes, that's fine.

“If on the other hand, you believe you’re going to an independent adviser who’s going to offer you a range of options, and that’s not really the case, then that is a problem in terms of the outcomes for the customer,” he says.

KiwiSaver not a priority for the wealthy

Looking further into the data, 22% of non-QFE AFAs don’t provide any of their clients with advice about transferring between KiwiSaver schemes, while 56% provide this advice to between one and 10 clients.

The figures look similar when looking at non-QFE AFAs when it comes to providing advice about switching between KiwiSaver investment portfolios within the same scheme.

Mason isn’t too worried about this, noting: “That plays back into the client base of AFAs - that on average these are folk with $200,000-$500,000 invested, and it’s probably more likely with this cohort that KiwiSaver is a smaller part of a larger investment portfolio… It’s less surprising and not necessarily concerning to me that there isn’t attention being paid to switching KiwiSaver within this group.

“The real focus that we have when it comes to KiwiSaver is the much larger group of people who don’t have access to an AFA. How do we help them?”

Low levels of advice on changing insurance providers

As for insurance, 18% of non-QFE AFAs don’t provide any clients with advice about changing their insurance. This is an increase from 15% in 2014.

Around 51% provide advice to between one and 10 clients, 19% to 11-25 clients, 8% to 26-50 clients and only 4% to more than 51 clients.

Mason recognises the tensions with these figure that on the one hand some AFAs have come under fire from the FMA for churn - suggesting their clients switch insurance providers every couple of years, so that they can receive high up-front commissions of up to 200%.

Yet on the other hand you could argue that if they aren’t advising their clients around alternatives, they are just clipping the ticket from the insurance provider every year without reassessing their clients’ needs.  

“The ideal is that you want advisers being engaged with the clients to make sure their needs are well met, but that any purchases should be driven by the customer’s best interests, not by the adviser’s. There’s certainly a line to tread there. From the data, there aren’t conclusions you can draw on those,” Mason says.

Commission levels unchanged

The FMA’s data shows that the portion of non-QFEs who receive commissions for the services they provide is fairly consistent with previous years at 55%.

Yet the portion who receive bonuses based on volume and set targets has dropped marginally to 21%. The portion who receive various soft commissions - vouchers, travel and other perks - has also fallen away slightly.

The FMA recognises commissions bring down the cost of financial advice, as advisers have the option of not relying solely on fees from their clients for their services. This should make advice more accessible to people.  

Along this line of thought, the Government has indicated it won’t ban or cap commissions.

In its draft Financial Services Legislation Amendment Bill, which repeals the Financial Advisers Act and amends the Financial Markets Conduct Act and the Financial Service Providers (Registration and Dispute Resolution) Act, it’s indicated advisers will have to meet higher disclosure standards.

However it has said these disclosure rules won’t be put into legislation. Rather they’ll be made through regulation, to give the regulator more flexibility around the shape and form of disclosure requirements.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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4 Comments

...And the Reserve Bank expects ALL depositors to know if their bank is stable and on a good financial footing. GET REAL RBNZ - give the NZ public insurance over deposits like they do is AUS.

The sterile discussion that never goes anywhere

I lived in AU during the establishment and growth phase of the Financial Advice Industry, participating tangentially but fully involved with direct participants.

During that time there was a move by a number of Financial Advisors to establish and promote the value of independent advisories not beholden to the dealer groups which are a front for, and backed by, the Banks

The prime moving force was a guy by the name of Travis Morien who developed quite a web presence. I never met him, but this many years later I still remember him.

I suspect he failed in his quest - but he still has his web-presence which I draw to your attention as much of his writings are most informative and depict all the problems the New Zealand industry experience

quote (from 10 years ago - don't think anything has changed)
"The majority of financial planners (90-something percent) work for banks or large dealer groups. Almost all dealer groups limit their advisers to operating off a "recommended products list" (RPL), which in some ways is a good thing (it stops shonky advisers recommending scams, assuming shonky advisers that want to recommend scams adhere to their dealer's RPL), but in many ways impedes the adviser's ability to offer good advice

In my case, when I left my old dealer group my advice changed dramatically. As much as I disliked it, I had to stick to the recommended product list as long as I worked there, those were the rules and they had to be obeyed. Nevertheless, it really ought to say something that now I am with a small independent dealer I have not used a single product from my previous employer's recommended product list and don't intend to ever again (although those products are still available to me if I want them)"

Gives some indication as to why ASIC and AU Government have spent considerable effort to move the industry away from commission payments but New Zealand remains content with

Worth the read
http://www.travismorien.com/independentfp.htm

Here is his web site
http://www.travismorien.com/

Here's my advice ............

1)Read
2)Read
3)Read
4) and then question what you have read
5) If its too good to be true , its probably not true
6) Only buy shares in Companies with proper tangible assets and a strong Balance sheet and sound profit track record
7) If your gains have been in excess of 15 to 20% over the past 12 months ............ SELL and take your profits
8) If an industry has sprinted (like construction or property development ) get out of those shares because they are going to run out of steam.
9) Dont EVER become emotionally tied to a share or stock ( like holding Fletchers because its a Kiwi success story or because your father worked there )

Then take your stockbroker out for a $10 lunch meal on Friday , and buy him a few beers and listen to what he says .

Then go with your gut feeling and let the rest of the world catch up with you later .

Boatman,

I was highly critical of your recent posts on rail,but here,I pretty much agree with everything you have said,with the exception perhaps of 7. A gain of 15% over a year is not exceptional for a good quality company and I am more inclined to run my gains and cut my losses. However,with holdings such as F&P Healthcare and Tourism Holdings where I have made very significant gains,I have taken profits for reinvestment elsewhere.
I hardly ever use a stockbroker. I spent most of my working life in Scotland as a Financial Adviser and would ban commission entirely.The perennial whine is that this would lead to many fewer people getting any advice,but no advice is better than bad advice.