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.
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.