As we edge closer to 1 July, 2011, financial advisers are spending most of their waking moments preparing for the new regulatory regime which will clearly identify those advisers who are authorized to give financial advice on investment products and those who are not. Financial advisers who are not authorized have some significant decisions to make about what happens to their investment clients. Investment products generate ongoing commission or fees and this stream of revenue is an asset which can be sold. Some advisers have chosen to sell their clients to authorized advisers. Some have sold their investment business back to the product providers using a ‘buyer of last resort’ facility. Some advisers are hoping, rather foolishly, that no-one will notice they are collecting fees or commission from investment clients to whom they are not authorized to give advice. An even more disturbing response is that some advisers are planning to ask their investment clients to sign a waiver stating that they do not wish to receive personal advice, that they wish to make their own decisions and therefore that they are transactional clients only. This could be seen as a blatant attempt to sidestep the new regulations and any investor asked to sign such a waiver should seek expert advice before signing it. No doubt the Financial Markets Authority will be taking a keen interest in this practice. The additional costs for authorized financial advisers, including registration and authorization fees, levies, membership of a dispute resolution scheme along with the increased amount of time required to document advice mean that inevitably investors will have to pay more for advice and commissions are likely to be replaced with fees. Investors should regard this as a positive move as along with the increased cost will come improved service and quality of advice.
20 June 2011
30 May 2011
The Price of Good Advice
The calendars of financial advisers throughout the country have a big circle around 1 July, 2011. That is the date by which, with a few exceptions, any person giving advice on investment products must be an Authorised Financial Adviser (AFA). An adviser who works for a large company, such as a bank, which has been approved as a Qualifying Financial Entity (QFE) may give on advice on products issued or promoted by the QFE without having to be an AFA but is expected to show the same standard of professionalism. To become an AFA, an adviser must meet certain educational requirements, be of good character, join a Dispute Resolution Scheme and follow a Code of Conduct. All this requires time, effort and cost. Advisers have responded to the new regime in a variety of ways. Some have decided to retire, sell their businesses or work under the supervision of an AFA. Commissions are gradually being replaced by fees due to the higher costs of providing quality advice. Many insurance advisers have made the decision not to sell investment products and have sold any existing investment business they have. Product providers have made it clear they will not pay commission on investment products to advisers who are not AFAs. What does all this mean for clients? Firstly, some will find themselves being ‘sold’ by their existing adviser to an AFA. Others may find themselves with no adviser at all if the adviser has had commissions cut or sold their business to a product provider. There will be a shortage of AFAs initially and with higher standards of advice required, and an associated higher cost, clients with small amounts invested may find themselves unwanted by advisers or being charged fees for advice. The changes are good, but they come at a cost.