Tag Archives | investment advice

The Changing Role of Financial Advisers

Adviser2The Changing Role of Financial Advisers

Financial advisers have been working under their new regulatory framework for nearly three years and many have changed the way in which they operate over that time. In 2011 the Code of Professional Conduct for Authorised Financial Advisers, which sets clear standards for the provision of financial advice, came into force. Since then, many advisers have been the subject of audits by the Financial Markets Authority to check on their compliance with the Code and legislation such as the Financial Advisers Act (2008). The FMA continues to work on policies and regulations that will broaden the regulatory framework for advisers.

The administrative and financial burden of complying with the new framework has seen many advisers either leave the profession or align themselves with an adviser group to access support and share costs. Sole practitioners are becoming a rarity.

Perhaps the most interesting changes is that investment advisers are more reluctant to construct and manage client investment portfolios comprised of direct investments in specific shares and bonds or single sector managed funds (that is, a fund that invests in only one asset class such as shares). Instead, advisers are increasingly recommending ‘model’ portfolios developed by research houses or diversified managed funds within which the fund manager makes decisions about the underlying investments and changes to the asset allocation. The role of financial advisers is becoming one of working with clients to understand their needs, matching them with investment solutions researched and recommended by technical experts, and broadening out the range of advice in a holistic way to cover such areas as achievement of goals, budgeting, estate planning and general financial advice. This is as it should be. Advisers should spend the bulk of their time working on developing relationships with their clients rather than pretending to be experts on investment selection.

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Smaller Investors Miss out on Advice

Smaller Investors Miss Out

One of the unfortunate consequences of increased regulation of financial advisers is that some smaller investors now find themselves squeezed out of the market for personalized investment advice. There are two types of investment advisers who are able to give advice to the public: Authorised Financial Advisers (AFAs) and Qualifying Entity Advisers (QFE advisers). Whereas AFA’s can give investment advice on a wide range of investment products, QFE advisers can give investment advice only on products offered by the company they work for. QFE’s are generally large companies such as banks and insurance companies. There are less than 2000 AFA’s in New Zealand, and many who hold the designation do not give advice to the general public. Just to make it even more confusing, some of the AFA’s work for QFE’s such as banks. An AFA working for a QFE can give advice on a wide range of investment products from different providers.

With the limited number of AFA’s available, many advisers and QFE’s are now setting minimum limits on the size of investment portfolio they will advise on and manage. These limits can be anywhere from $100,000 to $1million or more. At the other end of the spectrum, QFE’s such as banks are using the large number of QFE advisers in their branches to sell KiwiSaver and savings and investment funds for small lump sums or regular contributions. It is increasingly difficult for investors with small to average portfolios to find advisers who can advise them on a wide range of investment products from different providers. Getting advice on whether to purchase shares in the proposed Government asset sell-down is a prime example of this, as advice will need to be obtained from an AFA, not a QFE adviser, many of whom will not be interested in smaller investors.

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Free Help for Investors

Free Help for Investors

The Global Financial Crisis was the catalyst for significant change in the regulation and supervision of financial markets. Just like an earthquake, the Crisis shook the very foundations of financial systems and any weaknesses resulted in damage and destruction. Unfortunately many investors suffered losses and to reduce the risk of this happening again, the foundations of our financial system have had to be strengthened. The Financial Markets Authority (FMA) was established in 2011 with the objective of promoting and facilitating the development of fair, efficient and transparent financial markets in New Zealand. One of the ways it achieves this objective is by educating and informing New Zealanders on investing. Over the last year the FMA has been steadily building an inventory of resources to help all market participants, including investors. It now offers a comprehensive section on its website called ‘Help Me Invest’ – click here. It is well worth listening to Sue Brown’s video clip which covers how to be an informed investor. Sue is Head of Primary Regulatory Operations at the FMA and her top three tips for investors are:

  1. Understand what you are investing in. How does it work, what are the costs, fees and limitations? Does it match your goals and risk tolerance? What are the risks? Don’t invest in something you don’t understand.
  2. Do some research. You don’t need to become an expert, but you do need to know enough to judge whether the investment will meet your needs. Read the product investment statement as it contains the basic information you need to know.
  3. Use a financial adviser, and be aware there are different types. An Authorised Financial Adviser (AFA) can advise on most investment products, and a Qualifying Financial Entity Adviser (QFE Adviser) can advise you on the investment products provided by their company.
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A New Era for Financial Advice

New Era for Financial Advice

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.

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The Price of Good Advice

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.

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