The environment within which financial advisers operate has changed markedly and if we are to believe the industry rhetoric "the sharks have left the area and it is now safe to go back into the water."
The reality is that major problems remain in the form of the commission based remuneration model and, more significantly, the high annual fees charged by almost everybody. The impact of the latter is particularly destructive as it forces advisers to take higher risks with clients' money than would otherwise be the case. The industry would no doubt counter this argument by pointing to the new code of ethics and the requirement for all advisers to undertake continuing professional development (CPD).
The FMA has high hopes for CPD and in an email it said that "it is up to individual AFA's to decide on what courses to take up and their relevance. It is our expectation that advisers will select from a range of options when considering their individual training needs and can generally access appropriate training deliverables to fulfil the requirements of their individual professional development plans and thereby ensure that they have the competence, knowledge and skills required".
Nice dream - anecdotal evidence suggests that the FMA's optimism may be misplaced. The providers of CPD know that most of their target market is conflicted in one way or another. Usually this conflict relates to the receipt of commission and/or high annual fees. The providers therefore know they aren't going to be able to sell any investment strategy which threatens the industry's high cost business model.
Today's article looks at a few examples of where education plays second fiddle to commercial reality in the CPD offering from one of the biggest providers in the industry.
All of the 1957 AFA's in NZ like myself have to do 20 hours of CPD per year, ten hours of which have to be from an authorised provider. My firm has already had a bad experience with CPD when we wasted $1800 and two working days on a course which was totally irrelevant to the provision of advice to retail investors.
Despite this waste of time and money for better or worse I still had to do ten hours of structured learning. So when I read that Company A was offering this sort of thing over the internet I thought this was some good news at last.
The essence of Company A's CPD offering was as follows: The AFA wishing to avail him/herself of the collective wisdom held in Company A's database simply logged in, selected an article, read it, answered four questions correctly and the CPD credits duly accrued. The cost of accessing the database was $1,000.00 - over the top yes, but better than wasting a day or two travelling.
So it looked like a reasonable solution or rather it would have been reasonable had the articles been worth reading and the "correct" answers to the questions indeed correct.
Unfortunately neither was the case: many of the articles were not worth reading - almost a quarter of those on offer were specialist topics for Australian investors. Another low point was an article on how to get referrals from existing clients - CPD I don't think so. Despite this I was able to answer the four questions for each of the six articles I chose and thus get the CPD credits without even reading the articles. If this sounds bad what should worry the FMA is that in many cases I had to guess which wrong answer the industry provider had thought was the right answer.
Two of the articles I looked at concentrated on the fixed interest sector. Investing in bonds poses a major problem for financial advisers due to low returns and high costs. So what did the fixed interest articles have to offer? The short answer is not a lot. Instead one paper was full of technical analysis relevant only to someone who was going to be a bond dealer. Most worrying was one of answers to the questions in the assessment was demonstrably wrong.
The question said "what is the yield to maturity given a 7 per cent coupon, 10,000 face value and $9,500 price". None of the four options gave the right answer.
There was no mention of what best practice looks like as evidenced by the portfolios of institutional investors which are chiefly made up of low risk bonds and no mention of the tendency for the bond market to bifurcate in times of stress whereby junk bond prices collapse and low risk bond prices rise. Why? Because a low risk bond strategy won't work with the industry's high fee structure.
One of the few new developments in the finance world that have actually been of benefit to retail investors are exchange traded funds or ETF's. The database contained two reports on ETF's but both failed miserably in arguing what really is a very simple and highly compelling case for the inclusion of ETF's in all retail investors' portfolios.
Instead what they tried to do is present the advantages of ETF's without upsetting financial advisers and their high cost business model.
One of the assessment questions reads "the key advantage of ETF's over traditional managed funds in the context of financial planning is" and it gives four options. The incorrect correct answer according to the database was "their transparency allows investors to know exactly what they own". This is ridiculous and at variance to commonsense, every study I have ever read about ETF's and the regular review of the ETF industry in the London Financial Times.
Their biggest advantages are immediately obvious to even unsophisticated investors; firstly low fees and secondly an absence of variability which comes from active management i.e a lack of tracking error.
If the correct answer to this question was actually delineated, i.e low cost and no tracking error, that would upset financial advisers and their clients because the latter would then say why am I paying 3 per cent pa in annual fees when I am told costs are important and the ETF's charge just 0.25 per cent?
This is just a small snapshot of CPD in NZ and it may very well be that there are more worthwhile options available however I am yet to find one. The FMA therefore should be as keen to mystery shop CPD providers as it is to mystery shop advisers.