Money: Of finance advisers and their ethics

By Mary Holm

Financial advisers know many people are suspicious of their motives.

As Graham Rich, New Zealand boss of research company Morningstar, said at their recent conference: "Few enough people trust the concept of financial advice, let alone advisers."

And the comment of one adviser, in a conference workshop, doesn't help the image. "Ideal clients?" he said, "let's be quite honest, they're wealthy."

He went on to say that ideal clients are also educated, "people who understand that markets go up and down, and understand asset allocation.

"And people who know where they're going, when they'll stop having children. People who are settled."

Obviously, such clients would be easier to deal with, and more lucrative for the adviser than a family with a large mortgage. "They're not really appealing to us," said the adviser.

But, as a member of the FPIA, he is obliged to look beyond what's in it for him.

The first objective of the association is to "advance the financial well-being of the public".

And rule number one in the association's code of ethics is that advisers must "act in the client's best interests, above consideration of personal gain".

In a workshop on ethics and professional conduct, advisers were told they should take care how they deal with their clients - not just because that is the right thing to do.

"Unfortunately, we have an increasingly vigilant client base," said Gabrielle Wilson, an adviser who has helped draw up the code of ethics.

She has been an expert witness in several court cases in which former clients have sued advisers. "And the judiciary is very supportive of aggrieved clients."

There are three levels of service that advisers can offer investors, said Ms Wilson: A comprehensive financial plan; services limited to the areas listed; and conducting transactions without giving advice.

An adviser should make it clear, in writing, which type of service they are offering, she said.

If they are not offering advice, the client should be told that, so they cannot later take legal action if the investment turns out to be inappropriate for them.

As a new organisation, the FPIA is still finalising details of its code of ethics. After about a year, it expects its compliance officer will visit members on a random basis to make sure they are abiding by the code.

If they are not, they will have to pay penalties, said Ms Wilson.

Other gems of wisdom from the conference:

\EE It's best to "buy against the grain", said Don Phillips, chief executive of US firm Morningstar, which does research on managed funds.

Morningstar looked at what would have happened over the last 20 years if you consistently invested in funds "in the three hottest selling areas" and held them for three years.

"You would trail the S&P500 index [of America's biggest 500 companies] 75 per cent of the time."

If, instead, you invested in the three least popular areas, "80 per cent of the time you would beat the S&P500".

It's not easy to buck the trends, though. Mr Phillips said you can find yourself buying stocks "and you have to hold your nose when you're writing out the order, they look so bad".

\EE If someone has money in a savings fund and a mortgage on his/her home, he/she should take the money out of the savings and pay off the mortgage.

Then borrow the mortgage money again, and use it to invest in a similar savings fund, said financial planner Tom Watson of Apex Financial Services.

The mortgage has then been raised for investment purposes. That means the interest payments become tax deductible.