The environment within which financial advisers operate has changed markedly in the past 12 months with the advent of the Financial Markets Authority (FMA) and a far more stringent regulatory regime.

Last October the FMA, after a series of interviews and monitoring of "selected" advisers, released a bulletin which gave feedback to the industry as to what key variables the FMA would consider in assessing performance.

It was encouraging to see the FMA has decided to highlight the relative importance of "outcome" - that is, what is sold to the client - as opposed to "process", or how the adviser achieved the outcome.

In the past many advisers have undertaken a long-winded and tedious process to determine the risk profile of their clients and on that basis what asset allocation and products were appropriate.


In reality the process frequently had little impact on the outcome in that the outcome usually was that mum and dad got fitted up with the highest commission-paying products available; that is, finance company debentures, structured products and other instruments totally inappropriate for almost anybody.

The FMA has obviously seen through this charade and decided that while process is nice, the bottom line is the outcome, so advisers will no longer be able to get away with giving bad advice just because they have followed a legitimate process. That is insightful work by the FMA.

Another change for authorised financial advisers (AFAs) is that in the future they will need to undertake continuing professional development (CPD). The requirements regarding additional training were determined by a code committee whose make-up was dominated by financial advisers.

As Gareth Morgan pointed out at the time, the views and interests of the financial planning industry seem to have prevailed here at the expense of good sense and the interests of investors.

The committee was actually a bit of a disaster from the word go, as early in its life a number of its members resigned after their firms were mystery-shopped by Consumer magazine, which gave them "fail" reviews. Great timing, Consumer. But back to CPD.

Advisers need to do a minimum of 20 hours a year, 10 of which need to be structured training. For a course to qualify as delivering a CPD credit, it needs to be part of the requirements for a qualification on either the National Qualifications Framework, or the national register of quality-assured qualifications, or be part of a structured continuing professional development programme managed by a delegated assessment organisation (DAO) or qualifying financial entity (QFE) or professional body.

The code does not strictly define structured training and it is up to the adviser to determine what areas they are deficient in and organise their training accordingly.

This sounds like another step towards an improved investment environment, but the reality may be quite different. For example, in most QFEs, the structured training will likely be determined by the company that the adviser works for, and it is quite conceivable that a financial adviser could discharge their 10-hour structured training requirement by attending a course that prepares them to sell a particular product like a CDO or a finance company debenture.


It is hard to see that retail investors would benefit from this sort of training and, more importantly, this environment looks little different to what prevailed back in the bad old past. This problem is compounded by the fact that advisers working for QFEs didn't actually have to do much to qualify as AFAs.

My firm recently had first-hand experience of CPD and the net result was about $1800 in fees, two days lost time and no benefit whatsoever.

An associate attended an eight-hour course in Wellington to fulfil his CPD requirements, offered through the professional association we both belong to.

At $900 for the course fee, plus the costs of travel from Whakatane to Wellington, accommodation, etc, it covered interest rate product portfolio management and yield curve analysis, and was the best of a bad bunch.

The course booklet prominently featured the heading "Earn eight CPD hours" and had a picture of someone resembling Gordon Gekko with three screens keeping him occupied.

However, my associate advised that the course was almost a total waste of time as it focused on trading 90-day bills and the yield curve while hedging the physical position with futures.

In the 27 years I have been advising retail investors, I have never met an adviser who undertook this sort of activity for clients.

Indeed, any adviser who did propose this sort of inappropriate nonsense for retail investors would likely be disciplined by the FMA for offering advice that was unsuitable for the client. Ninety-day bills are a short-dated fixed-interest instrument and the Bank of New Zealand money market desk advises that the minimum trade it would entertain is $100,000.

The market is dominated by institutional investors, primarily the banks, and the BNZ dealer we spoke to remarked that in the four years he had worked there he had not sold a 90-day bill to a retail investor.

Needless to say, trading 90-day bills while hedging one's physical position in the futures market has no relevance to the provision of financial advice to retail investors. So the question is: how on earth did this course qualify for eight CPD credits?

What makes this poor allocation of education resources a big issue is the fact that so many financial advisers in New Zealand seem to have little understanding of what is and isn't the right thing to do when it comes to putting together a sensible fixed-interest portfolio for a retail investor, as part of a diversified portfolio.

Most retail investors' fixed-interest portfolios have little or no exposure to A- or AA-rated - let alone AAA-rated - bonds. Instead, what's left of Mum and Dad's fixed-interest portfolio after the finance company debentures have been written off is usually other higher-risk instruments such as unrated subordinated bonds, which, coincidentally, paid high levels of fees at the time of their issue.

Just this week a retail investor advised by a trustee company showed me her fixed-interest portfolio, which was showing huge losses on subordinated debt issued by the likes of Credit Agricole, Rabobank and various others. There were no AA-rated bonds, no medium- or long-term bonds and her bond portfolio had fallen in value at a time when the diversifying effect of longer-dated, low-risk bonds would have been most useful.

Fixed-interest courses for advisers setting out what best practice is, as illustrated by the portfolios of institutional investors, are desperately needed. These should concentrate on the basics and leave losing money trading 90-day bills to Gordon Gekko.

Brent Sheather is an Auckland-based authorised financial adviser and his adviser/disclosure statement is available on request and free of charge.