Financial advisers' fees lack clarity

As with any service, financial advisers should make their fee structures clear from the outset. Photo / Getty Images

Young investor looking for chance to invest aggressively met with suspicion, arrogance and conservatism.

I searched for a financial adviser about three years ago. I chose in the end - after going through about five initial meetings and one second meeting - that I would rely on myself to invest.

My initial personal experience, being female and in my late 20s, was that they couldn't relate to me, and two of them treated me with suspicion (maybe they thought I was wasting their time?) and arrogance. The remainder were professional but every one found the need to mention "you are the first person I've seen without grey hair"!

Other than being a bit put off on first meeting them, the main reason I didn't use any of the advisers was because of the fees and the structure of how the advisers are paid, and hence what they suggest I should invest in. Okay, you don't know what kind of return you're going to make. But you also don't know what kind of fees you're going to pay, which really bugged me.

Not knowing the total fees and what the adviser is making off me (that is, whether they are suggesting one investment over another purely because they want or need to make a commission) put me off for good.

Lastly I'll mention risk. Every adviser had me do an almost identical risk questionnaire, which was good, but none of them explained it. They just said okay, you're moderate conservative and this is how a model pie chart of investments for that would look.

I didn't like this, and it wasn't until a few months later I really understood why. One of my aims of going to a financial adviser was to make money, of course. At my age and situation I can invest more aggressively, yet none of the advisers talked to me about that or made any indication they would in the future. They just took it at face value, whereas I really wanted encouragement, and some hand holding, to invest in riskier growth investments.

At the time it felt like they just suggested what the majority of their clients do (which if they all have grey hair then, yes, they would be leaning towards being conservative) rather than what I personally needed.

I've edited your long letter, which went into more detail about how hard it was to get a clear picture of fees, commissions and so on. I agree that's poor. With every other service we buy, we're given a price, or at least an estimate.

But I was particularly interested in your comments about risk questionnaires. It would have been good if you had asked more questions. But still, an adviser is the professional one here - or is supposed to be - and they certainly should discuss the idea of taking more risk with anyone in their 20s - or for that matter their 30s or 40s.

They should have explained to you that successfully handling higher risk investing means biding your time when - not if but when - the value of your investments falls. And they should have said they would be there to support you through those times. Surely that's part of the adviser role.

Well done for "interviewing" a range of advisers, which is something more people should do. And well done for asking upfront about fees and commissions.

It's disappointing you didn't find someone suitable. Your experience is hardly encouraging for other young investors - arguably the ones who most need advice.

There are still a few more days for other readers to send me comments about their experiences with financial advisers. I may publish them in this column, but in any case I'll forward them to the Ministry of Business, Innovation and Employment by their July 22 deadline.

Open bank resolution rules

In the unlikely event of a need for the banks to dip into our saving funds to make up a shortfall in their vast wealth, could you tell me whether the banks take the percentage across the board, or just from specific areas, say private term deposits, leaving all else alone, or will it come from every account in the bank, private, business, whatever? I would appreciate your comment.

"The banks cannot dip into anyone's savings to make up shortfalls," says a Reserve Bank spokesperson. "If a bank was experiencing difficulties, there are a range of actions that may be undertaken to resolve the situation. These include: restriction of dividend payments; injections of funding from parent banks, shareholders or a third party; or conversion of subordinated bail-in instruments. Once all other avenues of support are exhausted, it is possible that a bank may fail."

I'm sure, though, that that's what you're referring to - what happens if the bank does fail, and open bank resolution (OBR) applies. In that case, a portion of deposits will be frozen, but the bank will open next morning and customers will be able to access the rest of their money.

Will it affect just term deposits? No, it will affect all accounts, including transaction and on-call and other savings accounts.

And on your private versus business question, the Reserve Bank says, "it is likely that all unsecured creditors would incur the same loss regardless of whether they are a private or business creditor.

"If someone has a deposit with a bank, then in the unlikely event of OBR being put in place, then the OBR rules would apply to that depositor and their deposit."

By the way, you write about a bank taking a percentage of accounts. It wouldn't really be the bank as you probably think of it, but a statutory manager, brought in to sort things out.

And at that stage there would be no vast wealth. "Shareholders will be first in line to lose their investments. A portion of other creditors' funds will be frozen to be available to bear any remaining losses once shareholders and any subordinated creditors have incurred a full loss," says the spokesperson.

Splitting retirement savings

We have our retirement savings on term deposit with one bank, but when it falls due later this year we have decided to split it up between several banks.

In this regard my question is is there a deposited amount that is protected from the haircut legislation? For example, are amounts under $100,000 (or less) protected? Or in the event of a bank failure, can the Government implement the "haircut" legislation to take a percentage (40 per cent?) of any amount held in term deposits?

I can see what you're getting at. If, for example, the first $20,000 was exempt from being frozen, you might limit your deposits at each bank to $20,000.

However, "There is no amount that is definitively protected from incurring a loss in the event that a bank fails," says a Reserve Bank spokesperson.

"The OBR policy provides for a de minimis amount to be applied to all on-call transactional accounts. However, the de minimis is designed to ensure that small depositors can continue to make essential payments and purchases and is not intended to provide widespread wealth protection if a bank fails.

"All funds deposited in banks are therefore exposed to the ongoing solvency of the bank, just as they were prior to the implementation of the policy."

"De minimis" is Latin for "about minimal things". It seems, then, that the $20,000 strategy is not going to work. The Reserve Bank is talking about some unspecified number way less than that.

Still, it's a good idea to split large term deposits among several banks. Not only does this protect you in the unlikely scenario in which a bank fails, but it also makes it easier to keep up with who is paying what interest.

Another issue: is your 40 per cent "haircut" a realistic number? The Reserve Bank's website says, "How much of their funds depositors can access will be determined by an assessment of the bank's losses." So the percentage will vary.

However, the website does refer to customers the next day accessing "the majority of their funds".

A final word from the spokesperson: "It is worth repeating that the New Zealand banking system is well capitalised and regulated, and engages in traditionally conservative business. These factors should help to constrain the losses that would be experienced by unsecured creditors in a failure."

Capital gains

Reader response to your June 27 column: Mary, very disappointed to see you completely avoided the opportunity (and responsibility) to fully comment on one of your readers' strategies to buy an Auckland house and shamelessly sell for (tax-free) capital gains in a few years, to fund a more lavish retirement.

Intending to profit and not paying tax is fraud and has cost our country billions if not trillions in lost tax. It is time to stop the rort, which sadly so many baby boomers have been on the gravy train doing, profiting from for a very long time.

You merely said his strategy was risky; that rents don't cover, and the property may not go up. I was very disappointed you didn't even broach the tax issue as this is a big, big problem in New Zealand. Can you please indicate why you didn't mention the tax issue at all?

To remind others, the reader in the Q&A was considering two options, the first of which was: "Buy a rental in Auckland and sell in a few years (hoping for capital gain and the tenant pays the mortgage)."

In my response I said, "With your first option, rents these days are often not high enough to cover large mortgages, so you might have to put cash in along the way. And there might be no gain - there could even be a loss - when you sell. It's risky."

You're quite right that - given the reader said he would be buying with the hope of selling at a gain - the gain would be taxable.

So why didn't I mention it? The reader didn't say he was planning not to pay tax, so it wasn't an issue.

Still, it would have been good if I had thought to mention it, because I agree that there's probably too little awareness of this tax - despite the fact that I've often written about it.

Another iffy assumption you seem to make is that sellers of property can simply choose not to pay the tax. Inland Revenue says it's increasingly enforcing this law. There's no way you or I can know how often it's not enforced, but something tells me your "billions if not trillions" might be a slight exaggeration.

PS: I hope the fact that you didn't write until more than two weeks after the column was published was because you read it later. I hate to think of you seething for that long.

Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.