Martin Hawes: New ethics rules will put clients first

I do not think it will be very long before commissions paid for the sale of investments will be banned in this country.

In the past few months there has been a sea change and the tide is now running very strongly away from those who sell investments on a commission basis. Financial advisers would be well advised to think about their business models.

In July last year I said financial advisers would never win the respect of the public or be regarded as true professionals until they changed the way they were paid. Few in the financial advice industry agreed.

Now there are several moves afoot that will bring change: in Australia, a Parliamentary enquiry recommended consultation to cease payments from investment product manufacturers to financial advisers.

Here in New Zealand, the Securities Commission and the financial advisers' Code Committee are looking closely at commissions with a strong desire to align New Zealand and Australia's regulation of financial advisers.

The Australian enquiry also recommended advisers operate under an explicit fiduciary duty - that they should put the interests of their clients before their own.

Two weeks ago, the Code Committee released a discussion paper on adviser ethics which had, as its first objective, that financial advisers should place their clients' interests first and that they should be independent and objective.

I do not think that putting your clients' interests first is compatible with selling a fund manager's products on commission. Most individual advisers are ethical, but the commission method of payment leaves a suspicion of surrender to a conflict of interest.

This is really important for investors. Money has been lost and lives wrecked by the collapse of some very poor finance companies. As much as 25 per cent of finance company investment came through financial advisers - that represents a lot of money.

If we had had better regulations in place and financial advisers had not been paid generous commissions by the finance companies, I do not think they would have been so keen to recommend Bridgecorp and the likes to their clients.

I do not think the difficulties over the past few years were caused by financial advisers' incompetence so much as a desperate scramble for commissions. The company that paid the highest rate of commission won - until it went broke.

The Code Committee has done some excellent work on financial adviser ethics and we may soon have an industry that the public will trust and make use of to a greater extent than it does now.

If this change continues, in a few years financial advice will come not from an industry that is the sales channel of fund managers but from a group of professionals who are respected and trusted by their clients. That has to be good for everyone.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com