Mary Holm: Fees-based advice a good start

So you think if financial advisers charge fees that will solve everything. I have spoken to several advisers that have moved to fees only. They have all sacked their smaller clients.

Some are looking at the next logical step of charging for "first interviews" - that makes shopping around for an adviser a costly exercise.

I believe that in many cases commission payments are much better value for the client as they reduce the transaction costs of invoicing and billing. There are also other hidden costs to charging fees such as bad debts and tax implications.

I don't think charging fees will solve anywhere near everything. It's simply a good start.

For readers who didn't see this column on November 7, a correspondent asked how to find a fee-charging independent adviser who does not get paid commission. She continued, "We are happy to pay a professional hourly rate for a qualified and experienced person to give us some advice on various investment options."

I responded with an invitation to investment advisers who charge fees and who meet certain criteria to send me information to list in this column. I added, "Readers should be able to rely on these advisers to put clients' needs first - as opposed to recommending investments that give the adviser the highest commissions or other rewards."

Your comment that the fees-only advisers you know have got rid of clients with less money is disappointing. I would have thought an adviser charging by the hour could still do well with "smaller" clients. And if they charge a percentage of the amount invested, they could always have a minimum fee.

The advisers in our table have widely varying minimum investment amounts, but about a quarter have no minimum. Apparently they can make it work to have "small" clients.

As for charging for first interviews, every adviser in our table except two say they don't charge. The exceptions are Irene Durham and Herald on Sunday columnist Martin Hawes, who both offer free initial phone conversations. Some advisers stipulate the first free meeting is only for half an hour. Readers should ask about this, so they know where they stand.

Your belief that commissions reduce costs may well be true. And it's possible that advisers who receive commissions pass those savings on to their clients one way or another. But I can't get excited about a business that might not serve its clients' best interests just because it has lower costs.

As far as hidden things are concerned, I wonder how you would defend "soft commissions" such as gifts, entertainment or travel, which financial product providers often give advisers as inducements to recommend their products.

I hate to say it, but your attitude is typical of many commission-paid advisers I've spoken to, who come up with any number of "reasons" why charging fees won't work. This little survey - with a surprisingly large number of responses - proves that wrong.

While I am sure many consumers will welcome your proposed list, I think it should be made clear that just because an adviser charges a fee rather than receiving remuneration by some other means, that is no guarantee the advice will be sound and appropriate.

Your thoughts are echoed by others. As one adviser put it, "The list of course may be seen as Mary's endorsement, that is, the 'goodie goodies' list."

It's really important that readers don't view it that way. As I said on November 7, "being independent doesn't mean being good. Competence, knowledge and integrity are perhaps more important.

"Readers should ask about an adviser's qualifications and experience and go through the lists of suggested questions on www.sorted.org.nz (search for 'Getting the right investment advice') and www.sec-com.govt.nz (click 'Financial advice') before hiring an adviser. There is also advice on www.consumer.org.nz. I suggest you 'interview' several advisers."

Even before doing that, read advisers' disclosure statements, which should be on their websites or available if you ring them. Look not only at the content, but also how clearly it's presented - to get a feel for the firm's communications skills.

Another important point: I'm not in a position to check what advisers have told me. I'm relying on readers to report back if an adviser doesn't stick to what they've said, and I'll report that in this column.

Since the November 7 column, I've had lots of feedback from advisers - ranging from helpful to snide or angry. On the strength of the useful comments, I've changed slightly the guarantees and promises the advisers have to commit to before being in the table. They now read:

* "I guarantee that when I give any new client investment advice or help them to make any investments, the only money or other consideration I receive is explicitly stated fees that I charge the client. Any commissions or other considerations I receive from financial firms or others are passed on in full to the client.

* "I promise to give any clients who request it a signed letter that says, 'I truly believe I have given you the best advice I can, having considered a wide range of products, and that I have told you about all real or potential conflicts of interest'."

I urge readers to ask for such a letter. Note the "new client" in the guarantee. A few advisers said they had current clients who prefer to keep getting "free" service while the adviser receives commissions. But that won't apply to new people approaching the adviser.

Advisers also had to state that they give advice on all types of investments, including property. By "property" I mean general advice in that area, not necessarily advice on specific property purchases. For example, the adviser could help a client weigh up whether to invest in rental property generally versus investing in a share fund.

Some advisers suggested we exclude advice on KiwiSaver, because hourly fees could be high relative to low KiwiSaver balances, whereas commissions might be around $5 or $10 a year. Said one, "We take the commission, disclose this and don't charge fees for KiwiSaver for now." That sounds reasonable. Readers should ask advisers how they handle KiwiSaver.

Note, too, that this whole exercise does not include insurance - only investment advice and products. Some advisers listed here do receive commission on insurance products. If readers want to go into insurance, you should ask the adviser how they will be rewarded.

And, of course, it's important to ask about fees charged upfront and ongoing fees. I think good firms should disclose all this clearly on their website and in their literature. Some advisers charge high "monitoring" fees and don't seem to do much for that money. Said one adviser on a website recently, "I like it when clients challenge me over the fees I charge because it allows me the opportunity to reinforce what we actually do for them."

A few more points:

* Many of the advisers travel around New Zealand, so if you are particularly interested in an adviser, phone or email them to ask if they could meet you.

* One adviser commented, "We would like to see the term independent adviser defined and included in the regulations and or code, which could then be used only by those that are truly independent." I quite agree. Keep your eye out for some good news on this issue shortly.

* You might notice the Australian in the table. He emailed me, "It's useful for both New Zealand advisers and Australian advisers to know where the quality is so that we can refer other people there. We're hard to find [due to our small marketing budgets compared to the 'big boys']." Fair enough.

* While you might spot two Herald columnists on the list I am not an adviser. Readers and advisers often assume I am, but I'm busy enough and happy enough in my other roles - see below.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her 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.

TASKFORCE WINNERS

The Capital Market Development Taskforce's report - which will include lots of recommendations that would help ordinary investors - will be online from next Wednesday. The easiest way to find the report and summary will be to do a search on "Capital Market Development Taskforce" and click on Taskforce Papers.

Winners of the draw to attend the taskforce's lunch in Auckland on Wednesday, December 16 are: Brett Austin, Bruce Blomfield, Annie Murray, Gordon Read, Mark Rowley, John Sandford, Mike Shepherd, Gordon Sims, Grant Smith and Derek Tan.

Winners of the draw to attend the taskforce's breakfast in Wellington on the same day are: Peter Beaumont, Margaret Butler, Jo Campbell, Ruth Harrison, David Harvey, Barbara Kent, Kaye McCarthy, Janet Milne, Don Ross and Jan Scown,

CHRISTMAS GREETINGS

This is the last column for 2009. Every year more people send questions for the column, and I just want to thank - and apologise to - the many whose letters didn't make it into the paper. I do appreciate your writing, and your many kind comments.

Have a great Christmas everyone, and I hope you get some time in the sunshine over the next month or so. See you again on this page on January 23.