Inside Money: Why commercial reality keeps advice in check

There aren't many financial advisers about - but how many do we really need? Photo / Thinkstock

My survey of authorised financial advisers (AFAs) published in August highlighted the fact there aren't very many of them - about 1,900 at the latest count.

But maybe that's all we need.

According to David Ireland, partner with law firm Kensington Swan and head of the AFA Code of Professional Conduct Committee, the low AFA population could simply reflect commercial reality.

"Is there actually much demand for personalised finance advice outside of financial institutions?" he said. "I don't know, but we don't hear from consumer groups saying the public can't find places to get advice."

Ireland did admit, however, that wrinkles in the 2008 Financial Adviser Act (FAA) do allow some 'advisers' to opt out of the high-compliance/high-cost AFA regime while still providing services that skirt close to the advice border.

"For example, you can offer 'execution-only' services without needing to be an AFA," he said. "I suppose [when the FAA came into force] some advisers asked themselves 'can I adjust my practice to stay within the law but outside the Code?'.

"It's just business people making commercial decisions."

The AFA Code is under renovation (an exposure draft of the revised Code should be out this week), and the new rules may encourage more advisers to sign up for duty, for instance, by offering a KiwiSaver 'pathway'.

But Ireland said it's not the Code Committee's brief to loosen AFA conditions to boost adviser numbers.

"We're more focused on producing [Code] options to provide clarity to advisers and streamline how their services can be delivered," he said. "Without undermining the purposes of the legislation."

In the short-term at least AFA numbers are unlikely to increase dramatically (indeed, my research indicated a slight decline) while the dominance of institutionally-owned advice businesses will also be difficult to unwind.

The scarcity of 'non aligned' advice channels was, in fact, one of the key findings of my AFA project. But 'non aligned', or 'independent' in language untouched by lawyers, is not automatically code for 'quality'.

"Independence is not necessarily the ideal model for financial advice," Ireland said. "Some advisers will push it as a point of difference but it's no guarantee of quality."

Nonetheless, consumers do need to be aware of the commercial forces that could be influencing their financial advisers. For bank-based AFAs, those influences are pretty clear; for others the lines are slightly more blurred.

"[Institutional ownership] is OK as long as there is clarity about any conflicts of interest and consumers can make fully-informed decisions while the adviser can show they are acting in their clients' best interests," Ireland said.