Inside Money: Why the financial sales model should be in better shape

Why did the Kiwi cross the road? Over the 12 months to June 30 2014, just over 150,000 KiwiSaver members changed schemes. Photo / Thinkstock

In its just-released 'Strategic risk outlook 2015' the Financial Markets Authority (FMA) explains clearly why money types tend to rate poorly in the annual most-trusted surveys.

"When conflicts of interest are combined with information asymmetries, it can be difficult for investors to know whether a market participant is acting in their best interests," the FMA report says. "Remuneration and incentive arrangements can also reinforce conflicts of interest, particularly when sales staff are remunerated on a volume basis or through certain bonus structures."

As well as oddly-shaped information, the FMA warns investors also have to be aware of other geometric tricks of the finance trade, particularly the dreaded "vertically integrated distribution models" (as popularised in recent Australian financial investigations).

The regulator has promised to straighten out some of the vertically integrated kinks next year through an "entity based monitoring" program that will focus on "remuneration arrangements" such as "certain volume-based incentives, up-front commissions and trail commissions".

These are particularly damaging when "the profit-making interests of the market participant are put ahead of the interests of investors", the FMA report says.

And one of the regulator's key areas of interest next year will be the world of KiwiSaver, where vertically-integrated sales models are driving profits higher by the day. According to an analysis shared in confidence with me this week, KiwiSaver providers pocketed a profit of $50 million over the last 12 months - of which the lion's share went to Australian-domiciled financial institutions. Those profits will inevitably grow as government-mandated contributions continue to flow into KiwiSaver - hence the institutional habit of pulling their vertically-integrated chains.

"Some of the [KiwiSaver] sales practices we have discovered through our monitoring activity do not reflect the best interests of customers," the FMA says. And while it doesn't go into details, I can share one revealing anecdote.

According to industry sources, one bank tried on a KiwiSaver switch move with a highly-placed financial services lawyer. Despite the lawyer in question revealing his areas of professional interest, the bank transferred his KiwiSaver account without consent, triggering an expertly-worded complaint to the FMA.

The lesson for banks is, surely, 'know your client'.

Coming in at 32, bankers rank five places above lawyers in the Readers Digest 2014 NZ most-trusted professions poll, and eight spots above financial planners. But here's the real proof of information asymmetry in the list: journalists are the 43rd most-trusted NZ professionals out of a total 49.