Pulling the pin on pay

By PHILIP MACALISTER

A guaranteed way to make waves in the financial planning business is to discuss how advisers get paid for the work they do.

Last month Gareth Morgan - who made his name as an economist but now runs an investment management service - lobbed a grenade at his peers over the issue. Unsurprisingly, he provoked a number of secondary explosions.

His grenade took the form of a series of allegations, including the claim that financial planning in New Zealand is real "wild west" stuff and that advisers are no more than "commission salesmen" for fund management firms.

One of his main points relates to the names used by people in the business to describe what they do.

Morgan reckons the term "adviser" is being totally misused in New Zealand. No one should call themselves an adviser, he says, if they are being paid commissions from a product provider such as a fund manager.

"If I hire someone to give me advice then I don't expect them to be getting paid by somebody else. I expect to pay them.

"The whole use of the word 'adviser' is totally misleading."

So what about the people who buy and sell shares being called "brokers"? No problem there with the name, nor with these people taking commissions, because they "broker" a deal between two parties and can be paid by both.

Likewise, Morgan doesn't have much concern over financial planners taking commissions, because they are not calling themselves advisers.

"I think they can use the words 'financial planner' because they do do plans for people - I don't think that's misleading at all."

Morgan would like to see regulators such as the Securities Commission define the term "adviser", in much the same way that the Advertising Standards Complaints Board has defined "independence".

Under the board's determination, advisers can't call themselves independent if they receive any sort of commission. As a result, the only "independent" advisers are those who receive a fee for the service they provide.

Only a handful of advisers in this country operate on this basis, and Morgan is one of them.

Morgan's campaign against commissions isn't new - he also went public on the issue in January last year.

However, this time he is taking aim at the Financial Planners and Insurance Association, saying many of its members are "commission salesmen posing as investment advisers" who are "not compelled to disclose commissions, soft-dollar arrangements and brokerage kickbacks".

Soft dollars are the benefits that planners often receive from the providers of financial products - often in cash but also in the form of gifts such as free trips - in exchange for recommending particular products, or for doing a certain amount of business with that provider.

To bolster his case, Morgan uses the recently introduced Financial Services Reform Act (FSR) in Australia.

The Australian law is a highly prescriptive, competency-based set of laws that are designed to be a barrier preventing rogues from getting into the industry.

Morgan argues that the FSR reforms target the practice of commissions being paid to advisers by product providers such as fund managers.

"Not so," says Australian Securities and Investments Commission executive director of Financial Services Regulation Ian Johnston.

He says FSR says nothing about how advisers are paid. Rather it says that any commissions have to be disclosed.

"Any sort of remuneration has to be disclosed. [FSR] doesn't say that you can't or shouldn't pay commissions.

"It doesn't even say that you can't have soft-dollar benefits."

In New Zealand, the chief executive of the Financial Planners and Insurance Advisers Association, Phillip Mathews, bristles at Morgan's allegations.

"The FPIA," he says, "are the champions of disclosure."

Under the law there is a two-step process to disclosure. There is some mandatory information that advisers must give all their clients, such as whether they have had any convictions involving dishonesty or been made bankrupt or have been prohibited from taking part in the management of a company or business.

The second tier is information that is available on request. This is the more useful information, but not all investors know to ask for it.

This information includes an adviser's qualifications, their experience and details of what commissions they receive.

The Government has acknowledged that the two-tier system doesn't work and previous Commerce Minister Lianne Dalziel pledged to change it to a single tier, where all the required information must be disclosed without the client having to ask.

Matthews applauds that approach, and points out that as a matter of course all FPIA members are required to disclose both levels of information.

Indeed, that is one of the association's selling points. It argues that if you use one of its members you get better information than you do from from non-members. As well, members have to abide by a code of conduct, and there is a disciplinary process.

This raises the question about how good is the standard of financial advice in New Zealand.

One person well placed to comment is former Tower executive Peter Baynes, who helped write the disclosure laws.

Last year Baynes established a business called Investors Advocacy, designed to help victims of bad advice.

He is winding down the business because he has accepted the job of chief executive of Perpetual Trust, a subsidiary of Pyne Gould Corporation.

However, his views on the advisory industry are a useful barometer of quality.

When the business was established, Baynes says, a significant number of people were coming to him alleging they had been given bad advice, but the number of enquiries has fallen.

Baynes believes things have quietened as the markets have improved. In other words, people think they have had bad advice because they have lost money, but in reality the advice has been fine, it's the markets that have been the problem.

The banking ombudsman has witnessed a similar phenomenon.

Baynes has always been an advocate of self-regulation, but says for it to work well some changes need to take place.

The two ombudsman schemes - one for banking, one for insurance - need to be more comprehensive and need to cover all advice given in the market. At present, many financial products and providers fall outside their jurisdiction.

He would also like to see the Financial Planners and Insurance Advisers complaints process accelerated.

Baynes says he has helped people recover money from bad advice, but has also played another important role. People who sought his services felt they had been hard done by because they had lost a lot of money when the international markets fell. In fact these people had suitable advice and just needed some "closure" on the issue.

Some advisers, says Baynes, are just "one step ahead of being out of jail".

"There are some real rogues out there," he says.

However, this group of rogues is a small minority of advisers.

Matthews points out that there will always be rogues in the advisory industry and regulation won't get rid of them.

Australia has a heavy-handed approach to regulating advisers, yet nearly every week there is a story in the media about some adviser who has been banned or jailed. However, it is very rare to see this sort of thing happening in New Zealand.

Unsurprisingly, Matthews says one of the best things investors can do is use a member of his association to take advantage of its code of ethics, disclosure, commissions and the complaints procedure.

* Philip Macalister is the editor of the online personal finance magazine Good Returns

* Email Philip Macalister