Financial advisers are heading back to school, regardless of their experience.

Under the Code of Professional Conduct for Authorised Financial Advisers, Carmel Fisher, Mary Holm, Gareth Morgan, I and everyone else who offers full financial advice will have to pass a number of exams or assessments before the code comes into force on July 1 next year.

The new code, which is long overdue, is in response to very poor advice given to investors over recent years, particularly in relation to finance companies, Blue Chip and other failed investment products.

The code is so demanding that Warren Buffet wouldn't be able to offer financial advice in New Zealand until he passed all 10 exams or assessments.

Financial advisers have been almost totally unregulated in New Zealand and this has led to some very poor advice, particularly by individuals with little formal training or experience.

One of the problems is that many people won't pay for advice and financial advisers have had to rely on commissions received from product providers.

Thus, if an individual sought free advice about the relative merits of a bank or finance company investment, and the finance company paid a commission while the former didn't, then the adviser had a strong personal incentive to recommend the finance company.

A number of finance companies, including Bridgecorp, paid large annual trailing fees to financial advisers in addition to upfront commissions.

Accordingly, many individuals were hugely overweight in finance company debentures because advisers were paid large commissions to recommend these investments.

In addition, some large financial advisory groups charged annual management fees which were often based on the initial value of these investments, even after the finance company was in receivership or operating under a moratorium.

The most important aspect of the new code is Standard 1, which states: "An Authorised Financial Adviser must place the interest of the client first, and must act with integrity."

Many advisers have put their own interests first and it is a sad indictment of the investment sector and regulators that we have had to wait until 2011 before "the interests of clients first" principle is given priority.

Standard 3 states that an adviser must not state or imply that they are independent when they are not independent and Standard 4 states that an adviser must not borrow from or lend to a retail client.

These are extremely important because of the problem with related party issues in New Zealand.

It is imperative for investors to know whether advice is independent or not and one of the biggest problems in recent years is that some financial advisers have recommended products where the funds were lent to companies or other entities associated with the owners, directors or employees of the advisory company.

The new code contains many standards covering the formal relationship with clients. These include the requirement to provide written recommendations, supply suitable advice and keep written records of this advice for a minimum of seven years.

However, the sticking point for most advisers is the requirement to obtain "minimum standards of competence, knowledge and skills required to provide financial adviser services". I To achieve these objectives, all financial advisers must achieve four units under the National Certificate in Finance Services (Financial Advice) (Level 5).

These are:

Unit Standard Set A, which comprises three exams and covers "knowledge of the industry, financial markets, the advice process and products"

Unit Standard Set B, which is just one exam, will test knowledge of the Code of Professional Conduct for Authorised Financial Advisers

Unit Standard Set C, where there will be four assessments, covers "professional practice advice process and complying with legislation"

Unit Standard Set D, involving two examinations, tests knowledge of "investment unit standards".

Thus, anyone who wishes to be an authorised financial adviser will have to pass these 10 assessments or they won't be certified under the new regime. However there are exemptions to the exams, none of which are based on experience.

For example, anyone with a tertiary qualification at degree level or above majoring in accountancy, business, commerce, economics, finance or management from a New Zealand institution is exempt from Set A.

Exemptions for foreign tertiary qualifications were not considered to be appropriate because the exams are considered to be too New Zealand-specific. Anyone with a CFA (Chartered Financial Analyst) certification is exempt from Set C and Set D. There are no exemptions from Set B.

As there is no recognition for experience, then Warren Buffett would have to sit all 10 exams or assessments if he wanted to become a financial adviser in New Zealand, whereas a young person with a New Zealand tertiary degree, CFA qualification and virtually no experience would only have to pass the one exam in Set B.

The potential problem with this new qualification system is that it may encourage individuals with considerable experience to retire and older investors, who may prefer to have a professional relationship with someone from their own age group, will find it hard to find a financial adviser.

The other problem is that younger graduates, with CFA qualifications, could dominate the financial advice sector and they may not have the experience to understand the risk-aversion bias of older investors.

Younger advisers may also be attracted to exotic investment products, including derivatives, which are inappropriate for older investors.

This column is not opposing the new financial adviser regulations - neither am I trying to avoid sitting 10 exams - but the regulators need to be careful that they don't drive most of the experienced advisers out of the industry.

This would leave older investors without qualified financial advice at a time when they desperately need it.

The new code is a welcome development and represents major progress since the aftermath of the 1987 sharemarket crash.

The 1987 crash was more devastating than the current crisis because the total value of the New Zealand sharemarket plunged from $42 billion at the end of 1986 to well under $20 billion, whereas the total losses from finance companies, Blue Chip, Credit Sails and other failed products is well under $10 billion.

$1 billion in 1987 was worth far more than $1 billion now, particularly as the average house price is currently $350,000 compared with less than $100,000 in 1987.

Nevertheless numerous recommendations to introduce better regulation after the 1987 crash were rejected, mainly because of fierce lobbying by the Business Roundtable and cabinet opposition by Bill Birch and Ruth Richardson.

Most of the post-1987 crash recommendations were sensible and practical but were never implemented.

If they were, New Zealand's capital markets would be in a far stronger position, investors' confidence would be higher and it is unlikely that we would have had the complete meltdown of the finance company sector.

In other words, New Zealand would be a better place today and more elderly citizens would be financially secure if politicians had implemented the post-1987 recommendations.

The current proposals regarding financial advisers are sensible and the consultation process has been satisfactory. However, the New Zealand investment sector is small and lacks experience.

The regulators have to ensure that the new code encourages more people to become qualified instead of driving out experienced advisers who provide a very good service to their clients.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management, which provides financial advice services.