Brent Sheather is an Authorised Financial Adviser and a personal finance and investments writer.

The law of unintended consequences postulates that the actions of people and especially of governments almost always have effects that are unanticipated or unintended.

Apparently behavioural economists and social scientists have known about this law for centuries, although they would say that, and for just as long politicians and regulators of the financial services industry have ignored it.

Today's story comes from the UK where we look at the unintended consequences of recent regulatory reform on the financial planning sector.

Very briefly, in the UK some years ago the regulators and politicians noted that many of the instances of bad advice had resulted from the pursuit of commissions. No surprises there - for a local context think unlisted property trusts, junk bonds, IPOs of dodgy shares and more recently finance company debentures.


Anyway, responding to public outrage the UK regulators decided that banning product providers from paying commission would sort out the problem..... cue the entry of an unintended consequence.

What happened was that the instances of mis-selling disappeared along with a good proportion of the industry.

The major unintended consequence was that a huge "advice gap" appeared whereby many millions of small investors could no longer access financial advice.

A cynic would observe being unable to access poor advice was no bad thing however obviously that wasn't an optimal solution.

The situation has been compounded by a move by the UK government which changed the rules, which previously compelled people to buy an annuity with their pension and allowed them to withdraw their pension savings as a lump sum.

Many financial advisors also decided that, now their initial and trailing commission revenue streams were absent and, given regulatory risk and increased administration costs, it was no longer worth dealing with clients with less than GBP100,000 hence the "advice gap".

Eventually after some years the politicians and regulators, notably the Financial Conduct Authority and Treasury, noticed there was a problem although, as the following humorous comment from the Financial Times observes, neither institution has "owned" the problem: "The ability to describe a disaster without directly admitting you helped to cause it is a useful one. All it takes is a lack of shame.

The FCA and the Treasury have just expanded a genre graced by Tony Blair's comments on the Middle East crisis with a report on financial advice. This concludes there is a gap in provision. The FCA and Treasury stand beside the smoking ruins, matches in hand, sorrowfully agreeing the house has burnt down".


What to do?

The report jointly authored by Treasury and the FCA was published in March and it is of relevance locally because many of the problems being grappled with in the UK are occurring in NZ.

The main findings of the "Financial Advice Market Review" are that the move to fee based advice ended conflicts of interest caused by commission and improved transparency but advice became more expensive. Apparently 43 per cent of UK advisors have turned away potential clients in the last year because the provision of financial advice to those people could not be done profitably for the advisor.

The FCA decided that mass market automated advice models i.e. robo advice looked like the best solution but that required changes in the law.

The FCA decided that mass market automated advice models i.e. robo advice looked like the best solution but that required changes in the law.

The other big issue that the report highlighted was that "many advisors told us that concerns about future liability are preventing them from giving advice today".

In response the FCA undertook to increase clarity and transparency about the way in which the Financial Ombudsman Service deals with complaints.

So what implications does the UK experience have for NZ?

Arguably we have something of an advice gap here as a result of various regulatory efforts. For example, anecdotal evidence suggests that a number of highly skilled practitioners left the industry rather than go down the somewhat deficient training mandated by the then Code Committee.

For example, the Code Committee in its wisdom decided that Gareth Morgan's PhD in economics majoring in finance wasn't good enough.

One unexpected outcome of the increased regulatory oversight and anti-money laundering laws is that full service financial planning is now, more or less, restricted to high net worth individuals and even setting up an account with a stockbroker to trade $2,000 worth of shares every two months or so seems to require a team of accountants, compliance experts and other assorted drags on productivity.

Meanwhile the truly dodgy characters with serious money continue to operate their offshore trusts in NZ, business as usual, avoiding all but the most basic regulatory oversight.

The most investor friendly financial innovation since the index fund and on the front lines in the fight for better outcomes for investors.

The government has thus far resisted calls to ban commission and the UK experience shows what could happen if this move were undertaken in isolation.

However mis-selling is not going to go away whilst some products pay higher levels of fees.

The other big issue for even high net worth individuals is the fact that financial advice is too expensive. The equity risk premium on global shares is generally acknowledged to be around 3 per cent so the 2-3 per cent annual fee structure implicit in the typical financial plan for someone with $500,000 to invest delivers the risk of equities with the return of bonds.

Low cost robo advice using exchange traded funds could conceivably get that 300 basis point annual fee down to a far more acceptable 40-50 basis points and offer that service to someone with more modest savings.

A recent Bloomberg editorial described robo advisors as being "the most investor friendly financial innovation since the index fund" and "on the front lines in the fight for better outcomes for investors".

The writer went on to say that the main advantage of robo advisors was that they deliver high quality financial advice to anyone who wants it at a reasonable cost - a feat that has eluded the financial industry until the robots arrived. So that's perhaps another unintended consequence - the robots are not a threat - in fact they offer potential salvation to the financial planning industry.

We all know that they will move costs down but, by doing things the right way and not racing off to continuing professional development training on how to do things the wrong way, will raise standards and improve behaviour which is something the silly code of ethics and the pseudo training will never do.