Financial Advice industry scandalously poor

Consumer NZ is calling for bold changes to the financial adviser industry after one of its mystery shops found the advice given to consumers was scandalously poor.

Consumer NZ wanted to know what advisers really delivered to ordinary New Zealanders. "We all know consumers have received bad advice in the past. But we, like everyone else, hoped that had improved. The results shocked even us," Consumer NZ CEO Sue Chetwin said. "This is an industry in serious need of reform."

We're concerned that what's currently being proposed is too little, too late. The government needs to think of practical ways to effectively protect people now, not next year, or five years down the track, Chetwin says.

Consumer NZ mystery-shopped 33 financial advisers, from large institutions with in-house advisers and agents, sharebrokers and nationwide adviser chains to small standalone firms. An expert panel assessed the quality of advice and information in the 17 plans it received. Of concern Chetwin said, was only three out of 17 advisers produced plans that were rated "good" by the expert panel. The remaining 14 were rated as "disappointing" or were "rejected".

"So many issues were found it was hard to know where to start. There was poor analysis, unclear costs, advisers portraying themselves as independent when they were not, high costs and bad products."

Evidence that the analysis and advice was done poorly reflected badly on the competence level of many practising advisers. "We're concerned that skill levels are low and will remain low, unless competency standards are included as part of the adviser authorisation process due to come into force next year."

Of the 17 plans received, 10 were investment plans and seven were comprehensive pre-retirement plans. The shoppers looking for pre-retirement plans had, or were likely to soon have, significant mortgages, other debts, bank deposits and other investments. Most were in Kiwisaver schemes. They were looking for savings and expenditure budgets that would help them meet their short-term goals and eventually provide a nest-egg. Some also needed advice about insurance, wills and enduring powers of attorney.

Chetwin said often they were told to invest too much in managed funds at a time when it was likely they would also have a large mortgage. Advisers don't receive commissions from providers for recommending debt-reduction strategies.

Chetwin said most of these pre-retirement plans were of little practical help. Costs ranged from nothing to $1200. The average price was $784.

In eight out of the 10 investment plans shoppers were given no meaningful explanation as to why they should take up the recommended investment strategy. And in seven out of the 10 plans the panel could not definitively work out the initial and ongoing costs of the advice.

"Shoppers were given conflicting information about service fees - and sometimes there was no information on costs. In half the investment plans, fund-management fees weren't adequately disclosed."

Too often advisers gave the impression they were knowledgeable about a range of investment products and might recommend any but in the end shoppers were told to put most of their savings with one provider, and were given no explanation of why this provider was preferred. Some of this "independent" investment plan advice cost more than $1200. The average cost was $549.

"Consumers need access to unbiased advice but this won't become an industry norm until commissions are banned," Chetwin said.

Chetwin said while there was a focus on the lack of financial literacy in this country, this project had shown that even when experts were presented with financial plans and accompanying reports, little of what was actually needed was there, and what was there was unclear. "It was not a matter of financial literacy, the information itself was poor, so even if you wanted to understand it you couldn't."

Chetwin said higher standards of disclosure were an urgent priority. There should be compulsory requirements for clear and concise disclosure in a set format of no more than two pages.

Consumer NZ believed it was inappropriate to allow the industry to have too large a say in the long-overdue reforms. "Self regulation clearly has not worked. It appears nothing has been learned from the bad press the financial advice industry has had over the past few years - it is still woefully wanting."

Consumer was pleased that next year's reforms would see the industry subject to a disputes resolution service.

How we shopped
Eleven mystery shoppers ranging in age from mid-30s to just 80 years old visited financial planners in Auckland, Wellington, Christchurch and Bay of plenty. Each shopper sought advice from several advisers. These were real people with real financial questions.

The expert panel
Jonathan Glass is a client adviser with Gareth Morgan Investments. He has 10 years experience in the financial industry here and in the UK.
Craig Wylie is an adviser and principal of Financial Fitness in Wellington and Tony Cross is an investment manager with BNZ. They were nominated by the Institute of Financial Advisers and attended the panel on alternate days.
Andrew Coleman is a senior fellow at Motu Economic and Public Policy Research and a lecturer in economics at Victoria University of Wellington.

Our panel members were given copies of the 17 written plans and also the disclosure statements and other documents provided by the advisers. As well the panel had summaries of both these documents and the questionnaires completed by the mystery shoppers. They assessed the quality of the advice and the information given by the advisers.

The Retirement Commission, the Securities Commission and the Ministry of Economic Development help fund this project. The analysis and conclusions are entirely from Consumer NZ.

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