Advice? Who is going to give it?
The best Laid plans of Mice and Men do not always result in the ideal situation. We all headed off down the track of better education, better dispute procedures, and appropriate qualifications – but as always there are unintended consequences
We all headed off down the track of better education, better dispute procedures, and appropriate qualifications.
The concept behind increased compliance and regulation was intended to improve the quality of advice for all New Zealanders.
Part of that process was to ensure that Advisors were qualified to give advice on various types of risk, investment and overall financial planning.
As always there are unintended consequences. We would all like to see quality advice available to every Kiwi, but to achieve that there has to be a business model that rewards people of jumping through all the hoops necessary to be a qualified advisor.
Otherwise Improving the quality effectively at the same time reduces the quantity!
Let us pretend that there are 2,000 AFAs and 2 Million kiwi saver accounts. Given that kiwi saver products have low management costs, and even lower income for an advisor, it is quite clear that individualised and personal planning cannot be a feature unless the client is prepared to pay a separate fee. The tradition of kiwis is to not pay fees, particularly for a product that they somehow think is a Government offer. Doubtless they will get plenty of advice from people working for QFEs like bank employees, but they can only advise on their own product. Is that the best thing for the client, a one stop shop with only one product on the shelf? I think not.
Another very interesting outcome. In my capacity as the only specialist business helping advisors buy and sell customers bases it has now become a lot more complicated. Those advisors exiting the business who previously were general practitioners are finding that there isn’t just one buyer involved, sometimes there are three. For example if their book includes clients that have category 1 products, they need to be sold to somebody who is able to provide those clients with advice, (ie AFA). Some of the client base may be of a more general financial planning nature and include issues around fire and general insurance, health insurance, income protection, partnership insurance, etc etc. Some of the people who are in the market to buy simply haven’t got the capacity to deal with those clients.
Sometimes the base has to be broken up and sold to different advisors.
But hang on a minute.
Very often it is exactly the same client!
In other words the client ends up with not one advisor, or two but a whole bunch of different advisors because of qualification issues.
Let’s look at another example. The ‘bad old days’ when people were paid to give advice by the Product providers, some provided trails or ongoing commissions for providing a service to clients. However, if that book was sold, is there any value in those trails now, given that the new advisor may not be qualified to give advice? Particularly on that product. Indeed we now find that product suppliers are not at all keen to have advisors out there who have purchased books, have built a good relationship with the client, but are not necessarily in a close relationship with the product supplier.
One of the bigger players is making noises about only doing business with people who are trained and qualified to deal with their products.
This obviously would exclude a significant number of ‘others’. Those ‘others’ may well have a number of clients who have products that they have either inherited, or perhaps sold on behalf of the organisation when they were a closely tied advisor but have now evolved into an ‘independent’. Those relationships may get very sticky. For example should one or more of the major life companies decide that they won’t continue to pay trails to somebody who is not licensed to sell their products, what happens there? Do they compel the no longer aligned advisor to sell back all of the products that they are no longer able to advise on? Or do they simply terminate paying trail, probably contrary to a legal agreement signed in the past. Do they write to the client saying that their current advisor is no longer able to make comment on their products despite the fact that they were happy for them to do so in the past?
We are acting for a number of vendors who see these issues as being important to the value of their practice. The day of the general practitioner is long past and specialisation is not only desirable but also inevitable since keeping up to date with a whole range of providers and products is just simply not a practical proposition for any individual. More and more we are seeing investment advisors selling off their risk book. More and more we are seeing risk advisors selling off their investment and investment related products. More and more we are seeing general practitioners pull out of fire and general and sell on their fire and general clients to somebody who is qualified to look after them.
All of these things are probably seen as desirable, but again we have unintended consequences. With full compliance underway, no doubt the regulatory authorities will want to see some open and shut cases to bring against financial advisors to demonstrate their powers and for the encouragement of others.
Some ill-prepared (or unlucky) advisor will be caught out.
The easiest target will be an advisor who gives advice on a category one product while not an AFA, or who doesn’t give advice when asked by the client!!
Certainly the new regime is providing plenty of activity for us, buyers, sellers and improvers are keen for assistance in unravelling a whole new ball of string!