Want to invest?
Want to invest?
Perhaps you won Lotto, inherited a windfall or simply saved your way to a nest egg.
You may want to make that money work a little harder than accruing interest in a saving account.
There's a whole industry of financial advisers dedicated to investment advice but making the leap and trusting your money with a stranger should be underpinned with thought and due diligence.
Here are some key facts to mull before you pull the trigger.
Who are they?
Financial advisors come in different shapes and guises.
Registered financial advisers (RFA) are individuals that can give advice and investment management services for what are termed category 2 investments.
Category 2 investments are considered "less complex" by industry watchdog Financial Markets Authority (FMA). They include bank term deposits, building society shares, credit union shares, shares in co-operative companies, cash or term portfolio investments, insurance contracts and life insurance policies.
Authorised financial advisors provide the same services as RFAs, and more. They have met minimum qualifications and professional standards.
They can provide investment planning services and advise on category 1 products; securities, land investment products, futures contracts and investment-linked insurance contracts.
Qualified financial entities (QFE) are companies that provide financial adviser services such as banks.
Qualified financial entity advisers are employees of QFEs. The QFE takes responsibility for their work.
They can give advice to wholesale clients and retail clients including personalised advice and investment management services for both category 1 and 2 investments.
An example of a QFE adviser would be an employee of a bank, but its worth noting bank employees can only give advice on the products the bank offers like KiwiSaver or managed funds.
QFE advisers need to be individually registered if they want to offer investment planning services.
Brokers can take, hold, pay and transfer client money. They must also be registered.
What do they do?
The Institute of Financial Advisers (IFA) says the role of a financial adviser is to recommend financial products and strategies that best suit your needs and personal circumstances from a myriad of options.
They have a duty of care to you as their client, must exercise the diligence and skill expected of a "reasonable" financial adviser and are tasked with helping you achieve your financial goals.
Who polices them?
The FMA is charged with overseeing the industry.
Its Investigations and Enforcement Report for the year ended June 30, 2013 shows two of the three largest areas of concern for its enforcement team related to financial advisers and their holding of client money and people or entities operating without the necessary registration or authorisation.
During the year 26 per cent of the FMA's inquiries and investigations related to financial advisers.
Of the FMA's 50 active investigations 27 per cent are investigations of contraventions of the financial advisers' regime, the authority says.
Breaches of the financial advisers' code of conduct - which sets out standards of behaviour expected by advisers - non-registration or non-authorisation and non-compliance with the Financial Advisers Act and potential Crimes Act breaches make up the active investigations.
FMA media manager Tony Reid says the FMA has a range of actions it can take against financial advisers for breaches. Reid says its like a piece of string; at one end there is litigation and prosecution for breaches and at the other end the FMA may warn an adviser and give them an opportunity to comply.
In terms of litigation action financial advisers amounted to 17 per cent of the cases taken by the FMA.
An emerging theme is unlawful and unethical behaviour going unnoticed, the FMA says.
Investors need to be aware of their "blind spots", the authority warns.
"Our enquiries have identified the importance of investors making sure they question any unrealistic portfolio returns and raise concerns with FMA in the event of any delayed payments," the FMA says.
The FMA refers breaches of the code of conduct to the Financial Advisers Disciplinary Committee (FADC), an independent body similar to the body which determines complaints against real estate agents.
It can impose a range of penalties ranging from recommending that a financial adviser's authorisation is cancelled to a fine up to $10,000.
Getting it wrong can be costly
Our recent history is littered with examples of financial advisers leading their clients down a path of wealth destruction rather than creation.
Think finance companies, think Blue Chip, think Money Managers.
The most flagrant case is that of disgraced financial advisor David Ross who fleeced his clients of about $115 million through the operation of an old fashioned Ponzi scheme called Ross Asset Management (RAM), whereby new investors' cash was used to pay out existing investors.
Ross was sentenced to 10 years and 10 months imprisonment last year.
Financial adviser Rodney Bourke-Shaw played a pivotal role in bringing Ross to heel but for all the wrong reasons.
He held serious concerns about RAM but failed to do anything meaningful about his concerns other than having a chat with Ross and sending some emails.
It was his clients' inability to pull their money out of RAM which blew RAM's cover.
An investor himself in RAM, Bourke-Shaw relied on his personal investment and "old accolades" and failed to adequately monitor RAM or Ross before recommending the Ponzi operator to his clients, the FMA says.
"In the FMA's view a reasonable authorised financial adviser ... would have made further enquiries to ensure he or she was satisfied that Mr Ross and RAM had complied with their obligations," the FMA said.
Bourke-Shaw surrendered his status as an authorised financial adviser and the FADC censured him and fined him $4000, $1000 for each breach of the code of professional conduct in September last year.
There appears to be little left for RAM investors but it's not always the case for those out of pocket due to poor advice.
An investor in the aforementioned Blue Chip successfully sued a financial advisor and won $250,000 from them for recommending she put her money into the property developer. A judge determined the 75-year-old widow was not well-served when her adviser recommended a risky investment like Blue Chip.
That's a good outcome for one investor but cold comfort to the other 1200 owed about $120m.
Find a good one
So how can you avoid the duds and engage a star?
BDS Chartered Accountants managing director and Entrepreneur Organisation member Peter Taylor agrees asking them if they recommended clients invest in Blue Chip might be a good start.
"I was advising people not to," he says.
Taylor says a good adviser should have a grasp on both micro and macro economics - in layman's terms they should be able to look at what are the best options for you as an individual taking into account broader trends and themes in the economy.
"They don't need to know everything but they should know when they need advice."
Taylor says you should ask an adviser about their existing clients and probe the depth and breadth of their experience including the industries they are most familiar with.
The IFA has a handy list on its website of questions to ask an adviser along with tips on how to choose an adviser that's right for you.
It says you need an adviser you feel comfortable with, who is prepared to discuss their professional history and financial philosophy and is clear and honest about their remuneration structure.
Some advisers earn commissions and fees from financial product providers. Others rely solely on the fees they charge to their clients.
EnableMe director Hannah McQueen says you should grill an advisor on how much they are earning from commissions and from whom.
"You really need to know the levels of commission they are receiving. What if they are receiving more from certain companies?"
For example, Blue Chip - again - was paying "premium" commissions to financial advisers to entice people, she says.
"There needs to be transparency on that."
McQueen recommends people use independent advisors but you have to be willing to pay for their advice in lieu of the commissions thay won't be getting.
The FMA recommends people ask five questions of their potential adviser.
For some Kiwi investors their choice of financial adviser meant they never got their money back. Take your time and ask hard questions.
If the adviser doesn't match up with any of your preferences there's bound to be another that will.