Advisers to dob in dodgy deals under new code

Financial advisers will be forced to inform on the dirty practices of their peers under a snitch clause in a contentious proposal for a new code of ethics to clean up the industry.

The draft code, which the public can comment on until December 18, also suggests a ban on adviser commission – a practice many see as a conflict of interest that played a big role in advisers steering elderly people's money into ropey finance companies.

But if commissions do stay – and it seems unlikely they will be ditched – the code wants to see advisers work harder for them, especially contentious trail commissions. These are annual payments in which a fund manager or finance company uses client money to reward adviser loyalty, and can range from 0.25% to 1% of client funds.

Under the draft code, advisers using these are required to earn them by actively monitoring investments for clients and keeping them informed.

The code also proposes that advisers "must place the best interests of the client first and act with integrity", a requirement that does not seem to sit well with commissions, which always bias financial advice.

It defines the word "independent" in relation to financial advisers, and suggests making advisers who are not independent spell out "the benefits of seeking independent advice" and to tell prospective clients in plain English they might like to go elsewhere "to take independent advice".

A plain English requirement for all communication is suggested, but the code does not mention misinforming clients through omission, such as an adviser neglecting to reveal previous calamitous investment advice.

The code would also ban advisers going into joint investment ventures with clients, and prohibit borrowing from them, though it is not clear how that relates to advisers providing their own finance companies, bonds or mortgage funds which on-lend to trusts and businesses operated by related parties.

The code is to be policed by a disciplinary committee under the Securities Commission. People can make complaints for the committee to hear, but it can't order compensation.

Advisers found to have breached the code face penalties including being forced to retrain, fines of up to $10,000 or being banned from working as advisers.

- © Fairfax NZ News