Advisers must build up trust

BY DIANA CROSSAN

OPINION: Kiwis tell me they don't know who to trust with their money - and why would they? A series of high-profile failures of investments have raised questions in New Zealanders' minds about the whole financial advice industry.

Whether or not people who lost money got advice from a professional financial adviser, and whether or not financial advisers could have predicted some of the failures, nevertheless many New Zealanders tell me they no longer trust any financial advisers.

There are advisers who are professional and do a good job. For example, the Institute of Financial Advisers, which has organised Financial Awareness Week, has a sound code of ethics and takes action against members who do not measure up.

The Government is also setting new rules through the Financial Advisers Act and other related legislation. Through our website sorted.org.nz and related resources, the Retirement Commission provides people with information to help them make informed decisions about getting financial advice, such as checklists and questions to ask.

But ultimately, it's up to the financial advisers themselves to prove to the New Zealanders they work for that they can be trusted to give good advice.

Even with the framework being set by new legislation, there are challenges for financial advisers, and for the broader financial services sector.

The first challenge is communicating clearly. We know from the ANZ Retirement Commission Financial Knowledge Survey that New Zealanders' understanding of financial terms is patchy.

People don't know what the words mean.

I hear people in the sector talk about "volatility" when they mean "you might get less money back than you think". They talk about "downside risk" when they actually mean "the chance of losing all your money".

The challenge for financial advisers is to keep checking that their clients fully understand what they're being told.

An area where clear communication is particularly challenging is disclosure. There is a legal requirement to disclose certain information about financial advisers, and the financial products they recommend. This tends to be done through lengthy written documents. There are efforts under way to make these as clear as possible, but there is still some way to go.

The challenge is to find a way to provide the information so that everyone, even people with low financial literacy, can fully understand it.

Perhaps a change of language would help; instead of "disclosure", we might get further if we think of it as "consumer information" or "laying all your cards on the table".

The Retirement Commission is working with the Economic Development Ministry on research into what makes for good disclosure for consumers considering investing in financial products, and we expect to have results by the end of this year.

Another challenge is how financial advisers are paid. Some are on a salary, some charge an hourly rate, while others are paid a commission on products they sell.

Putting myself in the client's shoes, can I ever be fully confident you are giving me the best advice for my circumstances, if you're being paid a commission on some products?

Is it time for the financial advice industry to reconsider how it charges?

The Capital Market Development Taskforce has an interesting suggestion in its recent report - that the use of the words "independent adviser" be restricted. It suggests if advisers get any incentives, such as commissions, then they should not be able to call themselves independent.

Financial Awareness Week is a good opportunity to debate these issues, because New Zealanders need sources of information and advice they can trust as they manage finances in an increasingly complex environment.

Through sorted.org.nz the Retirement Commission provides free, independent information to help New Zealanders of all ages understand money matters and manage their personal finances throughout life. Sorted.org.nz and related resources are used by almost one in three New Zealanders, but there are times when people need more specific, personalised advice and turn to a professional financial adviser.

About one in five New Zealanders got advice from a financial adviser in the past 12 months, according to the recent ANZ-Retirement Commission financial knowledge survey.

Every person calling him or herself a financial adviser has to "walk the talk". That means not simply doing the minimum that's necessary to abide by the letter of the law. It means acting ethically because it's the right thing to do.

Diana Crossan is the Retirement Commissioner. This week is Financial Awareness Week.