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Simon Hassan IFA President
Address to EUFA Meeting
21 January 2008 |
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Orewa Rotary Club, 4 Hibiscus Coast Highway, Silverdale
10am, 21 January 2008 |
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View PDF |
Good morning everyone, and thank you Suzanne [Edmonds] for the opportunity to speak today.
As you heard from my introduction I am a financial planner but today I am speaking to you as President of our professional body, the Institute of Financial Advisers.
In my 20 minutes I want to tell you about the Institute and what it does, make some comments about regulation - which is finally on its way for New Zealand financial advisers, and run over some investment fundamentals. Then you'll have the opportunity to ask questions. I will also be happy to field your questions along the way - feel free to interrupt with these. If you do, I will try and answer them there and then, but if there are too many or if they get too complex, I'll ask you to wait until afterwards. I have bought some cards with me and will give you a website [address] and free phone number if you want to be in touch later. My speech notes will also be available for those who want a copy.
During the last couple of years thousands of Kiwis have lost perhaps a billion dollars in finance company failures.
That is a tragedy. Some of those affected (and I assume that most of you have been hurt) have lost a lifetime's careful savings - a nest egg accumulated through years of careful budgeting and doing without.
Some will have paid for professional advice about their investment - and lost money all the same. Others, unthinkably, will have entrusted their life's savings to a shoddy company on the basis only of a newspaper ad featuring a credible looking name and a high interest rate.
That things like this happen in New Zealand today may be hard to fathom - but these have happened, and we are here to talk about what you may be able to do about it, and, most importantly, how to make sure it doesn't happen again.
Hopefully you will go home today with at least some of your questions answered, and better equipped to avoid the traps you may have fallen into or the sharks who may have preyed upon your savings.
The Institute of Financial Advisers, with 1,400 members, is the largest professional body representing financial advisers in New Zealand. We have a Chief Executive and he has a staff of two and a half. The rest of the work is all done by volunteers keen to help develop and nurture our young profession.
There is only one reason we exist, and that is to set and enforce professional standards for advisers - in the interests of Kiwi consumers.
Among other things the Institute requires members to:
- Act in the interests of clients
- Be competent in their areas of practice
- Undertake minimum levels of ongoing education
- Ensure that their advice has a reasonable basis, and
- Ensure their remuneration is fair and reasonable.
| The Institute also requires members to tell clients in writing about:
- Their qualifications and experience
- How they get paid (and in the case of investments, the amount and/or rate, or any commission)
- Their business relationships, and
- Any conflicts of interest.
| We are proud to say that all investment advisers will have to follow disclosure requirements like these when changes to the Securities Markets Act take effect at the end of February [2008].
But disclosure is not enough. When these new rules come into effect financial advisers still won't have to belong to a professional body. And - with membership voluntary - it is not surprising that most financial advisers choose not to belong to a professional body. Our 1,400 members - or the 1,800 or so who belong to any membership body - are a minority. It is hard to get accurate numbers in an unregulated market, but - taking the widest view these could be more than 50,000 financial advisers of one sort or another out there.
Membership imposes strict obligations - it is a "business risk". Some prefer not to join to avoid the risks. Others don't want the cost (membership costs $550 a year). Others, often those later in their careers don't want to face the hurdles of getting qualified.
And of course the Institute can only impose its rules on members.
So for now there is no requirement for all financial advisers to have even a basic education, let alone undertake ongoing professional development to keep their knowledge up to date.
There is no requirement to submit to complaints or disciplinary processes.
These are all things the Institute of Financial Advisers requires of its members.
Thankfully this is a key thing that will change when the Financial Advisers Bill, introduced into Parliament at the end of 2007, finally becomes law. All financial advisers will have to belong to a professional body. Professional bodies will have to be approved, and will work with the Securities Commission to ensure that financial advisers are competent, follow safe business practices, and are accountable for their advice - for the benefit of Kiwi consumers.
Unfortunately this will not happen overnight. The way these things go, with select committees, consultation and phase-in periods, a Financial Advisers Act is unlikely to be fully in force before 2012.
This means New Zealand will be the last OECD country to regulate its financial advisers. It's a great pity that successive governments have taken so long to get the process underway - something we have wanted for years.
And it's a crying shame that we had to see all this happen before the reforms were in place.
The Institute would prefer to see change yesterday. But we know that good law can't be rushed, and we are working very hard with Government, the Ministry of Economic Development, the Securities Commission and other professional bodies to get things done as soon as possible.
Of course regulation won't mean the end of problems. Regulation won't change human nature. Lawyers and accountants have been regulated for years, and yet members of those professions are regularly exposed as crooks in the media.
Financial advisers are regulated in Australia, but that hasn't stopped ordinary folk being preyed upon by financial sharks across the ditch.
But regulation will mean that unprincipled and incompetent advisers can be taken out of business, or face real financial penalties. It will also mean that advisers have to belong to a professional body like ours, and that will be a definite improvement - we can't discipline those who are not members.
The Institute of Financial Advisers is committed to helping create an environment in which Kiwis can have confidence about the financial advice they use.
We are also very keen to help educate the public about financial decision making and are involved with a number of financial literacy projects around New Zealand.
We have a website (www.ifa.org.nz) and a free phone number (0800 404 422). You can use these to find a member in your area, or to contact our national office with any questions or complaints.
Risk is usually the most important thing to think about when you are considering an investment. The word "risk" can have a variety of meanings depending on the context. In the context of investments risk has two common meanings:
- Most investment textbooks talk about "risk" as a chance that your actual return from an investment will be different from what you expect. In other words, risk has both an upside and a downside. Used in this sense you can't predict what risky investments (property and shares, for example) will do in the short term - they will be up one day and down the next - but over the long term (say over periods of ten years or longer) things like shares usually produce higher overall return.
- But most of us have a more basic understanding of risk - the chance you could lose your money. That is, the "downside" half of risk as it is used in the textbooks.
| It is interesting that the lesson from the finance company failures involves both definitions.
When you are building an investment portfolio the golden rule is to diversify - spread things around.
Generally you should use a mix of risky assets like shares and safer assets like bank deposits in a portfolio. More in risky assets if you are investing with a longer time frame and/or with no immediate need for investment income. More in safer assets if you need an income and/or if your investment is short term.
Safer investments tend to generate their return in the form of regular interest payments. Riskier investments tend to get most of their higher overall returns in the form of long-term capital gains (the sum of many, almost random, shorter-term gains and losses).
The basic mistake made by many investors who lost money in finance companies (or the mistake made by their advisers) was to look for higher returns from interest-bearing assets rather than from traditional sources like property or shares.
Unlike shares, finance company debentures (or term deposits for that matter) only have "downside" risks. They are contracts that will either pay you what they promise - or if things go wrong, less than that.
When the share market turns down (as it has here and overseas in recent weeks) someone with a well chosen mix of shares only has to wait to see values come back - time is their friend.
This is not usually the case with interest-bearing investments. When these get into trouble the only question that remains is usually how much of each dollar you investors will eventually get back. Time is your enemy: the longer any fixed interest investment has to maturity the greater the chance of things going wrong. That is one reason fixed interest investments usually offer higher interest rates than on-call investments.
There are no hard and fast rules, but if you had $200,000 to invest and you wanted to put some of this into higher interest (read "higher risk") deposits you should probably put no more than $10,000 in any one of these, and you should certainly not put all the money you are investing to provide an income into higher risk (read "higher interest") finance companies.
It is reasonable to expect this kind of advice from a competent financial adviser.
But before they gave you any advice they would also take time to learn about your needs and situation. In your initial discussions they will have discovered key things about you:
- Your time horizon (how long you were planning to invest for)
- How much income, if any, that you need
- Details including the overall mix in your other investments, if any (is this money all you have, or is it part of a bigger picture?)
- Your experience and sophistication as an investor
- How you feel about investment risk (your risk appetite), and
- How much risk you can afford to take (your risk capacity).
| Their advice would have conformed to core principles, such as the need to:
- Diversify, as outlined above (even at the most basic level we all know it's foolish to put all your eggs in one basket)
- Match your time frames to those of your investments (you wouldn't invest short term money in a long-term investment)
- Ensure they have a "reasonable basis" for any investment recommended (such as an external research report, or some other robust evidence of its suitability).
| And on top of that, a genuine professional would also give you all relevant details about anything that could have influenced their advice - including:
- The remuneration (fees and/or commissions) or other rewards (including "soft dollar" incentives like trips) they will get if you follow their advice, and from whom
- Any relationship or constraint that could have affected their advice, and of course
- Full details of any conflict of interests (such as if the investment recommended offered them twice what other similar alternatives offered).
| If your adviser was a member of the Institute of Financial Advisers at the time, if they were being paid to give you advice (rather than just acting on your instructions for example - advice costs money and not all clients want to pay), and if any of the key elements above were missing from the process they went through with you, you probably have a claim against them and I would encourage you to lay a complaint.
When we get a complaint the Institute follows a strict process:
- The complaints officer will receive your complaint.
- He will ask the adviser to respond to your complaint and provide you with a copy of that explanation.
- If the explanation does not satisfy your complaint, it will be referred to our independent Complaints Committee.
- The case goes to the Complaints Committee. This committee and the higher level Disciplinary Committee are independently chaired and are independent of the Institute board and management. The Complaints Committee (chaired by a QC) examines the evidence and may dismiss the case, deal with simply at this lower level, and refer the parties to an alternative disputes resolution process, or send on to the Disciplinary Committee for a formal hearing. It can also levy costs and publish its findings without naming the defendant.
- The Disciplinary Committee (chaired by a retired High Court Judge) can dismiss, censure, require undertakings and/or supervisions, impose fines of up to $10,000 plus costs, suspend or terminate the membership of an offender, and publish its findings in full. This committee also hears appeals.
| The Institute's powers do not extend to requiring a member to make restitution. This will change when the Financial Advisers Bill becomes law - then approved professional bodies will need to belong to an approved disputed resolutions service (these are still to be created).
But in the meantime a finding by the Disciplinary Committee would be strong evidence you could use if you were taking a case against your adviser - provided that they are a member of the Institute of course. You will hear more about this from the solicitor who will be speaking to you later.
In closing, I want to re-emphasise my main point. The Institute of Financial Advisers cares about Kiwi consumers and exists solely to see that you are served well by competent, principled financial advisers.
We do this by setting and enforcing professional standards. We also help by fostering financial literacy - raising the level of knowledge about financial products and decisions in the community. Unfortunately we can't discipline an adviser who is not a member. We can't change human nature. And we can't prevent investors who don't want advice, from making mistakes.
But if you have dealt with a member who has breached our rules we will not protect them. We encourage you to lay a complaint. You can start this process by calling 0800 404 422 during business hours.
Like all of you we want a society in which Kiwis can be confident in relying on those they go to for advice about investment, and other decisions.
Simon Hassan
Institute of Financial Advisers
President | |
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