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Conflict between advisers and investors

A review of the long-term savings industry in the United Kingdom suggests there is a conflict between consumers and the way independent financial advisers are paid.

Thursday, August 9th 2001, 7:17AM
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A review of the long-term savings industry in the United Kingdom suggests there is a conflict between consumers and the way independent financial advisers are paid.

The review, which is backed by the Treasury, has been done by Ron Sandler, the former chief executiv of Lloyd's of London.

Although the review looks at just the UK market it is relevant to New Zealand as there are similar industry structures in place.

One of the big differences between the two markets is that the UK has a heavy-handed adviser regulation regime, while New Zealand has the opposite.

Yet this issue isn't a major factor in the report as it looks at industry structure.

The report says there are grounds for concern as to whether the competitive process in the industry is necessarily producing efficient investment and an appropriate range of products that deliver to the consumer an efficient risk-return trade-off at the lowest possible cost. There are various reasons for this concern:

  • many consumers lack the time for or expertise in investment and savings issues, and there is limited shopping around;
  • as a result products are usually distributed through intermediaries, who are subject to their own commercial incentives;
  • costs and charges are poorly understood by consumers and exhibit very wide variations across the various product markets;
  • high distribution costs generally create substantial disincentives for the
  • consumer to switch products or providers even where it might be in their best long-term interests to do so; and
  • The report asks whether there is a potential conflict of interest between marketing revenues and investment advice given out by advisers.

    Its concern is that incentives to give advice are not aligned with the consumer.

    "To the extent that advisers' incentives are not aligned with those of their clients, competition within the industry may not lead to optimal outcomes for consumers."

    The report also says unclear pricing and a lack of transparency over charges is another area of concern.

    « How to deal with increased volatilitySovereign takes regulation bull by the horns »

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