Financial advisers have been widely vilified in recent times and have become a divining rod for derision. If you believe the media, all financial advisers are Madoffs.
Recent case in point, the just published report by the Capital Market Development Taskforce reads like a diatribe on the financial advice industry.
Almost a third of the report is devoted to the deficiencies of financial advisers when in reality advisers control only a fraction of the assets invested through our capital markets. Somewhat perversely, the entities the authors of that report represent collectively wield far greater influence over New Zealand‘s capital markets than the entire financial advice industry. But they seem to have chosen to deflect rather than reflect.
It seems to us that financial advisers are punching well above their weight.
Granted, the financial outcomes for investors the world over have been poor in recent times. But, while convenient for some, it is wholly inappropriate to lay the full responsibility for those outcomes at the feet of what is a critical but still relatively embryonic industry in our country.
We profess to know a little bit about, and a lot of, financial advisers. NZ Funds, is the only investment management group in New Zealand that makes its living exclusively from working alongside financial advisers. We have followed that course for more than 20 years now, from the genesis of our industry to its currently troubled point.
We work with advisers of all denominations. From one man bands to large national chains; from the truly independent (I will come back to that hoary old chestnut) to those that rely on us for a wide array of investment and business services; from those qualified primarily through experience to those who hold doctorates in finance.
They are generally good, honest people of strong integrity and ethics. They do not need to be told to put their clients’ interests first. They are acutely aware morally, if not necessarily technically, of their fiduciary duties. Their recommendations are not, in our observation, tainted by remuneration factors. But we do frequently observe their genuine concern for their clients’ financial outcomes and well being.
The distribution curve of financial adviser capability is no different than that of any other profession – some outstanding, many average and a small minority whose less than exemplary behaviours draws all of the others into disrepute. Ask any lawyer, priest or male primary school teacher about the stigmas of association.
People’s wealth is second in importance only to their health and their families. It is a source of enormous anxiety and uncertainty for them. This is especially so as the average client of a financial adviser in New Zealand generally has a significant shortfall between the life they desire to live in retirement and their current and prospective financial resources. They have an unfunded superannuation liability.
It therefore follows that as a profession, financial advice should be held in similar regard to the other profession that deals with the issues of our life enjoyment, namely, medicine. But it is not. Far from it.
The maligning of financial advisers has three primary legs to it:
- they pursue their financial interests ahead of their clients
- they are underqualified to perform their role
- they lack independence.
With respect to the first issue, if it were true one would expect to see abhorrent remuneration and great wealth being accumulated amongst advisers, much like that which has occurred in the investment banking and sharebroking industries globally. This has not occurred. Most advisers make a living, not a killing.
With respect to the second there is strong and unequivocal basis to this criticism. Most advisers we talk to would dearly love to see a stronger professional qualification criteria develop. But, like any industry in its relative infancy, the availability and level of professional qualification takes time to develop. It requires concerted investment from industry participants and government.
With respect to the last, there is much confusion and obfuscation around the issue of independence. There is no evidence that we are aware of that supports the contention that a wide range of choice (commonly referred to as independence) improves a client’s financial outcomes. To the contrary, there are very strong arguments and evidence that fully integrated advice and investment management services can deliver a superior outcome.
Advisers’ remuneration or commercial arrangements are not matters of independence, they are matters of disclosure. It goes without saying that they should be disclosed. But to say that an adviser delivers a lesser service because they utilise a narrower range of investment providers implies that is possible to fully understand all available products and securities – which is nonsensical.
Independence should be defined as the ability for an adviser to recommend what they believe to be in their clients’ best interests. Nothing more, nothing less.
Much of the noise in the media directed against financial advisers comes from those who hold a vested commercial interest in maligning the advisory industry (read their competitors). They are often advisers in drag. They, more than those they malign, are exploiting the investing public’s inability to discern the veracity of the distinctions they are making – many of which are spurious at best. They are patronising those they purport to protect.
An example from the Capital Markets Development Taskforce report bears this out. The report argues that funds are flawed investment vehicles because “individual members’ asset holdings may be distorted when other members buy or sell units in the fund”. Given that this same flaw could arguably apply to all traded securities (the circularity of which is perplexing given the Taskforce’s stated aims), one can only assume that the statement represents the interests of one or more of the contributing parties, not those of investors generally.
The real destruction of wealth that has occurred in New Zealand has been driven much less by the direction of advisers and much more by the lack of it. Most of the investment directed to failed finance companies for example, was and still is, made without the benefit of advice. There is strong empirical evidence globally that it is human behaviour, not bad advice, which is the primary enemy of individual investors.
The poor financial outcomes achieved by investors over the last decade have been exacerbated by the laying bare of the imperfections of modern portfolio theory. While modern portfolio theory is beautifully elegant it is flawed in its application for individuals. The returns from risk assets are not as predictable as the theory implies over the investing timeframe of most individuals; the outlier events occur more often and to greater extremes than the theory accommodates; and diversification does not provide the protection necessary to sufficiently smooth the ride. Despite all assurances, investors can not cope with the true volatility of the assets in which they are invested and their self defeating behaviours prevail.
These are failures on the part of academics and investors, not advisers.
One factor on which most will agree is that New Zealand and New Zealanders would benefit enormously from a widely accessible, professional, efficient, profitable, and client centred financial advice industry.
We believe that investing in the advice industry is a better means to that end than deriding it.
Richard James is the chief executive of NZ Funds Management
