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Financial advisers' independence needs regulation

Retail investors need warning labels on high risk products, simpler disclosure documents, and a deeper range of choices to put their money into, says the Capital Markets Development Taskforce, in its report released this morning by Commerce Minister Simon Power.

Wednesday, December 16th 2009, 11:20AM 1 Comment

The taskforce, headed by investment banker Rob Cameron, also recommends regulation of the phrase "independent adviser" to allow its use "only by those who are paid solely on a fee-for-service basis by investors and do not receive commissions from product providers".

A clear fiducary duty should be imposed on anyone using the phrase, the taskforce report concludes, and it supports the use of "mystery shopping", such as that employed by Consumer magazine in a recent survey to guage financial adviser competence.

It also recommends the replacement of the current investment statement requirement with a "new, two-part disclosure document that aids understanding and comparability". The first section would be just one or two pages long, with a standardised approach. An online repository for all documents would also assist investors seeking to compare investment offerings.

"Investment statements, which are intended to provide key information to the prduent but non-expert investor, are often excessively long," the taskforce report says. "The required disclosures are written in complex legal terminology and buried in marketing material. Risks are frequently obscured, and critical information like fees is not disclosed in a manner that is comprehensive, simple and comparable."

Where products are particularly risky, they could include a "warning label", and changes in where trustees sit in the chain of responsibility are recommended to improve the transparency of managed funds.

Clearer disclosure of managed funds' fees, asset holdings, conflicts of interest and returns should be targeted, says the taskforce, which began work under the previous government and had its scope widened by the new Commerce Minister, Simon Power, early this year.

On investor advisory services, the taskforce says that while some practitioners give unbiased advice, "others are effectively salespeople".

"Even when advisers seem independent, many receive commissions and other incentives from providers that give rise to serious conflicts of interest.

"Equally important, however, is providing New Zealanders with a greater range of investment choices, with gaps in the local stock market particularly apparent in publicly listed agricultural companies, financial services industries such as banks, and high levels of central and local government ownership of potentially listable utilities.

"In other countries, these may be government-controlled, but they are often partially listed."

The government has promised no state asset sales in its first term, but Finance Minister Bill English yesterday signalled the ground may be moving on that commitment if elected for a second term. English identified better management of the state's capital assets as a major area of focus for fiscal strategy and the 2010 Budget Policy Statement.

The taskforce was also critical of the limited range of debt products available to New Zealand investors.

"This is likely to be contributing to the high level of finance company investment by retail investors who thought they were investing a relatively secure product."

The report also makes a wide range of recommendations relating to the desirability of aggregating certain services currently split between the Securities Commission, NZX Ltd, and the Companies Office.

It identifies "improving the links between public and private markets by facilitating the development of more lightly regulated exchanges that are able to develop rules and be owned or operated by fully regulated exchanges".

Specialist agricultural capital market capabilities should be pursued to play to New Zealand's economic concentration in agriculture, and Crown Research Institute and universties' commercialisation units should be consolidated to create scale and improve capability, the taskforce recommends.

Businesswire.co.nz

« Tower looks to double adviser numbers in next two yearsSovereign takes regulation bull by the horns »

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Comments from our readers

On 18 December 2009 at 2:29 pm paul said:
The thoughts of the task force around independent advisers and the use of the term is interesting. I would be inclined to suggest a three tier segregation:
Independent Adviser - as per the task force suggestions
Adviser - Working in the client's interests, fee only with disclosure of relationships and pool of products.
Salesperson - commission only tied to product manufacturer but limited to simple low cost mass market products and barred from using the term Adviser. Then let the public choose.
Commenting is closed

 

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