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AFAs have to disclose remuneration, but not RFAs

Financial adviser disclosure regulations require authorised financial advisers (AFAs) to disclose how they get paid, but not registered financial advisers (RFAs) leaving questions about how it will put the consumer in a better position.  

Tuesday, November 9th 2010, 5:00AM 13 Comments

by Jenha White

Securities Commission director supervision Angus Dale-Jones says the core legislation in the Financial Advisers Act (FAA) allowed for prescribed fees disclosure for RFAs, but it didn't go that far in its decision.

AFAs however, have to provide comprehensive fees and commission disclosure with the prescribed form saying:

"I am required to tell you the specific fees, commissions, extra payments and other benefits I have received, or will, or may receive in relation to the services I provide you."

One adviser says she can't believe the backward step that has been taken with RFAs not having to disclose their remuneration. 

"It seems like a real double standard out there, how is this going to put the consumer in a better position than pre-regulation?"

She says disclosure of fees should be something everyone has to do in setting up professional practices.

Dale-Jones says the clear disclosure of both advice and product charges is integral to professionalism for all advisers and the Securities Commission expects all advisers to treat their clients openly.

"In doing so, we expect that there is an open discussion about what fees, commissions and other incentives might be relevant."

He says the government has left the door open to impose requirements at a later date on RFAs if it needs to.

"The government will be monitoring closely to see the initiatives taken by advisers themselves and by professional associations to make sure that professionalism is maintained across the sector."

Qualifying Financial Entities (QFEs) have to disclose every matter that is required in their terms and conditions which are being consulted on at the moment.

Dale-Jones says many of the topic categories that apply for AFAs are picked up in what is being proposed for QFEs as well.

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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Comments from our readers

On 9 November 2010 at 7:05 am Bazza said:
and they haven't included conflicts of interest, and 'Independent' can be used by RFA's without breaching the act, and if you do want to add these things into your disclosure document, so you can be 'open' with your clients, it is now illegal as the law states you can't add anything else to the disclosure document. The lawmakers don't understand our business, or what is good for the consumer, and have stuffed up again. This is beyond a joke!
On 9 November 2010 at 8:55 am Brian Klee said:
If RFA's are smart and want to be also regarded similarly to their AFA counterparts they will want to voluntarily disclose their remuneration. They will not need to have any regulatory authority to insist that this happens - it will be sound business practice.
On 9 November 2010 at 11:07 am Wise one. said:
Agree with Bazza totally. It seems unbelievable that an AFA is required to disclose fees on all advice (including Category 2 advice), yet an RFA doesn't.

An RFA also doesnt have to disclose if they have been bankrupt, admitted to the no asset procedure, been the subject of disciplinary procedures or criminal convictions.

Yes, RFAs could volunatrily disclose this info, but as Bazza pointed out, they can't do it in their disclosure statement as prohibited to add anything other than what is prescribed.
On 9 November 2010 at 1:10 pm Mac said:
I will only deal with industry accredited service providers , such as a Chartered Accountant or a Registered Builder (not a Master Builder). I expect quality new prospective clients would also prefer to deal with an Authorised Financial Adviser (not a "RFA").
On 9 November 2010 at 2:04 pm Ron Flood said:
In response to Bazza and Wise one, an RFA can not act or advertise in a misleading or deceptive manner. This includes calling oneself independant when in fact you place 85% of your business with one company.

As far as disclosing convictions etc. these have to be disclosed at time or registration regardless of adviser status.

If we consider one of the more recent driving forces behind the Financial Advisers Act and subsequent regulations, the loss suffered by mum & dad investors of over $1billion invested in Category 1 products, then it makes sense that AFA's will operate under a higher standard of disclosure and governance. This reflects the importance the Government places on the advice AFA's will be giving on these products.

In submissions made to the Code Committee, the Life Brokers Association argued that disclosure of commissions on category 2 products would disadvantage risk advisers when competing with bank employees. We pointed out the anomaly whereby a salaried employee of the bank would not have to disclose any commission, yet an adviser paid on a commission basis would.

We gave examples where the cost of cover with a bank was similar or in some cases more expensive than the same cover with companies paying the highest commission rates.

The LBA does not see the merit in having anyone disclose commissions on Category 2 products at this time.

However,at the end of the day, providing all participants including QFE employees have to disclose commissions or commissions received by their employer on Category 2 products, we have no objection to this being a requirement of all advisers in the future.

In the meantime,we should respect the space each adviser wishes to operate in and act more professionally. This will involve going about our own business and not denigrating others, who are simply adhering to their legal requirements.
On 9 November 2010 at 3:19 pm Wise one said:
How soon we forget that mum and dad investors invested direct into alot of the Category 1 products you quoted, as mentioned at a SCF roadshow (bad example as no funds were actually lost by mum and dad investors in secured debentures due to the GGtee), over 60% of their clients were direct. With other companies who extensively advertised, I have heard this rate was much higher.

No amount of governence will fix our DIY attitude in NZ.

On the matter of convictions,etc, I wouldn't want to buy something as important as insurance from someone with convictions or major disciplinary action against them, but then, I'll never know will I?
On 9 November 2010 at 4:25 pm Anon2 said:
I'm not sure that any risk adviser (hand on heart) can say they are independent.

They are usually influenced by either product providers who entice them with commission and 'deals' or by aggregation group leaders who tell their members to only deal with certain companies (because they obviously get paid to do so).

I don't know of any adviser who has actually read all policy wordings from all companies and completed their own comparisons - instead they depend on research houses who have their own view of products.

It is only financial advisers that charge fees that could truly call themselves independent
On 10 November 2010 at 10:32 am Andy said:
Thank you Ron for clarifying a couple of points there. Bazza - from what I can gather, RFA's do not need to disclose possible convictions because those are already vetted in the registration process. Those with convictions are unlikely to get past the registration process.
On 10 November 2010 at 11:16 am Bazza said:
Thanks Andy but I never said anything about convictions. And well done Ron I didn't say anything about disclosing commission, but it would be nice to disclose how an RFA gets paid in a disclosure document. In fact if they had just stuck with the current disclosure rules most professional bodies require that would have been a better outcome. I see these guidelines as a step backwards from where 80% of RFAs where at with disclosure already, (Maybe with the exception of LBA members, I don't know they are getting harder to find.) Denegrating? No. Just voicing a concern that regulators don't get it.
On 11 November 2010 at 4:56 pm Daryl said:
Anon2,
Yes, we use independent research and we do our own primary research. Risk products are selected on a best quality / best value basis (including underwriting considerations) that deem to be in the best interests of our clients. The processes used to select product/s has absolutely NOTHING to do with levels of commissions that we receive from the providers.
On 11 November 2010 at 6:19 pm Graeme Lindsay said:
Having read Anon2's post, I figure that there are a number of issues here.

Firstly, independence! It seems that different parties ascribe different meanings to the word. To regulators, it seems to mean that to be independent, one cannot receive commission from an insurer. To life brokers, independent means that one has no contractual obligation to place any business with the any insurer. Brokers use the term to distinuish themselves from (what were called) sole agents or the more current version, advisers who contract to transact a set proportion (frequently 85%) of their new business with the insurer in return for an enhanced remuneration.

The next issue is Anon2's comment that advisers are influenced by providers or aggregators. I can say that the advisers whom I know, are generally pretty clear thinkers who weigh up the merits of the offerings of the various providers when preparing for each client.

I'm intriugued with his/her comment "I don't know of any adviser who has actually read all policy wordings from all companies and completed their own comparisons - instead they depend on research houses who have their own view of products."

I thought that this is exactly what he would expect a research house to do. IE Study the products offered carefully and take a view. To imply that a research house taking a view of products is somehow wrong, contradicts logic.
As the owner of the only NZ-domiciled analysis service (I prefer analysis to research), I can confirm that we carefully review all products and publish our analyses to enable the adviser to better understand the products so that they can better advise their client. We do not tell the adviser what to sell! We publish ratings of many product types, but these are of a general nature and not client-specific and cannot be taken as a recommendation to the adviser on which product is best for a particular client.

Then, I should comment on the notion that an adviser could read all the policy wordings in the market and then make a selection for the client under consideration. The sheer volume of words contained in these policies would mean that the adviser wouldn't have any time to work for his/her clients as they'd never finish reading the policies. Just keeping up with the ongoing changes keeps me busy, and I've been doing it now for over 16 years!

The smart adviser does subscribe to an analysis service, and uses it to better understand what is on offer, so that he/she can make a sound recommendation for each and every client.

Cheers
On 11 November 2010 at 9:29 pm Neil Smith said:
"the Life Brokers Association argued that disclosure of commissions on category 2 products would disadvantage risk advisers when competing with bank employees."

Twaddle.

I've done for years. Clients don't care!
On 27 January 2011 at 9:13 am Murray Chong said:
I agree with you Neil Smith.

So long as you can offer better products then the banks can offer then Clients dont care about our commissions.

On the other hand if one group has to disclose then it should be the same for others.

If it's good enough for the Goose then it's good for the Gander.
Commenting is closed

 

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