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Financial advisory sector expected to shrink 20%

Hassan and Associates director Simon Hassan says he expects the sector to shrink 20% as advisers struggle to meet the educational requirements of the Financial Advisers Act (FAA).

Friday, January 21st 2011, 7:00AM 30 Comments

by Jenha White

He says advisers must obtain a Level 5 financial advice qualification which will be hard for older workers and those with family and work commitments.

Hassan points out that a lot of older advisers probably didn't even finish secondary school, let alone have any qualifications, making the education requirement daunting for them.

"It's a pity because a lot of those people are very good advisers, but it's one of the consequences of going through the change."

Hassan also believes the dispute resolution process is a catch 22 as it will be a better environment for consumers, but the public perception will probably be more negative because of media exposure around cases.

"It's a bit like after someone yells shark at the beach. It makes it safer because people are watching out for them, but you feel much less keen to go back in the water."

He believes the industry, "which is a relatively young profession", will experience profound change over the next five years.

He says he and his fellow five FPSB committee members will be focusing on the tough issues currently facing the industry including the role of commissions, ensuring clients' needs are placed first and enhancing document transparency.

Hassan believes the largest barrier to establishing trust in investments and the profession today is that many countries, including New Zealand, still use commissions.

He says the FPSB advocates a fee-based system, rather than a commission structure and where commissions are used, they should be appropriately disclosed to the client.

How financial advice is presented to clients is also an area which needs addressing according to Hassan.

He says advisers need to present documentation in plain language to support the advice they are giving.

"For instance, if an adviser tells a client to take shares from one company and place them with a different firm, the reasons for that advice need to be clearly documented. This should be standardised across the industry."

Jenha is a TPL staff reporter.

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Comments from our readers

On 21 January 2011 at 9:17 am John said:
I feel for the older investment advisers (at least those that have always operated ethically) that will now be forced out of the industry because some 20 something year old at the ETITO says they have not passed the new “academic standard” for being an AFA. With maturity comes a certain level of empathy and worldly experience that can’t be taught or learnt in a classroom and I might mention a lot of younger advisers in the industry could well do with a dose of!
On 21 January 2011 at 11:07 am Mark said:
I think you will find the ETITO is utilising experienced people, many of whom are CFP's to assist them - and they are all well past their 20's!
On 21 January 2011 at 11:14 am Richard Renfrew said:
I am amazed when I read all the comments about the reluctance of some advisers to do the Standard Set requirements.

We are putting our PA through the requirements to be an adviser and we know of other advisory firms putting all their admin staff through the Standard Set courses.

So, to say some advisers are being forced out of the industry is utter nonsense. They are choosing the easy option.

After all, the Securities Commission has given advisers one easy option; sell only insurance and do nothing about educating yourself!

Think of this: I met two retired men in their late 50's on the Picton to Wellington ferry. Each of them had sold their businesses for millions of dollars. Neither of these two men had invested their money with a financial adviser and talked mockingly of the failed panel beater who became a financial adviser. They told me that the adviser was involved in Blue Chip and many of the retired people he advised in their community lost their homes.

We cannot expect to be respected as professionals while there is no barrier to entry. This is the purpose of the Standard Set requirements. They are not actually daunting but do require an investment in time. I suggest it would be better to have more positive comments and give more encouragement to those studying than building up an expectation that the process is just too difficult for those who have not studied before. After all, how do you eat an elephant? One bite at a time!
On 21 January 2011 at 12:31 pm Michael Donovan said:
Great comments Richard. However, as I fit into the "old bugga" category now, and have effectively moved out of active service (having achieved #1 status many times since entering financial planning in the mid 1980's), would it be feasible to have some "old buggas" remain active in the profession, so long as they aligned with some "younger buggas" who had the inclination toward achieving academic qualities. A JOINT effort, where the academic simply checked-over the "old Bugga's" recommendations and process notes, and even met the client/s and disclosed their joint process. Because clients would love the warm fuzzies of knowing they had a combination of two advisers looking after their money, yet the 'main' client relationship could remain with the "old bugga".!

Is not the more perfect result the combination of CFP (Academic)& QBE (Qualified By Experience)?
On 21 January 2011 at 1:04 pm Alistar said:
Richard I don't think the public will suddenly start respecting (or should that be trusting?) investment advisers again just because they are now doing all these standard set courses and attaining AFA status. It all looks good on paper to say “I’m an AFA look at me!” but does it suddenly mean the leopard changes it spots? We’re kidding ourselves if we think the public will forgive and forget those amongst our fraternity that focused on a quick buck with no regard to whether the provider being recommended was going to deliver on the return promised (before they all collapsed)

There have been a few comments from readers on here talking about known offenders amongst us (some of whom have been before the courts) that will be continuing in the investment industry albeit now with them having gained AFA status. Personally then I don’t see that becoming an AFA has any real substance to it when one talks about their being a barrier to entry now. Clearly there is no barrier if such advisers can be allowed to keep operating! This just makes a mockery of regulation and you’d be pretty naive to think otherwise.

I would like to see those “very good advisers” that Simon Hassan talks about above being allowed to remain in the industry rather than being exited early. These chaps at least have been around for the last 25+ years so by definition must know a thing or two about what they are selling. Doesn't experience count for anything nowadays?
On 21 January 2011 at 1:44 pm John said:
Michael Donovan. I like the sound of that QBE (Qualified By Experience) qualification you mention. Suggest you set up a company in direct competition to ETITO and let the consumer decide themselves which qualifications have more relevance and thus the advisers they want to trust when it comes to advice on financial matters. I think lots of “old buggas” like yourself might find you’ll be in great demand.
On 21 January 2011 at 1:48 pm John said:
The problem with a QBE is that in order to get the E you need to learn on the go, and your education pathway, through trial and error, almost certainly costs your clients. Can "QBE's" honestly say that the Financial analysis and written plans they provide now (with all their experience) are of the same quality as the ones they gave to their early clients? I'm sure they were just as confident in their own abilities back then and exuded this to their clients but the truth is they were /are probably way underqualified to be dealing with peoples money and lives! I'm not an adviser, I sit on the other side of the fence and quite frankly I want to know that my adviser has a sound understanding of financial instruments and a formal education behind him. The problem I have encountered with most QBE's is that the qualification is always "self issued" with no formal's your chance to formally measure your E...sit the exams!
On 21 January 2011 at 3:04 pm Patrick said:
Hey Richard: you say the standard sets aren't very daunting but you, as a CFP, didn't have to work thru Standard Set C and the 60 page "Assesment Pack". Your definition of the word "daunting" may be different if you had to. Cheers.
On 21 January 2011 at 3:24 pm Alistar said:
John (comment posted at 1.48pm) I don't disagree with what you are saying in principal but experience counts a lot in this industry. It’s like looking into the cockpit of an airliner and seeing a grey haired male at the controls. Personally I always feel a lot more relaxed knowing my family and I are in a safe pair of hands. I’m not so sure I’d feel the same way seeing a fresh face kid in his late 20’s (whose is fully qualified to fly passengers no doubt) but has minimal hours logged in the air with actual passengers carried.

I remember my days in banking when the person whom you could rely on at the branch for the best financial advice on term deposits wasn’t the recent university graduate employed by the bank as a personal banker. It was the head teller who had been setting up term deposits on behalf of all the branch staff for the last 20+ years. I would imagine that this example rings true still to this day.

The exams that ETITO are selling to the industry as "raising standards" might be educational for some but to most of us experienced advisers they are a waste of time (and money!) and will have no benefit to anyone but the ETITO’s bank account.
On 23 January 2011 at 9:33 pm anon said:
The industry will shrink because there is an uneven skew to older age – the average age being 58 or thereabout. And male – perhaps another failing of the industry to attract and retain smart women!
What the industry lacks most is professionalism. This has nothing to do with age, commissions, fees, the amount of business you write, or any other spurious nonsense. Does this come with qualifications – yes but not those alone. Professionalism is the way you treat and respect others in the industry and those that wish to use the services of the industry. Qualifications are a must, but so is a mind shift that I believe will only be brought about with time (and I suspect a long time at that). An example of this lack of professionalism is the necessity of any reference to Authorised Financial Advisers to be an opportunity for some (who clearly – measured by their own yard stick - think they are better) to say that others don’t deserve to be Authorised. If you are an AFA this is a breach of the code of ethics – unsurprisingly committed by a recently appointed AFA quoted in the Herald.
Personal ethics; how you treat not only clients but other professionals within the industry; how you share your knowledge – willingly, and perhaps even freely - or for personal benefit? These are the things that define a profession. When the industry can let go of blame and encircle, teach, and grow all its participants it will be stronger and the investing public will correctly be able to have faith. Till then they will rightly give the whole industry a wide berth!

On 24 January 2011 at 9:44 am John said:
Alistar, I agree with your comments, however this industry has historically let anyone jump behind the controls of a plane and take off, calling themselves a pilot from day 1. Grey hair means nothing under those circumstances, I would prefer my Pilot had earned his wings, regardless of how many hours he's done. Now we are saying that everyone needs to attain their pilots licence, become an accredited Pilot and move on for the benefit of all passengers. Under those circumstances, I absolutely agree that "experience" is worth its weight in gold. I am also not naive enough to believe that this process will stop some planes going down due to pilot error but it should raise the bar across the industry.
On 24 January 2011 at 10:18 am Sceptic said:
The exams may require time, but are hardly an intellectual challenge and are certainly no where near the cutting edge of investment research. They will do nothing to improve investment outcomes. In that sense I fear they will simply mislead investors. The fundamental problem is that advisers dare not tell investors the truth - that neither they nor anyone else (especially fund managers) can have any confidence in predicting next week, never mind next year. Unfortunately, investors want to believe there are secrets to which their adviser may be party. The most persuasive advisers are simply the most eloquent. If they are also right, that's a bonus, but most likely lucky chance. Diversify your advisers as well as your investments.
On 24 January 2011 at 12:03 pm Colin said:
My complaint is against the ETITO organisation that has exclusive rights to the Set B examination which must be passed by all aspiring AFA’s.
The cost of sitting a 60 minute computer based exam is bad enough but if you fail and have to sit again another full fee is payable. This is a license to print money.
However my major issue is the terms of the exam where you can get 90% of the questions correct and yet fail because you got 1 question wrong or a part of one question wrong and you have to re-sit. I understand that you need to pass 70% overall with a 50% success for each section. The section I got wrong you had to get 4 out of 6 which is greater that a 50% pass rate!!!
I have never heard of any education organisation that doesn’t advise you what you got wrong so that further study will assist your knowledge. You can appeal (at a cost of $150) but what’s the point if you don’t know what you got wrong!!
I would like to hear from others that feel the same as I do or am I a 40 year industry fossil that needs to be pensioned off leaving the advisory industry to the academically inclined.

On 24 January 2011 at 1:02 pm John said:
Hi Colin, The ETITO is simply out to secure as much money as possible from advisers as it can. Remember they were banking on ALL of us opting to become AFA but now with the vast majority of advisers having wisely opted for RFA status instead they need to draw this process out as long as possible for those that choose to sign up for their training courses. For an organisation that is supposed to be all about "education" as you state your comments about their exam practices prove that they are nothing but a business out to make money from advisers. This whole saga called regulation has become all about money and don't think for a second that the consumer is at the forefront of the ETITO's agenda! And no at 40 years you're not an industry fossil, you just have the wisdom to question what advisers are being asked to stomach.
On 24 January 2011 at 5:56 pm Kimble said:
Colin, a greater than 50% pass mark is fairly common, and is perfectly acceptable when your goal is to establish a high minimum level of knowledge.

By not telling you which specific question you got wrong, you are forced to through the entire material again to figure it out. This is consistent with the goal of requiring mastery of the material.

It might seem tough, but everyone wants these exams to be tough, right? If they were too easy, what would be the point of them?

And it is understandable that answering certain questions wrong results in an (epic) fail. Consider the question, "Is it okay to 'borrow' from a client's account to pay the rent on your office?"

Answer that question wrong and an instant fail is understandable.
On 24 January 2011 at 6:06 pm Murray Weatherston said:
To Kimble @ 5.56pm.

I don't think you are correct in your last assertion. If you answered your question wrongly, but answered all other questions in that section correctly, you would not fail because you got your single question wrong.

Unless of course ETITO has some undisclosed rules as to how they mark the exam!
On 25 January 2011 at 10:14 am Independent Observer said:
I want to present a very different outlook for the industry than what is commonly being suggested – that is that the NZ financial services industry won’t necessarily shrink through additional Regulatory pressures.

This comes from talking with many IFAs in recent years, which have remained fully committed over the past few decades to growing their financial advisory businesses (albeit with varying levels of success).

Whilst some are actively looking to retire/wind down their day-to-day involvement, many are unable to attract the interest of willing purchasers, or are unwilling to depart from the financial services industry at this point. I have encountered few IFAs who have expressed a desire to vacate the industry due to perceived future hardships, with many smaller IFAs preferring to relocate to a home office, push through their education requirements, or link up with institutional entities.

The feedback that I’m receiving is that the financial services industry firmly remains a relationship activity, with many of the participants enjoying great friendships with their clients. Whilst the Regulatory framework, margin squeeze, and industry demographics will no doubt continue to add pressures, it seems that the NZ financial services industry remains a relatively attractive space to work.
On 25 January 2011 at 10:21 am Kimble said:
Thanks Murray, I wasnt trying to say that that was a question that is actually asked or anything. It was just an example of how a single very wrong answer could deservedly lead to an instant fail. If an entire section was made up of simple questions like that, missing three out of six would show a dangerous deficiency in your understanding of the standards.
On 25 January 2011 at 11:36 am John Milner said:
Guys, there is no "reds under the beds", no "big brother" wanting to control you, no secret agenda to take your money. The NZ government through the securities commission are attempting to lift the confidence of the public in the market. To do so they have started with a minimum standard. I don't think the government is expecting the public to gain confidence over night but this is the starting point on a long journey.

A number of you need to look at the big picture and the spirit of the legislation, rather than the minor discomfort you have in your little world sitting the exams.

As time goes by we will eventually have advisers with both experience and qualifications but this will take time and has to start somewhere. As for the "old bugga’s”, there are plenty of opportunities to contribute to the industry working with the IFA and ETITO helping to shape the future of our industry rather than dwell on the "good old days".
On 25 January 2011 at 4:17 pm Ross said:
I would like to make two points -
First, all the educational requirements that the powers that be may seek to impose on members of our industry will not address the problem of the bad apples. These people will simply be educated bad apples.

Second, However, we all know the rules if we want to stay on in our industry. Let's not countenance and grandfathering of people who consider themselves to be QBEs.
On 25 January 2011 at 4:40 pm Anon said:
John Milner, your comment is what everyone needs to read. You have your head screwed on!
On 25 January 2011 at 11:40 pm John said:
Regulation of the financial services industry has been a joke from day one and all it has demonstrated so far is the following:

1)When there’s a chance to make a quick dollar off an industry there’s always plenty of people waiting in the wings ready to pounce.

2)Making the educational requirements tougher on advisers won’t improve ethics or integrity (the root cause of poor advice to clients in the first place) As someone said the bad apples will simply be educated bad apples!

3)Politicians can be easily hood winked by Government Departments into funding a process that blows its budget and takes 2 years!

4)The end result is not a victory for the consumer at all but a windfall for more bureaucrats.
On 26 January 2011 at 4:24 pm Anon said:
@John 11:40pm.

You seem to still be stuck in the "this is to hard" part of the fence.

Your first and third comments are just background noise of not wanting to do anything, making up excuses etc. The cost of your education and time out of selling can easily be paid back with 4-5 good sells.

As for point two, I think you are on the right track but are missing a piece of important info.

The whole point of regulation and compliance is to ensure the client is protected from said bad apples. Sure those bad apples will be educated bad apples now, but it means when they are either found out or questioned, they will hit the wall hard then a ton of bricks and face big, costly consequences. Where before regulations etc they would of gone under the radar and flicked off to another adviser.

Another reason why the regulation and compliance is good is it will act as a deterrent to those wanting to be bad apples from even trying to be bad. The ones that do try, will hit the wall hard.

As per Ross's comments, just get it done with, seriously it's not hard to fit the business to the changes and get it working like a well oiled machine. If you do it right you will spend all your time selling rather then tapping away at a keyboard or demanding your PA do something. I have seen many advisers in the industry currently building such a powerful machine, embrace the change!
On 27 January 2011 at 6:46 pm w k said:
I do not think any adviser is against some form of regulation, in fact, no one that I know of is against it.
But, so far, none I know is happy the way it is being handled - most incompetently and unprofessionally done.
I thought the way to go should have been - let all advisers have a clear understanding of the regulation, that is, without doubt, whether the advisers like it or not, then implement it with a clear dateline. NOT put a dateline, then move the goalpost, then still make changes and modifications to the rules even nearing the dateline (I believe more to come), and that confuses and upsets everyone.
I suggest a one-year or two-year licence whereby a few BDMs or peers need to make justifiable recommendations. Without those recommendations, no renewal of licence. Under the current rule, it is hard to get rid of a "cowboy" as long as no clients take action.
On 28 January 2011 at 5:51 pm Who Nose said:
Has any FA ever set a contract where the FA gets paid ONLY if the investment earns a profit, and the fees are ZERO (or even better, NEGATIVE), if the investment does not earn a profit? Or do you all not trust the advice you give your clients? Seriously think about that. The first FA to introduce such a scheme will get inundated with clients because such a scheme is extremely fair and totally understood by both parties. Profits, the FA gets paid; Losses, the FA pays the client back! What's the chance that NO FA is prepared to do so? So there you have the answer - it's fair game to take their money but not fair game to give it back if/when you fail. It's bit like providing consumer warranties / guarantees! As it now stands, without an investor you get nothing, and with an investor you get paid, regardless of a profit or loss. The scheme described above means you have to monitor much more the negatives, but at least your clients would feel much, much happier and would tend to accept bad years more readily. Think about it! Don't just tell me "It won't work." Certainly would work for me!
On 28 January 2011 at 5:53 pm Who Nose said:
Has any FA ever set a contract where the FA gets paid ONLY if the investment earns a profit, and the fees are ZERO (or even better, NEGATIVE), if the investment does not earn a profit? Or do you all not trust the advice you give your clients? Seriously think about that. The first FA to introduce such a scheme will get inundated with clients because such a scheme is extremely fair and totally understood by both parties. Profits, the FA gets paid; Losses, the FA pays the client back! What's the chance that NO FA is prepared to do so? So there you have the answer - it's fair game to take their money but not fair game to give it back if/when you fail. It's bit like providing consumer warranties / guarantees! As it now stands, without an investor you get nothing, and with an investor you get paid, regardless of a profit or loss. The scheme described above means you have to monitor much more the negatives, but at least your clients would feel much, much happier and would tend to accept bad years more readily. Think about it! Don't just tell me "It won't work." Certainly would work for me!
On 28 January 2011 at 7:10 pm Kimble said:
Who Nose, what if your advice is about how to reduce risk, not simply to gain the highest return?

You want the adviser to take on the investment risk, and then only share in a portion of the investment gain? Why would they advise you when they could invest their own money and get a better deal? (Paying for the downside but getting all of the upside.)

If you make the adviser culpable for a portion of an investment losses, then you tie the investment risk to the advisers risk appetite rather than the clients. That means the adviser will put the money into safer (lower returning, but smaller loss making) investments, which might not be what the investor actually needs.

You may think you would like that sort of set up, but you dont really know how much you would have to pay for it. The sort of risk removal you are talking about is quite expensive.

The closest you will get is a fulcrum fee as they have in the US. That is where a portion of the advisers fee is variable depending on the performance of the investment, but there you still get charged a base fee. The value of the variable fee can be negative but never more than the base fee. They arent common.
On 29 January 2011 at 12:19 pm denis said:
To Who Nose

You can be sure that Cash deposits and Gvt bonds will always return a profit but other sectors like property and shares can and do fluctuate - sometimes returning negatively for several years in a row before returning positively again.

The long-term investor should be relatively relaxed about these downturns because the eventual upside ride is that much more profitable to these investors.

Time and time again you read of the entrepreneurs that made their fortunes by being involved in falling or stagnant markets that everyone else has turned away from.

What I am saying is that the investment that returns negatively for a while is not necessarily a failure. In fact, to make a real return on these sectors, you actually *want* the negative periods, so that you can cash in on the eventual upward movement.

It also depends greatly on the client's attitude to risk and how long they are investing for.

An investor that strongly feels that they want positive returns with no downside ever ever ever, would probably be best directed towards Cash and Govt Bonds.

It seems harsh to penalise an Adviser for offering sensible advice and providing access to an investment that does exactly what it says on the tin.
On 31 January 2011 at 5:24 pm Regan Thomas said:
If you are a client of Mine, Who Nose, please call me to arrange the immediate withdrawal of all your funds. You will notice every time I post I use my full name, would you be so bold? You might like to try the friendly team at GMI, although it can be hard to get a turn on the soap-box...

I would guess you shop at New World, because they guarantee their products 200%, and I am assuming you regularly drive between Mega and Bunnings making sure you benefit from their 15% price promises too.

Fact is, most investments are on a % of Assets under Management, so if your portfolio dives by 20%, the adviser's fee drops by 20% too, which is why some advisers businesses have been hit so hard over the last couple of years. Not quite the scheme you propose, but still painful. Your adviser didn't make the market drop, and a good adviser would have placed you in appropriately allocated investments, based on what you told them. If your time horizons, goals, and/or risk tolerance change so dramatically that you need to realise present (paper) losses why should your adviser(assuming they did a good job initially) be financially responsible for that?

Please understand that we are all in the market together, and can only do our best to place clients in a portfolio that best balances upside and downside risks against goals and time frames you give us. That is what you are paying for. I can arrange a portfolio that is as safe as can be, has a govt guarantee and reliable (albeit bloody low) returns, but then what value would I be adding?

The mechanic with no cars to fix also doesn't get paid, but if he does the right thing, repairs the car and then someone crashes into you, your car is now worthless, but the mechanic doesn't have to refund you. Some things are outside our, and your, control.
On 15 February 2011 at 11:12 am Andrea said:
I don't understand why the QBE 'older brokers'feel that the qualifications have excluded them. These qualifications are pretty standard:
A - Knowledge about the industry and its related markets (you need to know the industry you are working in)
B - Code of professional practice (Pretty standard - nothing new here - best practice)
C - Client files that conform to the advice process (following the advice process ensures that the adviser hasn't left anything out during the advice process)
D - Investment Strand
E - Broker Strand (basics of the standard products in F&G, Life,etc.)

It merely is giving evidence of competency - the evidence required by the adviser to prove competency are not difficult. If you can write or type an answer to a question or provide evidence that you know and understand the requirements as set out in the qualifications, then it is pretty easy.

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