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Outside, inside out disclosure

Friday, July 4th 2008, 10:37AM 7 Comments

by Philip Macalister

The introduction of disclosure statements (DS) is something I have watched with more than a little interest.

The idea of the DS regime was to add more transparency to the industry and therefore help build a bit more confidence in the advisory sector.

So it was pleasing when the regime came in, how many advisers I spoke to who were quite happy to send a copy of their disclosure statement. It's been useful to see the different approaches taken and what level of disclosure advisers gave.

One of my initial thoughts on seeing statements though, was surely the remuneration model for the industry is wrong.

In the spirit of disclosure these documents list everything the adviser may use and the remuneration levels. In some cases the list of products and commissions ran to pages.

To the uninformed investor they would look at this and be amazed at all the fees and percentages. You could be excused for thinking some of the beat-up stories in the media maybe right. You know, "commission-driven salesmen" etc, etc.

It just looked like advisers were clipping the ticket left, right and centre and there was little left for the client. (Remember this is the perception from the docs, not necessarily the reality).

My thoughts are that the sooner we move to fee-based advice, the better.

My second line of thought on disclosure documents comes from some work we have been doing in ASSET Magazine. We have asked a number of advisers for their DSs, yet some have point blank refused to provide them and others, including senior advisers (that's in terms of experience, not necessarily age) have been quite hostile to these requests.

There appears to be a moot point whether DDs have to be given to a member of the public if they ask, or whether they just have to be given to clients and potential clients.

I don't think that is the issue.

The action of advisers to withhold DSs make it look as though these advisers have something to hide, and that may be their remuneration model is something they actually don't want to disclose.

If the industry wants transparency and to build its reputation, then advisers need to be upfront about what they do.

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Comments from our readers

On 4 July 2008 at 11:19 am Majella said:
Perhaps the DS should also list all the freaking overheads that need to be met BEFORE a taxable dollar emerges?
On 4 July 2008 at 12:08 pm Chris said:
Your term remuneration is as bad as saying income! The money paid by supplier companies is revenue not net profit. Companies pay this revenue as it is cheaper for them to do so than the earlier model of tied agents/flash local offices/ local sales managers and support staff. Now the broker has to supply the office /personal assistant/ computers/photocopiers/date base systems et al. Vehicles require a standard of professionalism and costs are soaring. these costs have to be absorbed as no one pays us extra as our costs increase. Few clients for risk business prefer a bill for service compared to paying through the premium base.
On 4 July 2008 at 4:46 pm Bronwyn said:
The material contained in a disclosure document is pretty prescriptive and uniform throughout the industry - except the appendix section detailing adviser remuneration.

I would suggest that one reason you are met with such reluctance to display disclosure documents is the variance in commissions paid to advisers throughout the industry (insurance AND investment). Given many suppliers are displaying a willingness to deviate from their 'published' remuneration offer and constuct 'one off special deals' for all in sundry, is it any wonder the advisers you contacted don't want to share details of their perceived windfall with the rest of the market???
On 4 July 2008 at 10:07 pm Kiwi Patriot said:
Dear Phil,
For all people, whatever they do for a living, each one values their own ability - just as financial journalists do when they write a story and cartoonists do when they pen a picture of a current situation, whatever it may be.
I don't believe that financial advisers are any different.
Currently, Disclosure Statements, as discussed are purely a reflection of a system gone mad.
Soon, advisers will need to tell 'prospective' clients that he/she is wearing a G string, so the client might judge their credentials. Does one need to know this? When we read your good topical stories, are we given any disclosure of your credentials or the money you may earn (from advertising) if your readers subsequently make a decision directly related to your story?
As I see it, if stockbrokers, financial planners, trading banks, lawyers or accounting firms dare to provide commentary (and potential advice?) on the market environment, do they have the freedom you enjoy? ie. without an obvious disclaimer or disclosure statement?
Everyone involved in the industry for the sake of the 'market', including newspapers and websites, should be entitled to represent their views, without having to state and restate their credentials.
Whatever is wrong, the concept of 'caveat emptor' is so relevant right now. I am sad for those who have lost their money buying high interest % finance co. securities in last few years. Yes, sad, but those of us who understand and do advise on risk and return, know, are held to the sword for a market that has evolved with no due recognition from the authorities RBNZ/politicians, where it has bucked the trend, and the regulators have been too ‘airborne’ in Wellington.
Please advise us when you get a new advertiser on your website; please also attach a disclosure of your interest, so we can judge the story you might write, in favour of the advertiser.
I rest my case.
On 5 July 2008 at 11:46 am Philip said:
I think there are some differences here. You can easily see who advertisers on sites and magazines so it is clear where the income comes from for publishers.
Added to that you can read the stories and make up your own mind whether you think editorial is being influenced by advertisers.
Newspapers, magazines, websites aren't in the business of giving advice and therefore are not remunerated for advising people. Advisers are.
I also think you will find that when people like stockbrokers give market reports on the radio it is made clear a disclosure statement is available on request.
I think the public should be able to see if certain advisers are getting sweetheart deals for selling particular products. There has been plenty of discussion around this in the media, and it appears groups like Vestar under its former ownership, got preferential deals on commission to push certain products. Isn't this something which should be transparent?
I think Bronwyn's response addresses that topic.
One person I spoke to who has seen inside Vestar commented that if it wasn't for all these sweetheart deals the company was getting from finance companies it would have been losing something like $50K a month.
Looking at the group's fixed interest portfolio you have to wonder whose interests were being served - shareholders or the clients.
Unfortunately, when these things happen the whole industry is affected.
On 6 July 2008 at 4:54 pm Ed said:
Maybe the problem is that advisers represent themselves to prospective clients as 'independent advisers' who are working in the clients best interests... but at the same time they are paid by the product supplier and not directly by the client.

So the DS isn't there to pry into what advisers are paid, it's there to clarify the relationship between the 'free advice' and the 'incentive' for providing it.

I wonder what would happen if advisers called themselves 'insurance salespersons' instead of 'advisers'. Maybe that would eliminate the need for a DS. Just a thought.
On 21 October 2008 at 4:02 pm Tony Ryburn said:
There's a lot words been written about disclosure statements but surely this phrase sums it all up: '...the sooner we move to fee-based advice, the better.' End of Story.

Disclosure statements are largely a waste of time in my view because the uninformed investor won't know, or want to know about them. And these are the people who need an investment advisor (if anyone does!)

Alternatively why not require Investment Advisors to advise their client in writing if they are receiving any benefit from an organisation in which they recommend the client invests? They would be required to keep copies of all such statements signed by the client as evidence that the client had been advised.

Commenting is closed



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