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Advisers' Code about to get tweaked

Just as advisers start to get to grip with the new rulebook on how to operate in a regulated world they find out that the Code of Compliance is about to be tweaked.

Tuesday, May 21st 2013, 6:00AM 8 Comments

by Philip Macalister

Code committee chairman, and lawyer, David Ireland told delegates at the PAA conference in Auckland that work is already underway on updating the code.

He describes the changes as “tweaks” however there are some significant issues.

One area of concern is around professional development requirements.

Ireland says there is some confusion, or lack of clarity, around what advisers need to do.

Another issue that the committee has identified is the shortage of Authorised Financial Advisers.

There are still less than 2000 AFAs and this is insufficient to service New Zealand investors, he says.

Ireland described the shortage as being a “huge concern” and the committee needs to look at options to “plug the gap”.

“There are some intermediate steps we can take with the code.”

He says the committee wants to make “enhancements rather than chucking it (the code) out and starting again.”

“It’s about how we can get a better outcome for NZ Inc.”

A consultation document will be prepared but this won’t be done until the Financial Markets Conduct Bill is passed into law.
Ireland says the bill creates a lot of changes for the code.

The Code Committee has to consult with advisers and then make its recommendations to the Financial Markets Authority.

He says the FMA’s role is to make sure that the committee has properly consulted with advisers.

If it agrees the changes are sent to the Minister of Commerce for approval. Changes would be made to regulations through an Order in Council.

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Comments from our readers

On 21 May 2013 at 10:20 am Brent Sheather said:
The big problem with CPD is that much of it, if not all of it, tends to encourage behaviour that moves investment advice further away rather than closer to best practice. This is because best practice is not good for business, in the short term anyway. I am defining best practice here as the sort of portfolios that pension funds own presently and have owned for the last thirty years i.e. including low risk bonds, some exposure to index funds and properly diversified. Most of these attributes are at variance with the standard industry business model of maximizing profit per muppet and the CPD providers know that if they provide CPD which encourages doing the right thing no one will buy it therefore they will go out of business thus much of CPD is dominated by selling esoteric, expensive and irrelevant products.

Structured CPD needs to be expanded so that anyone can do anything which in their opinion improves the way they do their job. This would mean the onus is on the adviser to justify CPD once the FMA visits and for advisers who genuinely want to improve the standard of investment advice rather than increase profitability that they would be free to do so rather than been constrained as they currently are.

Now let the comments roll in …
On 21 May 2013 at 10:48 am Simple Advisor said:
Whilst I agree that the issuance of CPD’s has been abused (dishing out CPDs for attracting clients – sigh), by and large, the events that I’ve selected are well coordinated and tend to deliver a considered viewpoint on a range of topics.

In particular are the investment and portfolio construction events that I’ve attended whereby the views expressed are researched, varied and contribute significantly to portfolio outcomes.

Strangely I’m yet to see Mr Sheather at any of these – as I suspect that he may be exposed to opinions that are at odds from his existing views.

Hey Brent: Check out the Yale Endowment Fund, and their recent declaration around the poor contribution of passive funds... or continue to read the literature that tells you that your views are correct LOL
On 21 May 2013 at 1:12 pm Brent Sheather said:
Good point Simple Advisor and I have made a note to contact the world’s best active managers for any clients I have with more than US$19.4 billion to invest. Unfortunately most of my clients are less well endowed (LOL) and, as we know, the best active managers are generally only available to the biggest investors so I think I will take a leaf out of someone who commented in the London Financial Times the other day that “he wouldn’t invest in any hedge fund that would take his money”. Just read the 2011 Yale Endowment update and one paragraph stood out, “As many managers cower in the face of career risk executing a sensible active management program is challenging and rare”. I didn’t see the negative comment on passive you alluded to so if you could post them that would be useful.

Having said all that the average pension fund indexes about 50% of its equity portfolio so it is not really an “either/or” issue, is it? I think the real problem is that if you include low cost funds in a client’s portfolio sooner or later they become fee conscious and start to ask everybody difficult questions. LOL.

By the way you said that the investment and portfolio construction events you’ve attended contributed significantly to portfolio outcomes but didn’t advise whether the contribution was positive or negative. I have looked closely at much of the CPD offerings and my guess is that if you followed the advice returns would be lower and risk higher. One event I saw recently seemed to recommend a 50% weighting in emerging market equities. Ridiculous but of course good for biz, in the short term!
On 21 May 2013 at 3:57 pm CJM said:
I always like Brent's comments - although I am not really sure it is that on topic.

In the active/passive debate I lean more toward Buffett's circle of competence. Each adviser needs to work out what they are good at (and not good at) and stick to doing that.

But this requires people to analyse their own track record - and very few people I have come across do that. Most people just assume they are good at their job.

If you are good at picking active managers then keep doing it. If you are not, or have never worked out if you are any good, then perhaps passive investment is for you.

I am less convinced on the idea that Pension funds provide a benchmark for planners.

Pension funds are generally pooled vehicles. They have clients at various stages of life - from retirees, near retirees, workers, to young people just starting out. They work out what is the best asset allocation and investments on average for that group. That does not mean it is the right allocation for any particular individual.

Planning is about working out a plan for each person. It is more expensive than a pooled pension fund, but it should provide a more appropriate asset allocation for each person.

So I don't really get why I should care about Pension funds? Without knowing whether their client base matches my client base, it does not really provide me with much information.
On 21 May 2013 at 4:01 pm graemetee said:
Simple Advisor - you seem to have reverted to playing the man and not the ball in your last comment. When faced with a reasoned and researched comment that you cant be bothered articulating a reasoned argument against you just attack Brent personally. I'm surprised the Editor even allowed that comment.
EDITOR'S NOTE: Fair point - that comment should not have been approved. It has currently been removed. The thrust of it was that there is a place for active management.

For you information Portfolio Construction Forum has banned us from their website and conferences (I assume) because Brent dared to disagree with some of their experts that you seem to listen so intently to. So much for free speech and exchange of opinion in the investment world. lol
On 21 May 2013 at 4:36 pm graemetee said:
CJM- actually it was the other guy that started the active vs passive debate on this blog!! OK this is why you should be concerned about pension fund asset allocations and the link to CPD. You work for a large bank's wealth management and you are advising a Trustee on an appropriate asset allocation. You fill out the standard risk profile for the retired trustee/income beneficiary and you determine she is conservative and recommend a very low share allocation based on her risk profile. Does this sound familiar to everyone? I would say without benchmarking your asset allocation recommendation the children of the trustee/beneficiary would be lining you and any independent trustees up for damages if your portfolio under performs inflation. If all your CPD credits were from your employer or product providers, what defence do you think you would have?
On 22 May 2013 at 2:34 pm Eric Simpson said:
@gt Interesting comments about being banned from the Portfolio Construction Forum.

I read their terms and conditions and thought would I really want to go to a conference who treats delegates like that.

Have a read
On 24 May 2013 at 10:59 am Andy said:
Enjoying the debate, but getting back to the topic:
"There are still less than 2000 AFAs and this is insufficient to service New Zealand investors, he (Ireland) says."

Has Ireland actually stopped to analyse why this might be? The costs involved, and the risks to the (AFA) adviser, then the challenge in seeking reimbursement from clients MIGHT JUST BE factors. Add to that the issue of commission and possible removal further down the track. I admit that some clients are quite happy to pay fees - but they would only be the top echelon of investors - those who value advice and knowledge. Unfortunately the remaining 80% of Kiwi's want their advice for free, even for the retirement funds (KiwiSaver included). How do you propose paying an AFA sufficient to service the remaining free-loading or ignorant investors? How do we educate them and still earn a living?

Regarding RFAs giving advice on KiwiSaver plans - I admit I am on the fence. But when banks can churn business without justification, I fear for the public, and wonder about the future of good advice to the majority of NZers.

So if Mr Ireland wants to get more AFAs to fill the gap, he needs to make it worthwhile for people to take on the extra risk, study, and workload (involved in keeping ahead of the 3000 bits of legislation). From my experience to date, the legislation has revolved around arse covering and best practice, rather than ways to get GOOD advice to the clients. Instead of focusing on ways to protect ourselves if something goes wrong – why don’t we look at better ways of getting better information to our clients. After all: that’s what they are paying us for.

THEN we will have a more consistent standard of advice, rather than debating the methods and funds as the previous commentators are doing.

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