1 Comment 1 Commentby Susan Edmunds
Simon O’Grady, chief investment officer of Kiwibank – Gareth Morgan Investments and a director of the CFA Society of New Zealand told an INFINZ/CFA Society debate last week about the Financial Advisers Act that the question of commission was a red herring.
The Act is due to be reviewed next year.
“What we are talking about is who is going to pay for advice, and how are they going to pay it? Commission is not really the issue, it’s the conflict of interest and there are a variety of different ways of addressing that. But a bugbear of mine is that the cost of delivering quite basic investment outcomes for clients is far too high.”
He said once manufacturer, platform and advisory costs were added, investors were paying more than 1% and sometimes up to 3.5% for standard equity products.
“The risk premium is gone from the asset class before you’ve even begun,” he said. “To get some clarity, the review needs to have one of its areas of focus on clarity and itemisation of the actual costs behind these products, particularly the advice. How much is the investor actually paying for the advice?”
He said consumers had shown through their behaviour that they did not want to pay outright fees for advice and expected it to be free. “Therefore it has to be incorporated into the cost structures.”
Lloyd Kavanagh, of law firm Minter Ellison Rudd Watts, asked the panel what they thought the unintended consequences of the FAA were.
Barry Read, of compliance firm IDS, said it was that people had left the industry who perhaps should not have. “People who potentially were giving good sound opinions and recommendations previously stopped giving them because they were scared of the consequences.”
FMA head of legal Liam Mason said he was not sure the right balance had been achieved in terms of access to advice, or whether the regime was improving consumer access. “I think the registration function has added to difficulties for consumers in terms of branding of AFAs.”
Kavanagh said another unintended consequence could be the re-emergence of the “tied adviser”, in the form of QFE advisers. “My point is whenever we reform we need to think about the good motives but also the unexpected consequences.”
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If any industry participant wants to be paid, then they must clearly demonstrate their value proposition & price - enabling the consumer to determine whether this is "value for money".
As technology & availability of choice accelerates, industry participants will need to provide something more than a simple annual portfolio review in exchange for an annual payment