Advisers under the magnifying glass
Data collected from last year’s first round of information returns by authorised financial advisers shows how diverse the industry is and will help target monitoring activity, the FMA says.
Friday, April 24th 2015, 6:00AM 
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by Susan Edmunds
It yesterday released a report based on the returns, filed last September.
Head of supervision Kirsty Campbell said the data would enable the regulator to target its monitoring activity to specific parts of the industry.
“The wealth of information means we can take a much more risk-based target approach to monitoring. It’s a much better use of resources.”
The report found there were about 1900 AFAs in the market, of whom 11% were not advising clients.
Fifteen per cent had been advisers for a period of less than four years. A third had more than 20 years’ experience.
About a third of AFAs are employed by a QFE.
The FMA signalled some of the areas it was concerned about.
It said it wanted to understand how the biggest client bases were being managed. The average number of clients was 250. But of those who manage their clients’ investments, just over 12% had a client base of more than 500.
About 13% of AFAs said they were closely aligned to one provider for remuneration. The FMA said it had concerns about distribution models that exacerbate conflicts of interest.
The main method of remuneration for AFAs was commission, at 45%, followed by bonuses at 40% and fixed fees at 36%. The FMA’s report said: “Distribution models such as volume-based incentives, up-front commissions and trail commissions should not encourage conflicts of interest between AFAs and their clients. We have also signalled that with managed funds, we will focus on fee-driven behaviour that is likely to result in unfair investor or market outcomes.”
Two-thirds of AFAs provided advice about KiwiSaver but nearly half advised on joining or transferring to just one scheme.
Many AFAs (40%) were providing advice to their clients about insurance.
A small number of AFAs were providing a high volume of financial advice about insurance product replacement. “We have previously signalled that we are concerned about the potential mis-selling of insurance products, including selling products that do not meet the customers’ needs, or churning of customers," the report said.
The FMA said 1784 of the 1901 AFAs completed returns.
Campbell said the FMA wanted to ask more questions to delve deeper into the information reported but the return would remain the same this year to stop the process being too onerous on advisers.
She said the FMA was aware that advisers would like to combine the information return with the annual AML/CFT return but that would not be possible yet.
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