2 Comments 2 Commentsby Susan Edmunds
Aaron Gilbert is associate professor in the AUT finance department, researching the readability of financial disclosures.
He has completed work that showed product disclosure statements for KiwiSaver, while shorter under the Financial Markets Conduct Act, were not delivered in a way that was accessible to the average KiwiSaver member.
He said the financial advice disclosure regime as outlined by the Ministry of Business, Innovation and Employment in its recent consultation, did not seem primed to deliver results that were any better.
MBIE has suggested it wants to deploy a principles-based approach to requiring advisers to deliver information to their clients, including what they are paid and how, and what products they have access to.
But Gilbert said that might not produce the results MBIE intended.
“I get they are trying to avoid the tick-the-box approach to disclosure. But there’s a risk it leaves the door open for less scrupulous players to disclose without making it clear what people need to know.”
He said “plain English” requirements discussed by MBIE were already in force for disclosure statements but had not yet delivered disclosure in a way that most investors could understand.
Financial Advice suggested that it was the cost of the distribution channel that should be disclosed, not the commission paid to advisers.
Gilbert said the primary concern should be to improve New Zealanders’ financial literacy.
“People don’t know what they don’t know,” he said. Clients needed to understand what they should be asking advisers, he said, and what they needed to get from the documentation.
“Things like who’s paying for that advice, are you paying directly is the adviser taking commission from someone else? That has a huge impact on how much faith you can place in the advice you are getting and how critical you need to be about your evaluation of that advice. We need people to understand what they are getting into better so they can ask the required questions.”
From there, it could be considered how best to present that information.
He said many clients would lack even a basic understanding of how advisers were paid.
“Even when paying for financial advice there are situations where the adviser is receiving kickbacks. I think there would be people who would be surprised to find the adviser was being paid at both ends. I don’t think people understand how it works.”
He said it would be nice to think it was something that could be left to the industry to deliver the appropriate solution but it was likely that the regulators would have to step in to enforce a best-practice standard.
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There will always be a few rogues in the industry – there is in every industry. The regulatory regime should not be designed to stop them getting in. It should be designed to give good outcomes for those that are principled based and provide a framework to prosecute those who do not comply. Yes managers will not like a principle based regime, as it does not give them the precision that want to know that meet the law, but a basic regime that required the investor understanding what fees they will pay, what outcomes they are likely to receive but may receive and what decisions they can make along the way would be a significant step forward, and would cost less to implement. It would also likely get rid of the rogues.