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FMA warns adviser over advice to go conservative

The Financial Markets Authority (FMA) has issued a formal warning to an AFA who made recommendations to clients that they urgently move their investments to low risk funds in the wake of Covid-19.

Thursday, May 28th 2020, 10:07AM 6 Comments

The adviser failed to clarify that the advice may not be suitable for all clients.

The AFA sent a bulk email in March 2020 to clients urgently recommending they move their savings in KiwiSaver and other funds to less risky options.

The FMA was alerted to the communication after receiving a complaint from one of the adviser’s clients.

FMA head of supervision James Greig said the advice was inappropriate and had the potential for significant harm.

"The FMA has a low tolerance for poor conduct that poses risk to customers as a result of the Covid-19 crisis, especially because New Zealanders are looking for financial guidance at this time.

"If the adviser’s clients acted on the advice, they would have locked in any losses caused by market volatility. This change may not have been appropriate for all clients, depending on their investment plans, risk tolerance and specific circumstances."

After reviewing the adviser’s email to clients, the FMA considered that a reasonable adviser in similar circumstances should have:

•       Clearly communicated to clients that the email provides class financial advice, has limitations and may not be appropriate for all clients.

•       Recommended that clients first discuss their personal circumstances and goals with an adviser, instead of asking them to urgently act on the advice.

After making inquiries, the FMA concluded the adviser’s actions would likely be a breach of section 33 of the Financial Advisers Act, which says a financial adviser must act with care, diligence and skill.

Greig said a warning was the appropriate and proportionate regulatory response in the circumstances.

The FMA decided not to name the adviser because they had cooperated with the regulator’s inquiries, and they later clarified the advice with their clients. The FMA wanted to urgently deal with the issues at hand and send an important message to the industry about its expectations for providing suitable advice in extreme market conditions.

The warning was issued under section 9 of the Financial Markets Authority Act 2011.

Tags: Covid-19 FMA

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Comments from our readers

On 28 May 2020 at 11:29 am Majella said:
What an egregious error - not just the bulk e-mailing but the nature of the 'advice'! This AFA should be required to redo the Investment Strand in the Level 5 Cert.
On 28 May 2020 at 11:29 am Nakiman said:
Naughty AFA. However the FMA's suggestion of what is proper is tantamount to flipping a coin and crying "I haven't a flipping clue". Even a stopped clock is correct twice a day!!
On 28 May 2020 at 1:48 pm Trish G said:
This makes me so cross! I am an RFA and actions like this mean we all get tarred with the same brush. Most of the public does not know the difference between and AFA & an RFA. It also gives the FMA and the rest of the bodies, including the Media, who like to grab onto any bit of information to highlight how AFA's and RFA's cannot be trusted.

Any one with a modicum of intelligence about financial transactions would know how downright “dumb” this information and action was. But unless there is a really good reason not to name the AFA, I don’t understand why the name should not be made public, particularly given the obvious basic level of knowledge that the AFA apparently does not have!
On 28 May 2020 at 3:08 pm Skeptical said:
Just a warning?!
On 28 May 2020 at 4:26 pm AFA said:
What would the FMA be saying if the advisor had sent out an email to all clients saying "buy" on the same date ?
Would the FMA be saying it was "inappropriate and had the potential for significant harm" to tell clients to take on more risk even though those who took the advice would now be a up 20%-30% on those investments ?
On 29 May 2020 at 9:51 am JPHale said:
The issue here isn't the advice but the execution of that advice.

Looking at the market over the last few weeks it is clear that there are valid and relevant concerns about volatility with the recent behaviour of the market. Losses in March have broadly recovered in April, but forward-looking it's anyone's guess what will happen.

Lots of Fed money pouring in against lots of on the ground economists predicting -30% to -40% reduction in US GDP, makes for a market that has significant volatility and a very real risk of being a dead cat bouncing.

Does that impact someone on the coal face trading, sure, they also have access to move quickly. As you step back from there into layers of managed funds, it doesn't work nearly the same.

Right, wrong or indifferent, the issue isn't the advice but how it is communicated so clients are able to make an informed decision.

And right now more than ever, we have stressed people reacting to things they wouldn't normally react to and need clear concise advice.

So sure warn the adviser concerned, but more the point demonstrate to the wider industry and community what the expected behaviour is.

This adviser may have had a mistimed brain fart, but doesn't necessarily constitute grievous harm, especially when uncle Joe's best friends second cousin is also saying run for the hills and buy gold... Which is a more pressing risk for the ill-informed investor.

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Last updated: 21 September 2020 10:48am

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