Conflict of interest risk remains, inaugural FMA financial adviser survey finds

Thursday 23rd April 2015

The Financial Markets Authority's inaugural survey of authorised financial advisers show there's still scope for conflicts of interest, with some advisers aligned to a single product provider or getting paid volume bonuses.

The survey, covering the June 30, 2014, year is mandatory for AFAs, a 1,900 member subset of a New Zealand industry that employs more than 20,000 advisers, most of whom don't have to register individually because they are linked to a qualifying financial entity such as a bank, fund manager or broker.

The survey shows the main method of remuneration for AFAs, making up 45 percent, is commissions, while bonuses accounted for 40 percent. Those charging fixed fees or an hourly rate to clients amounted to 36 percent. About 13 percent of AFAs were "closely aligned" with a single product provider for remuneration.

"We have previously signalled our concern about distribution models that exacerbate conflicts of interest," the FMA said. "We have indicated that we will look at remuneration arrangements that can lead to conflicted advice or sales, and whether firms have in place appropriate safeguards against mis-selling."

Advisers are now required to provide disclosure of how they generate their income but the results of the survey suggest some may simply foist savings and insurance products on members of the public seeking advice based on the payment from the product provider.

The survey found that a significant proportion of AFAs provide financial advice to clients on 'alternative' products including junk rated bonds and private equity. It also found that with KiwiSaver, "many clients received advice about a narrow range of schemes," with almost half of AFAs providing advice on joining or transferring to just one KiwiSaver scheme. Only 5 percent gave advice on more than five schemes. All up, 47 percent were providing advice about a single KiwiSaver provider.

About 40 percent of AFAs also provided advice to their clients on insurance products, including 2 percent providing "a high volume of 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 (rapid turnover of insurance business that is not in the customers' interest)," the FMA said.

About 20 percent of AFAs provided advice about UK pension transfers and the FMA said it had recently warned people to be cautious of potentially misleading and deceptive advertising about transferring UK pension schemes to New Zealand.

Of AFAs managing their clients' investments, 29 percent indicated they had fewer than 50 clients of their own, while just over 12 percent had more than 500 clients.

"We would like to better understand in subsequent reports how these AFAs are managing such a large client base," the FMA said.

Among the positive findings, more than 90 percent of AFAs recorded no complaints in the year and less than 2 percent had more than four complaints.

The biggest topic for financial advice was managed funds, with 83 percent of AFAs providing such advice, followed by retirement savings at 64 percent, then sub-investment grade bonds at about 29 percent and private equity at 14,4 percent. Among extra services, about 11 percent were advising on trustee services, 8.4 percent on borrowing to invest and 4.1 percent on taxation services.

BusinessDesk.co.nz

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