This article was published on 26 July 2005. Some information may be out of date.

Keeping financial advisers on their toes — good for the rest of us

A warning to financial advisers: You’d better give good, unbiased advice to your next new client. And the one after that. And the one after that. You never know which one might be a “mystery shopper” working undercover.

If you do serve a mystery shopper, they will report on a website whether the advice you gave “is truly in the best interests of the individual client” — something that Joe and Joanne Blow often find hard to judge.

Anyone trying to choose an adviser will be able to check out your performance on the website.

The programme is among the recommendations in a report by economist Arthur Grimes, “Improving Consumer Trust in the Retail Savings Industry”, that can be read on the Retirement Commission’s website, www.retirement.org.nz.

It’s not a new idea. I did a mystery shopper article about financial advisers for the Listener about 15 years ago, and more recently Consumer magazine has used mystery shoppers. But it IS a good idea, particularly if lots of advisers are visited.

Grimes also recommends that every investment product should be accompanied by a standard form that tells its expected return, both before and after fees. The form should include a simple measure of the product’s riskiness, making it easy to compare it with other products.

He would like to see expected returns over one-year, three-year and ten-year horizons, if the investment runs that long.

And, he suggests, investors should be told the probability that gross returns will be 3 per cent higher, 10 per cent higher, 3 per cent lower, 10 per cent lower and 50 per cent lower than the expected value.

Let’s say, for example, that you were comparing Low Risk Product, with an expected return of 5 per cent and High Risk Product, at 8 per cent.

If you knew that LRP had only a slight probably of being 10 per cent below its expected return and almost no chance of being 50 per cent below, you might prefer it over HRP, which had much bigger chances of both.

Grimes recommends that directors be required to attest that the calculations have been done objectively. If they are guilty of false attestation, they should be fined.

And — here’s a good bit — “any investor who loses capital having invested in a product for which a director is found guilty … should be able to sue the director for full recompense.”

He notes that such a system already applies to bank directors.

Grimes’ other recommendations are:

  • Investment advisers should be required to declare how much they will receive from all sources — in both percentage and dollar terms — if a client invests according to their suggestions. And they should be required to offer a range of similar products, each with fees disclosed.

    Clients should also be told “the total of all fees paid to firms through the product chain, (eg including fees paid to the trustee, the investment company and to subcontracted investment companies).”

  • The Retirement Commission should get more money to expand its educational work — in schools, tertiary institutions, workplaces, community groups and through the news media.
  • New Zealand should have a financial ombudsman to handle complaints across a broad range of financial services.

    We already have a banking ombudsman and an insurance and savings ombudsman. But a broader approach, similar to that of the United Kingdom, would be simpler and would cover areas not currently covered, such as financial and investment advice and some investment products.

    Grimes suggests the ombudsman’s annual report could reveal “organizations and advisers that attract a considerable body of complaints.”

It all sounds good to me. Here’s hoping the report leads to action.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.