Consumer financial adviser study ‘seriously flawed’
The Consumer study of financial advisers released last November was seriously flawed according to an independent report and the institute could end up facing legal action.
Thursday, June 10th 2010, 5:11AM 
16 Comments
by Jenha White
Plan B and Rutherford Rede commissioned the report written by Michael Mintrom, an expert in research methods and public policy analysis, after both financial advisory companies had their advice rejected in the Consumer study which described financial advice in New Zealand as "scandalously poor".
Consumer says the purpose of the study was to see if the standard of financial advice had improved and it received financial support from the Ministry of Economic Development and the Retirement Commission.
Overall it mystery shopped 33 financial advisers from large institutions with in-house advisers and agents, sharebrokers and nationwide adviser chains, to small standalone firms. An expert panel assessed the quality of advice and information in the 17 plans it received.
Only three out of 17 advisers produced plans that were rated "good" by the expert panel and the remaining 14 were rated as "disappointing" or were "rejected".
According to Mintrom the Consumer study was motivated by good intentions but the quality of the study was poor, especially when judged by the number of cases involved, the high rate of attrition of cases during the study and the lack of screening and training of the mystery shopper.
Mintrom says if this study had been done through the University of Auckland, the design would not have even made it through an ethics board.
One of the main concerns is the naming and shaming approach. Mintrom says this strategy should be avoided unless there is high quality and robust evidence, which is hard to obtain.
He says the sample size of the Consumer study was one of the problems. The Institute of Financial Advisers has 1,400 members, yet the decision was to include only 33 firms in the study.
Only 29 were assessed because four plans arrived too late for assessment by the panel. Of those 29, another eight firms were dropped because of a mismatch between the shoppers need and the adviser. Of the 21 remaining, another four only gave oral advice leaving just 17 responses to be judged.
"The attrition of cases from the original sample of 33 suggests very poor project management," says Mintrom.
He also says the mismatch between the shoppers and advisers is clear evidence that the people who managed the project had no understanding of how their own incompetence could bias the results they obtained.
Mintrom suggests a study of at least 100 firms would have been needed to be more representative of the financial adviser industry and at least two to three mystery shoppers would have needed to visit the same firm to be sure of the level of advice.
"If you want to engage in naming and shaming, you have to be dead sure you are correct in the claim that a company is not giving good advice."
He says it is especially troubling that the mystery shoppers got to choose their own scenario.
It is reported that "eleven mystery shoppers ranging in age from their mid-30s to just over 80 visited financial planners... These were real people with real financial questions".
Mintrom says there is a fundamental problem here because the diversity of the mystery shoppers is very likely to have affected the quality of the advisory sessions.
"Hardly any effort was made to control the character profiles and test scenarios, as a result, the quality of the advisory sessions would have been influenced in unknown ways by the knowledge and behaviours of the mystery shoppers, which Consumer did nothing to control."
Consumer said in eight of the 33 cases, "there was a mismatch between the shopper's needs and the adviser" which Mintrom believes points to a major flaw in the study that very likely corrupted the findings.
He says studies that make effective use of mystery shoppers devote time and energy to developing realistic character profiles and test scenarios.
Mintrom believes that while Consumer had good intentions to start with, the way they went about it could end up having legal implications if companies decide to go down that route.
He believes the report is detrimental to the investment climate in New Zealand especially when the government is trying to get people to diversify with investment.
"I do have concern that taxpayer money was spent on this when the quality of the study was so poor.
"We must question why a survey of this kind, with such potential influence, was left to Consumer rather than a professional research house with the experience and background to manage the entire process effectively."
Consumer was not available for comment.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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Comments from our readers
Generally speaking, many NZ financial advisers do provide bad advice (relative to more mature jurisdictions where the advisory industry is further developed). Most NZ advisers are reliant upon substandard research or the tripe that has been produced by manufacturers to base their decisions
The NZ financial services industry (like all other industries) has its fair share of villains who are ruining it for everyone. Unfortunately the NZ Regulator has neither the competence nor the resources to put these folks out of business. So beware – many still work amongst us.
Despite the previous points, most of the NZ financial advisory community take their fiduciary responsibility to consumers seriously, and endeavour to provide the best level of financial guidance that they are aware of.
…all of which should be considered when deciding whether the IFA’s half price sale represents value or not.
To be able to come to that conclusion, either you have personally sampled a majority of the many thousands of financial advisers in NZ, or alternatively we can accept that statement with the same lack of competence as the Consumer report.
By the way, generally speaking, independent observers are never independent! Are they?
I also beleive you do not understand fully the current IFA "half-price" sale (as you call it).
Current members who do join up a new member to the IFA are entitled to a 50% discount on their own renewal memebrship. The member may choose to share some or all of that discount with the new member.
In other words, any new member joining the IFA does not automatically get 50 off their membership, that is up to the nominating existing IFA member to decide. At least that is my understanding of the offer.
Finally, all Financial Advisers ask of any report on the quality of our advice is a fair and reasonable report based on the same sort of professional standards of competence we are being asked to produce. Clearly this report was not up to an acceptable standard of competence.
I am not an investment advisor, but I know a great number of them, and in the main, they are competent people, who advise their clients with skill, integrity and a real concern for those clients. The industry is NOT full of fraudsters! Inevitably, there are some who do not meet the standards that are reasonably required of them, but, if you think about it, there are 'bad eggs' in every business or profession! There are no more in the investment advisory world than any other.
The lead article above addresses the fact that the Consumers Institute conducted an unscientific test that has been proven to be seriously flawed. It seriously calls into question their skills, integrity and motivation.
As an aside, I recall that on this website, a previous blog showed that far more people invested in finance company securities responding to advertisements of the promoters than did acting on the advice of a financial planner. They were responding to promises of high earnings and believed the claims of the promoters and their auditors. Sadly, no one in the finance company world had a crystal ball that enabled them to foresee the disastrous credit crunch that caused the collapse of many of the promoters. Clearly some promoters were crooks, but, I suggest, that most were working quite legally, and doing a good job!
It's easy to sit behind a computer screen making unjustified and unpleasant statements about financial planners from a position of ingnorance - with some more understanding of that world, you might be less inclined.
Cheers
If all providers/suppliers of financial are well regulated, then it does not matter if advisors are inexperience or incompetent (not that I am advocating), clients will be safe regardless of which product they invest in.
Regulators have to ask themselves, are you putting the responsibilites of all investment products 100% on the shoulders of advisors? - Anything goes wrong, nail the advisors first, the Regulators are not at fault, and the unscrupulous directors get away scott free or a slap on the wrist with the millions or billions. That's the signal I am getting.
Btw, just wondered, how many on the committees have ever had experience practicing as an advisor? I am asking, because I don't know, and I also don't expect some CEO, with an MBA or PhD, sitting on many boards for many years in the manufacturing sector to advise the DHB how to run their medical facilities.
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I hope that this latest scandal gets properly aired by the daily media, so that ordinary investors can see who really was the loser in this scenario.