AMP: Concern over advice quality

Can’t help but be sceptical about whether education improves outcomes for investors. For a start my experience with education …. if you can call it that … doing the AFA courses was that a material amount of what I was being taught was wrong. In fact in some of the multiple choice questions I had to guess which wrong answer the examiner thought was right. In the event they re-wrote some of the course because I took the trouble to back up the answers with academic research. The reality is that education has been captured by industry … for example nowhere do you read that fees are the best indicator of returns as far as managed funds are concerned as per research by leading academics. Why – because this is at variance with most business models.

Secondly, much of what is taught is, at best forgotten and more frequently overruled, at work. We all know that diversification is the only free lunch there is…. reduces risk whilst maintains returns. But look at recommendations from stockbrokers and private bankers and you will see that that idea is out the window… the reality is there are many investment plans recommending lots of concentrated portfolios in NZ and Australia and, most stupid of all, some advisors recommend five or ten international stocks as a proxy for the world stockmarket. That makes sense, not.

I’m looking at CPD at the moment and if anyone has attended any CPD that they think was a waste of time let me know. brent@cpam.co.nz

Regards
Brent Sheather

Brent - AMP are talking about a CFP. Thus the education would involve a university level level 7 grad diploma, not some off-the-cuff CPD credit or level 5 AFA course.
The education will thus cover investments with academic rigor, at least to level 7 standard.
The larger point is that current NZ education levels for AFAs are too low, as they were set at the current level 5 as an intro measure.

Hi Mike

Thanks for those comments and it’s good to see you engaging with the industry. In the 2006 to 2009 period I saw a lot of recommendations from Tauranga authored by CFP’s, all of which derived 80% or more of their bond exposure via finance company debentures … most of which are sadly no longer with us. I was asked to critique these recommendations at the time by various solicitors and accountants and they horrified me and my staff so much that we issued a slightly tongue and cheek disclosure statement that we never had, never were and never would be qualified with a CFP or a member of the IFA or the IRA.

More recently I see numerous investment plans by highly qualified CFP’s recommending mum and dad obtain their international exposure in part or in whole via the purchase of five or so international stocks … out of the 5,000 or so large cap entities that make up the MSCI. So my question for you, as you seem to know a bit about the CFP degree, is “is that what they are being taught at university” and if it is “why is it so at variance with best practice as evidenced by the portfolios of pension funds” not to mention commonsense.

My take on this is, as per my first comment, that what education there is, is being dominated by commercial realities.

Look forward to your comment and maybe if you are interested in this field you could mystery shop a few CFP’s so you can see the state of the play for yourself. I am sure it would make interesting reading for us all.

I'm convinced that the CFP designation is a step back not forward for many in the industry, as it merely demonstrates academic recall rather than practical skills

Personally I'd prefer the prerequisite to be a business degree + a minimum of 3 years "practical" experience (yet to be defined)

Brent. Thanks, I have been engaging for a long time, to some advisers' annoyance.

The CFP is not a degree, but an international professional certification. It is regarded internationally as the current best standard cert for financial advisers, and is managed by an international body.
As part of obtaining it is NZ, applicants have to pass the papers within a level 7 graduate level diploma. It is certainly more rigorous and comprehensive that the level 5 courses which underlie AFA registration. It does not require a full degree, only about 1/3rd of a degree. So I wouldn't describe CFP's as 'highly qualified'. The investment education involved is, however, rigorous enough to enable all CFP holders to understand modern portfolio theory and points you make in your many articles.
There are alternative certs, which can be higher. For example the CFA, which requires a finance degree.

The major point I have been repeating a lot lately is that the current level 5 for AFA is pathetically low and advisers of complex products or full advice, need a level 7 at least. Otherwise they will not understand any portfolio theory. The feedback I received from the SC committee and MP's at the time of regulation was that level 5 was a good start, to drag advisers into the system, and the intention was to increase it over time. The NZQA has only just finished reformating the Level 5 quals, and working on level 6 as we speak. Progress will occur.

However, as we all know, education, certification, registration and disclosure are no guarantees of ethical behaviour. We all know that adviser recommendations during the pre-2009 period were often faulty; hence regulation. A recommendation of 5 international shares rather than an ETF seems suspicious, though there maybe a sound reasons with a diversified portfolio. What is needed is a process whereby AFA's can be required to justify their recommendations within a professional atmosphere. As you should know, the FMA and others are checking advice.

How the key has to be the creation of an atmosphere of professional, client-first advising. Any ideas how to do this?

Hi Mike
Thanks again for all that. On your last points perhaps the best way of ensuring “professional, client first advising” is to encourage the idea that advisors can observe best practice by looking at the portfolios of pension funds both locally and overseas.

This gives direction as to what asset allocation is appropriate for an average risk portfolio and sets out very clearly what level of diversification is necessary within asset classes.

For example in the global equity sector no pension fund in the world would only own five stocks…200 or more is common and most of this exposure is by various funds whose asset allocation is a function of the relative market cap of each country ie: 50% in the US, 10% UK etc etc.

The worry is however that advisors and investment firms, like banks, can make more money by alluding to stock picking skills that they don’t have. It is far easier to justify a high fee when you suggest that you can beat the average.

We all know that is a hard act to follow but that’s the way the game is played. Furthermore because so many of the FMA’s employees are ex banks and financial advisory firms there is no way they would be committed to this sort of approach either. The industry has captured the regulatory authority and we won’t even talk about the government given that the Minister of Commerce is an investment banker.

Anyway good luck and nice talking.
Regards
Brent Sheather