Big changes for some RFAs
Advisers will need a way to prove their competence, regardless of how long they have been in the industry, the chief executive of the PAA says.
Tuesday, February 28th 2017, 6:00AM 
10 Comments
by Susan Edmunds
As part of the revamp of financial adviser legislation, a code working group will be convened in the early part of this year to devise a new code of conduct.
It is scheduled to come into force in 2019 and will include new competency requirements for all advisers. It has been suggested that this could mean a level five certificate requirement for all industry participants.
It is unclear so far what that would mean for those who are already in the industry without a qualification.
Among the transition provisions outlined is the suggestion that advisers who have been working for some time – the consultation paper suggests 10 years – could be given an alternative path to compliance, if they do not have the qualifications the new code requires.
MBIE has suggested an assessment process could be possible that would involve reviews of client files, tests and interviews.
PAA chief executive Rod Severn said it would be unfair if that process gave the level five qualification to advisers who had not completed it. “That’s not fair to those that have done it. But until such a time as we know what [will be in the code] we are guessing. You could assume level five because that’s all there is. Whether they deem everyone has to do it, who knows.”
He said it would be a good standard to impose across the industry. But he said it was worth asking whether it was reasonable to expect those who had been in the industry decades to go back and sit an entry-level qualification.
“But you still need to test competency regardless of how long they have been there. They could have been doing things wrong since day one and don’t know any better.”
RFAs should have to do continuing professional development (CPD) he said. “It’s crazy that RFAs and AFAs do the same thing but one has this massive legislation over their shoulder and the other has nothing. I’m all for an even playing field. I’m not trying to enforce level five on everyone but some form [of requirement] across the board is needed.”
He said RFAs were in for the biggest change as a result of the new regime. “It’s designed to have an impact but to what extent we don’t know yet.”
It seemed likely that some would leave the industry, he said.
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Comments from our readers
On 28 February 2017 at 9:31 am Brent Sheather said:
What is really crazy is the fact that RFA’s and AFA’s are compelled to do highly counterproductive/waste of time CPD most of which is useless and a good proportion of which actually encourages bad behaviour ie higher risk, higher cost portfolios. The benchmark for good behaviour is clearly what pension funds do and their exposure to esoteric, small cap, high cost funds is usually minimal.
The unfortunate reality around CPD is that no one will buy anything which encourages good behaviour because good behaviour = lower margins. If the FMA seriously expect CPD to improve the outcomes for retail investors they need to put some resource into improving standards.
On 28 February 2017 at 11:31 am Headmaster said:
I agree with Mr Slater that Level 5 is not the answer to the competency qualification question.
A Level 5 certificate is a low-level qualification by today's standards, and it is a stretch to expect it to usefully qualify a person to be held up in society as a financial adviser. On the other hand, an adviser who possesses a relevant degree, such as in business or finance, is much more qualified to hold that designation than someone who has only matriculated on the back of a Level 5, polytech-level certificate. And it would be inconceivable to require the degree-qualified adviser to go back and complete the Level 5 qualification. This would be akin to requiring an adviser with an MBA to go back and re-sit NCEA.
I would be most surprised if MBIE restricted itself to the Level 5 certificate in specifying the qualification component of the yet-to-be-proposed competency standards. It has much more available to it than that.
On 28 February 2017 at 12:35 pm Pragmatic said:
There are a couple of issues that I would challenge from this article and the responses:
1. I strongly believe that the industry needs to start looking at itself through the consumer lens, and do away with various designations, acronyms and educational standards. Just with the medical profession, each industry advisor should have a minimum entry level before calling themselves an advisor, with additional qualifications for unique areas of expertise. The minimum isn’t an overly high hurdle to meet, and will at least help advisors to understand what they know / don’t know.
2. I strongly disagree that the CPD system isn’t working, and believe that all industry participants must complete a minimum level of ongoing education. Whilst I’m sure that some CPDs are dispensed for inappropriate topics, most of the education events that I’ve encountered are generally well organised and have some content that is useful. In this dynamic world, it is naïve, foolish and negligent to believe that you possess all of the information and skills to benefit your clients.
On 28 February 2017 at 2:49 pm Murray Weatherston said:
I wish all people commenting on CPD would take the trouble to read the Code.
CPD is not dispensed by the product manufacturers, education providers and industry bodies.
What does and does not count as structured professional development is determined by each AFA herself. What is necessary is (1) the matter fits within their current (or about-to-be- amended...?) PDP (2) it's delivered by a subject matter expert (3) there has to be opportunity for discussion and feedback and (4) need 3rd party verification that you actually attended (note the verifier does not need to be the course provider, it can be the person you sat beside at the meeting.)
So if there is criticism of CPD programmes, it should properly be addressed to AFAs themselves, not the course providers.
On 28 February 2017 at 5:41 pm Dirty Harry said:
Well, Brent is consistent...
On 26 March 2015 at 4:48 pm Brent Sheather said:
The reality of most CPD for AFA’s is that it has negative value in that it generally promotes specialisation and higher cost products
On 21 June 2016 at 8:59 am Brent Sheather said:
At my firm we don’t do the job properly but at least we are aware of the issues.
Must say that there is a surprising lack of knowledge on this subject which is a worry considering all the valuable CPD everyone is apparently doing (LOL)
On 29 August 2016 at 8:08 am Brent Sheather said:
Second reason is that most of the marketing programmes that the IFA promotes as pseudo CPD would be exposed for what they really are...a waste of time, or worse….moving advice further away from best practice
On 9 June 2016 at 3:15 pm Brent Sheather said
It’s ridiculous when you look at the stupid sales training which masquerades as CPD.
On 20 April 2016 at 11:08 am Brent Sheather said:
My view is that IFA members have done enough as regards “building trust in the profession” and given their historic input they should never have a role in regulation or determining best practice. Indeed because best practice invariably conflicts with short term profitability - think ETFs (good) and finance company debentures (bad) - no advisor groups should be involved in determining best practice especially those which provide courses on maximising sales masquerading as CPD
On 26 March 2015 at 4:48 pm Brent Sheather said:
The reality of most CPD for AFA’s is that it has negative value in that it generally promotes specialisation and higher cost products which take portfolios away from best practice where best practice is the average portfolio of NZ pension funds.
On 11 October 2013 at 5:08 pm Brent Sheather said:
Hi Ally
I’m with you on this. There are no unbiased trainers, as far as I can see, and thus little or no training worth doing if your benchmark is doing training which will bring your advice closer to best practice. There is of course tonnes of free advice from providers selling esoteric, high cost, irrelevant products which introduced tracking error and thus take clients portfolios further away from “doing the right thing”.
On 9 September 2013 at 10:09 am Brent Sheather said:
There is no way that bodies like the IFA should be able to offer structured training not least because of the horrific record of investment advice that IFA members have inflicted upon New Zealanders with the latest example occurring just last week.
To have the IFA actually training people is patently ridiculous although it is becoming clear that there are some things that the IFA are good at.
On 16 February 2017 at 3:10 pm Brent Sheather said:
The other important issue is Mr Dodds’ statement that “New Zealanders will be better off with advice”. President Obama’s study into the financial advisory industry in the US that prompted the DOL’s version of “putting clients’ interests first” found that “no advice” was substantially better than “bad advice”.
It is quite easy to observe “good advice” and that is to look at the practices of the average pension fund, for example no finance company debentures, highly diversified, 50% indexed etc etc.
On 3 October 2016 at 8:49 am Brent Sheather said:
I ignore semantics and don’t differentiate between putting client’s interest first, best interests or whatever. Retail investors won’t differentiate ….as we know many are illiterate so we need to keep things simple.
Best practice is clearly achievable by following the strategies of the average pension fund.
On 2 August 2016 at 8:45 am Brent Sheather said:
the regulators position is, at best, constrained by the law, the fools at MBIE don’t know what’s going on, the Code Committee is busy lobbying the FMA in favour of performance fees and government ministers are on the net searching for their next job at a bank.
The simplest way to differentiate what is putting client’s interest first and what isn’t is to, as I have argued before, have regard to what the average pension fund does.
On 11 October 2013 at 5:08 pm Brent Sheather said:
I have no solutions but recognize the problem
On 1 March 2017 at 9:31 am Brent Sheather said:
Hi Murray
Thanks for your comment. You say that “CPD is not dispensed by product manufacturers, education providers and industry bodies”. I don’t really understand that comment because I see lots of courses by these institutions all of which say they count for CPD. So my thought is that they are just about the only people who dispense CPD. Can you explain?
Your next point hits the nail on the head as I guess what you are saying is that AFAs can choose what CPD to do and I alluded to that as well when I said “no one will buy anything which encourages good behaviour because good behaviour equals lower margins”. I should have also added that high annual fees need to be justified by complexity so CPD needs to advocate complex solutions. I saw a portfolio put together by a bank a few years back where global equity exposure was achieved by equal weightings in a global value ETF and a global growth ETF. Hilarious.
Murray you set out what is necessary in four points but you missed out the fifth and sixth points and these are - No. 5 the CPD must be free and No. 6 the CPD must not conflict with a high cost, highly complex investment solution which emphasis active outperformance, overstates prospective investment returns and understates the importance of fees.
I was contacted by a new client the other day from Auckland who had been to see five financial advisors, all AFAs who do CPD and not one recommended an index fund. How is this possible if CPD is doing its job given best practice is clearly 50% indexed?
Also Murray do you have any thoughts on why, despite Code Standard I, just about everybody in this industry puts their/the firm they work for interests in front of those of the consumer as per my examples on 27 February at 11.39 am? You could add to that list – retail investment solutions typically with 2-3% pa total annual fees when the forward risk premium, according to DMS, AQR etc, is also around 3% i.e. the typical retail solution offers the risk of equities with the return of bonds. Is that putting client’s interest first?
Last but not least – thanks to Dirty Harry for that summary. The post on 2 August 2016 at 8.45 am even made me laugh.
On 1 March 2017 at 2:46 pm gavin austin adviser business compliance said:
Brent
We all are well aware of your views on CPD as you have pointed out the deficiencies in you view ad nauseum. You are however as an AFA required to comply with the Code so the fact that you don't know what CPD is obvious by your comment about "fifth and sixth points". For your information the code states "structured professional development training that has identifiable aims and with outcomes relevant to the learning needs identified in the AFA’s professional development plan, and:
(a) is provided by a qualified educator or relevant subject matter expert;
and
(b) provides for interaction and feedback; and
(c) participation is verifiable by documentation
Structured professional development may include technical product training
but excludes training provided for the principal purpose of promoting a
particular financial product." Perhaps the FMA should consider you to be in breach of the code as it must be nigh impossible to be compliant given that you give the impression by your misinformed comments, that you have probably never read it.
On 2 March 2017 at 9:09 am Brent Sheather said:
Hi Gavin
Sincere apologies for causing nausea with the continued criticism of NZ’s poor CPD environment. Where I’m coming from is that, if you observe the standard of retail financial advice locally and then compare it with best practice, there is an obvious need for improvement and it is quite frustrating to see business development continually masquerading as professional development.
Yes I am aware what the Code says but my points 5 and 6 were additional criteria frequently unofficially embraced by many local AFAs.
Just for your interest the areas that I have identified for further learning include behavioural finance as it relates to retail investors , the impact of fees and in particular performance fees on long term savings plans, the equity risk premium, forecast long term returns from bonds, property and shares, alternative investments and hedge funds and in particular why they don’t make sense for retail investors, financial history and how historic returns compare to future returns and the identification of fads and bubbles in investment markets. As regards the latter local CPD is occasionally helpful as the fad is frequently the asset class recommended by the investment manager offering the free CPD.
In respect of your comment on the FMA maybe I’m lucky you are no longer employed there. You could however view my comments as an opportunity for your business rather than a threat. There must be some AFAs, admittedly not many, who would purchase CPD designed to actually improve outcomes for retail investors rather than outcomes for retail financial advisors.
Regards
Brent
On 2 March 2017 at 11:16 am Murray Weatherston said:
Hi Brent
Happy to address your points in your comment yesterday
1. There are 2 strands to my answer; one applies to AFAs who are members of IFA; and the other applies to AFAs like you and me who aren't members of IFA.
IFA has a different scheme for their members CPD requirements than the Code applies.
To count for IFA purposes, the CPD has to be approved by IFA as Structured Credits - I understand giving the stamp to providers is a revenue line for IFA. So any provider who says their CPD offering counts for CPD is prima facie working in that IFA structure.
For us non-IFA members, that claim counts for nought. Our requirements under the Code are as I set out in my earlier comment here.
2.I wondered what you were on about in four 5th and 6th requirements - they certainly aren't in the Code, but your answer to Gavin suggests you knew that. What individual AFAs do or don't do is not my concern - it's between those AFAs and the FMA, [in they event they are subjected to FMA "audit"]
3. In your last paragraph, you get into an area that I have been debating for some time. Everybody can parrot that the paramount Code Standard is put the interest of the client first. BUT, there is no consensus on what this means. If you have been following the other thread s here, you will know that I have only ever been able to make sense of it in the context of conflicts of interest.
Lot's of others think it means something more than that and your comments show that you think it means more than that.
I am sure you have noticed that officials articulation of the duty to put clients interests first in s431H of the Draft Bill sides strongly with my view (I am not claiming they must have heard me)and limits the duty to situations where a conflict oi interest arises.
A lot of people try to wrap other things into PTICF. I would lump these under a heading like "style of advice". Active vs passive, only low cost funds irrespective of relative performance (some high cost active funds have done well over some periods), fixed asset allocations a la pension funds. In my view all these are all outside of a duty that requires a conflict of interest to be triggered before the duty becomes operative.
There are lots of other areas where matters of style occur. Some people always have to drive a new car, some will only drive Fords - but that is personal decision. Some legal consumers will always choose Queen Street irrespective of how complicated the topic; some people will buy steak and only cook it at home; some will go to the greasy diner at the end of the Street, others will only consume it in a 3 star Michelin or equivalent. The price points are different. restaurant. I hope you get this point.
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Like other roles education, training and experience needs to fit the role. For example, an adviser who only provides risk advice would be wasting a lot of time completing all of the required Level 5 subjects. Likewise an insurance broker working inside a larger brokerage. I'm sure the AONs of the industry don't want to pay for 300+ adviser to do Level 5.
I think the simple answer is asking what financial advice do you want to provide and then matching the ETE to that profile by assessment and training where the needed skills are short.
I can also say from experience that having Level 5 does necessarily make you a better adviser than not.