Proposed code will devalue advice: Tate

I have been consistent in my rambles (and advice to Minister Faafoi) that any CWG must comprise of those at the coal face. Any 'advisory' groups or derivatives of this is simply paying lip service to the industry for whom the rules are being designed.

Some history – or how did we get into the situation that Nigel et al are complaining about.
There are at least 3 strands intermeshed within this story.
• patch protection for “financial planners”
• the definition of financial advice in FAA and FSLAB
• How the CWG proposed to treat qualifications product advice vs financial planning

1. A long time ago - 1987 or 1988, Graham Rich and others introduced the term financial planner into the lexicon and formed International Association of Financial Planners(or was it Planning – doesn’t matter) IAFP. In the mid 1990s, it took on the NZ licensing agency for the international CFP mark. The C stands for Certified, but it equally could have been comprehensive, as mark holders signed up for the 6 step process, and allegedly did comprehensive plans covering all of personal situation, cashflow and balance sheet management, taxation, investment, retirement planning, personal risk management and estate planning. I think most of the CFPs probably specialised in investments (that was where they thought the advice bit and the money was best).
There is a proud history for the true financial planning devotees.

I think for a long time, the IAFP and the things it morphed into (now Financial Advice) harboured the ambition that it was the natural SRO for financial planning and investment advice.

2. Now change focus to regulation since 2008. The design criteria for the FAA was based on financial products – recommendations or opinions whether to buy hold or sell financial products. Initially the scope was wide, but due to lobbying, the principal focus was restricted to category 1 products (in broad swathe investment products) and in order to be allowed to give advice to retail clients on category 1 products, an adviser had to become an AFA.

I have recently been reminded that s20 of the FAA introduced a prohibition on anyone holding themselves out as an investment adviser or a financial planner unless they were an AFA. [It might well be that that is the only use of the term financial planner in the whole Act.]

But in 2008 it became realised that the product definition of advice would not trap all all advisers who advised retail people on investments. As an aside remember that the Act only dealt with some investment products (listed, unlisted managed funds, credit contracts, life insurance contracts, bank deposits) – but completely left out things like residential property investment.

There were a few people who gave generic advice on investments but who didn’t make actual investment product recommendations. They would make asset allocation recommendations, but didn’t get into recommendations and implementation at the specific product level.

So a second limb got added into the definition of financial advice which covered investment planning services.

3. Forward to FSLAB which is intended to treat advice on non-investment products in the same way as FAA treats investment products. The Bill as presented to Parliament had a definition of financial advice as a recommendation to buy sell or hold a financial markets product or an investment planning service. The distinction between Cat 1 and 2 was gone. But while they widened the product scope to non investment products, they left the planning services at simply investment planning services.

Some of us recognised that that might let some people slip between the cracks and out of the regulatory net because there could be advisers advising in insurance without getting down to the product level (e.g. you need $500,000 death cover so go and talk to an insurance broker); ditto mortgages, general insurance etc.
SIFA included this in its submission, saying surely all disciplines should be included.

CWG also recognised this issue, and submitted that the term investment planning service should be changed to financial planning service, which is where the clash with Nigel et al arises – the term CWG proposed “financial planning” was not the same as what the industry believed was “financial planning"). [As an editorial note, that is not the first time in the review that the bureaucrats had taken a term in common usage and used it to mean something different.]

In the AFA space, most pieces of advice fitted into both the investment planning space and the product advice space at the same time. My guess it was well south of 10% of cases where product advice wasn’t also caught by investment planning service, and also well south of 10% of cases where an investment planning service didn’t also fit the product advice definition.

4. The plot was thickened by CWG in its consultation paper. Assuming that their submission to change investment planning to financial planning was adopted, they proposed to make a distinction for the CKS qualifications for product advice (level 5) and financial planning (Degree for showing you could thank and Level 6 for the technical stuff.)

What resulted was both that the true financial planners were incensed that their cherished term was being extended to people who were simply life agents or mortgage brokers, and those same insurance and mortgage advisers were incensed when they realised that they might be required to do a degree and level 6 because what they had been doing happily for 20 years was now caught as financial planning.

Now based on what the Chair told the Financial Markets Law Conference recently, I think CWG has walked back their split recommendation for qualifications – it is a good bet that the next iteration of their thinking will have Level 5 for everyone (at least in the non-institutional space.)

5.I happen to think most life agents, mortgage brokers, general insurance agents will find themselves in the same boat as investment advisers have been – most of the time most advisers will be caught under both the product specific and planning limbs of the financial advice limbs.

6. But the financial planners will still feel aggrieved.

I think the answer is simple;

There are advisers who provide planning services and product advice.

There are advisers who provide only planning services (Very Few) with no product advice.

There are advisers who provide only product advice with no planning services.

Under planning services there are several types;

- Financial Planning
- Estate/Trust Planning
- Investment Planning
- Retirement Planning
- Insurance Planning
- Mortgage/Cash flow Planning
- Property Investment Planning

Under Product Advice there are several categories;

- Investments
- Superannuation/KiwiSaver
- Insurance
- Mortgage/Banking/Debt
- Property

If the CWG had a matrix of each of these areas of Financial Advice and there particular competency requirements, advisers could then select which planning services and products the provide and match the competency requirements of each that they individually require.

For example an adviser like Tony might do Insurance Planning and then offer product advice on insurance products. He may also offer product advice on implementing KiwiSaver, but doesn't provide a retirement planning service. This type of service is likley not to require degree level competence and from a client point of view they are not using Tony as a Financial Planner to achieve all their financial goals.

Where as a financial planner is likley planning or offering advice in all these areas and the client is relying on that plan to achieve their goals, so a higher level of competency is required.

So the pick an mix option is the way to go in my opinion with all advisers having a core industry, legislative and ethics strands of competency to achieve along side their individual requirements.

A request to the CWG

“The wisdom and experience of older people is a resource of inestimable worth. Recognising and treasuring the contributions of older people is essential to the long term flourishing of any society.” Daisaku Ikeda

There is quite a number of advisers who are over 65, who still contribute a lot by helping Kiwi mums and dads with their money, and retirement planning in particular

For myself I would like to keep giving the advice, but drop out of managing their money

It would be good if the CWG could think about us older advisers and make an effort to ensure that FSLAB does not push us out in 2021 (perhaps we are yet another category in Barry’s matrix)

The important things for the CWG to focus on that the Code requires:
• financial advisers’ communications to be clear, concise, effective – and recorded;
• financial advisers to provide only services they are competent to provide (with the Code and providing examples of the qualifications, skills and experience usually deemed to demonstrate this for each kind of advice and product area;
• financial advice to be in the clients’ interests, adequately explained, and as applicable accompanied by reasons (anything a reasonable person might want to know when deciding whether to work with the adviser or act on the advice), and
• financial advisers to disclose no later than with the advice – or if this in not possible as soon as practicable after this –
o any third-party relationship that could influence advice about financial products and services (including “platforms” and “administration services”), and
o the source and dollar value of any third-party remuneration or other incentive likely to be received by the financial adviser of a related person (including employer, firm, etc) if the client acts on the advice.

Financial planning is a red herring. As I see things, it is simply the process that any professional would want to use when advising a client – whether the advice is on a single issue, or broadly addresses the achievement of their life goals – in which case the advice might need to take account of a broad range of issues (including as relevant financial management, insurance, retirement planning, investments, estate, and tax).

The largest international standards organisation in this space is FPSB (www.fpsb.org), which currently licences Financial Advice NZ to award its CFP certification marks to NZ financial planners.

You don’t need to be a Certified Financial Planner to practice, and it is certainly no quality guarantee (nothing is). But in a regulatory environment that requires all financial advisers to put client’s interests first it still signifies an adviser who has crossed more than minimal education hurdles, who has some relevant supervised experience, and who is serious about their career: definitely worth a new adviser’s interest.

Finally, it may be worth pointing out that financial planning advice need not involve any product advice, but if it does any professional would want a clear scope of service, to clearly disclose costs, and to deal transparently with any actual or potential conflicts of interest, including telling their client how and by whom they will be paid.

All very constructive comments above, however my comment when I was approached was around differentiating the qualifications required for the various types and breadth of advice given. Whilst in years to come, it would be great for all financial advisers to hold a tertiary qualification, preferably at degree level, this is not what I or anyone else is proposing at present.

It is important in my view to have advisers wanting and able to stay in our profession no matter what their area of expertise, this is likely to mean that a degree for Risk Insurance advice or Lending advice, for example, is not yet required while anyone holding themselves out as a Financial Planner should be required to hold at least a level 7 Tertiary qualification specifically in Financial Planning, this protects both the term “Financial Planner” and those that are not desirous of becoming Financial Planners.

Advisers that wish to stick to a narrower area of advice such as Insurance or Lending, in my view should be required in this round of regulation, to hold at least a level 5 NZ Certificate in Financial Services with specific papers in the area or areas that they specialise.

It is my contention that Advice becomes Planning once you start to advise on a broader range of needs, for example when you advise a client on Lending, Risk and Retirement you have stepped into planning, this is quite common with current Financial Planners who have a narrower Scope of Service with a client. It then extends to full and Comprehensive Financial Planning when you also incorporate Cash Management and Estate and Tax Planning.

Getting the vernacular right in Legislation and Regulations is imperative to maintain clarity of purpose.

There are a number of solid points made. Comprehensive planner makes a lot of sense.

Particularly when you look at the basics of the 6 step process. To say anything using the 6 step process is financial planning, is living with the fairies.

As too, saying any financial product should be exempt from the 6 step process is also living with the fairies.

When I mention the 6 step process I’m not talking the bloated AFA version of it, I’m talking the basics of prescribing a solution to a problem, the ISO standard version.

Let’s look at a phone call from a client for house cover at 3pm on a Friday about to settle.

1. Get to know your client. (Name, address, phone, dob, relationship if relevant)
2. Gather data (where’s it located, what’s it made of, how old is it, how big is it, etc)
3. Analyse and research (take relevant data from the client situation and apply to the stated need to come up with a product recommendation)
4. Recommend the appropriate solution you have available with the relevant pros and cons for the clients stated need (including slapping a bandaid on now for you to settle and we’ll talk more next week/once settled etc) because at this point we know clients just want to get the job done.
5. Implement said solution (including documenting what’s going on and what the pro’s & con’s are ie needs survey before full replacement cover can be placed)
6. Follow up and review (actually follow up and review, especially if the Friday night answer was a bandaid)

End of the day, it doesn’t matter what the product Advice situation, everyone is doing this at some level.

The big difference is many (VIO’s) don’t do the advice suitability check, they prescribe what they have and move on. Leaving the punter without the information or awareness that their solution has holes.

Require the sense check, inform the client, and document what was done. The onus is on the ‘adviser’ not the client to get this done.

Surprised and pleased to hear BNZ say to a client today, we can look at your insurance, we’ll probably be cheaper but probably won’t be able to match the advice and cover you have... that one example is a start, a start that the message is getting through somewhere bringing awareness of the risks when clients often blindly approach financial services