Naylor explains why a Level 5 qualification is too low for quality financial advice
Massey University Senior Lecturer Mike Naylor says the financial advice sector can't think of education as a box to tick. In this article he explains how the NZQA system works and why a Level 5 qualification is setting the bar too low for good quality financial advice
Thursday, January 3rd 2019, 6:00AM 
3 Comments
The basis of Massey’ submission to the code review is that adviser education has to be seen as an increasing sequence, rather than a one-off pass-fail set-up. There cannot be any simple code requirement.
Instead there needs to be an explicit layering of skills, with an explicit requirement to refer up the chain if required. This can be compare to that operating in medicine; of nurse, GP, general specialist, advanced specialist, then national expert. Patients are initially assessed at the lowest level, then referred up depending on complexity.
The NZQA Level 4 curriculum is aimed mainly at administrative staff while Level 5 is aimed at advisers who can handle general cases, but who have higher-educated senior staff who they can refer difficult clients to. The Level 5 curriculum carefully excludes any areas requiring complex or skilled knowledge and visualises the clients of Level 5 educated advisers as middle-income families with limited complications. All complex or customised advice cases are then visualised by the NZQA framework as being referred to a Level 6 or 7 educated adviser within that organisation or via external reference.
In practice this means that Level 5 graduates will not be able to handle areas like; business insurance, commercial property insurance, insurance involving complex underwriting, the selection of shares or the creation of portfolios, commercial lending, etc. The pedagogy of Level 5 is focused on teaching of knowledge with a limited amount of conceptualisation and application. This means that a key aspect of teaching Level 5 graduates is to ensure that they can recognise clients who have needs which require more advanced advice and therefore should be referred.
Any code which sets Level 5 graduates as the accepted level will therefore ensure that advice remains at the very basic level. The idea of Level 5 graduate offering insurance advice to a business or doing more in the investment field than making a mutual fund recommendation is fraught with danger, as they are not aware of what they do not know, of what additional advice may be required.
A current issue in the industry is that often Level 5 advisers or QFE staff are not being aware of what they are not advising on, especially if an issue only occurs within a limited number of clients (the unknown unknowns). Even organisation trainers are often unaware of the complications.
Within a university setting of Levels 5 to 7, (years one to three) we create a ladder of skills; starting with teaching basic subject knowledge, including terminology in year one, teaching specialist skills and concepts at year two, and then using that acquired expertise to develop application skills to case studies in year three.
Even at year three (Level 7) an implicit assumption is made that markets work well, and exceptions can be ignored. It is only within a Masters’ course (Level 8/9) is discussion of areas of market failure and how to handle these by referring to current research introduced. Note the evolution from knowledge to conceptualisation to application. What this means is that the kind of skills required to be a upper-level financial adviser and to be able to handle advanced analysis has to be taught at Level 7.
Any attempt to teach conceptualisation of non-standard cases at Level 6 runs into NZQA restrictions on what that Level means and does not match what is actually taught at Level 6. For example; portfolio creation is only taught at Level 7, so a Level 6 graduate would only be able to compare mutual funds. Any attempt by a Level 6 graduate to exceed this is problematic as they have not been taught the exceptions to the general rules.
Only a Level 7 graduate has the conceptualisation skills to oversee a team of Level 5 or 6 staff and see the rarer issues which their staff may be missing.
There is an obvious need for a Level 9 graduate within larger organisations.
Massey also considers that financial advisers should be required to belong to professional bodies. This is required for two reasons;
(i) knowledge requires frequent updating, which is best handled by continuous professional development, and by interacting with their peers and actively engaging with the community.
(ii) Providing good advice requires a professional mind-set, a combination of theoretical knowledge, technical skill, practice management, commitment to ethical and to professional behaviour. All successful examples of professional advice occur a framework which requires professional body membership.
Massey also considers that accountants and lawyers should not get an automatic exception from code education requirements. While these professionals are members of high-level professional associations with strong ethics rules, there is nothing in their training which meets the requirements of personal financial advice, and the professional bodies do not currently offer relevant CPD credits.
These professions should not be granted exemptions outside areas strictly defined as within accounting or legal advice.
One of the major issues with the current AFA education requirements is that it is tending to lead to a lower level of skill in the industry than was the case re-regulation. Prior to the code the better financial advisers were aiming to obtain a Level 7 qualification, via a Graduate Diploma and CFP/ CLU.
The current requirement that Level 5 is all that is needed before getting AFA discourages new entrants from continuing onto the Level 7 qualification.
Therefore, a Level 5 qualification, however, is only acceptable as an interim measure. One of the lessons of the recent financial crisis and the collapse of finance companies is that the level of theoretical expertise required of an investment and/or financial advisers has to be at a high level.
The level of technical competency displayed by Level 5 New Zealand advisers has in general been low. Examples of this were the inability of some advisers to understand the relative performance of assets over a business cycle or to tell the difference between a fixed-interest rate mutual fund and a CDO mutual fund, and the scarcity of advisers able to handle business personal insurance correctly.
In the medium-term investment, and comprehensive, advisers need to be subject to a Level 7 qualification. This is increasingly the base requirement internationally.
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Comments from our readers
I think it's very short sighted to think that to be able to give a great advice outcome based solely on being able to share a great story, or being a better "salesman".
Giving quality insurance advice, in my opinion, goes hand in hand with being able to share stories, and where risks lie for clients with the ability to assess their current risk Vs their future risk. If you look to the global environment, you will see that the advice industry, this can be insurance or investment, or mortgage, has evolved to become more regulated and to provide more quality advice, both in a quantitative sense and a qualitative sense.
The reason for this is obvious: client outcomes, on average, were not up to standard. You need to be able to measure and assess competency independently - hence a qualifications framework. By all means bolt onto this the ability to "sell the intangible" to mums and dads via stories and better sales processes.
As for your comment about investments - Yes the basics apply and every investor has the ability to employ your suggestion and invest themselves. After all there are a plethora of tools on the net for this purpose, but I would point out, and it is answered by your last sentence in the second paragraph" online companies have a tiny market share". People want people they trust to give them advice
The problem that I see is that the worst outcome is the worst possible outcome for the public is no advice and no insurance. For about 70% of the population that's exactly the outcome that the industry has delivered. A stunning industry failure. But also a marvelous market opportunity.
Competent salesmanship is an essential skill to get the job done. The problem that I have with the current debate is that this seems to be overlooked and that raising the academic bar too high simply restricts entry into the market and means that the majority of the population will remain uninsured.
Yes to Level 5 for everyone; Yes to degrees and diplomas for those who have the passion and desire to solve big or highly technical problems. But the bottom line is: no stories, no engagement with the public, no salesmanship = a failure to serve.
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The real problem (and main opportunity) is that the general population is terribly under-insured. As an industry we simply need more feet on the ground to get out and "tell the story". Life and health insurance is a product that is "sold, not bought" - that is why a personal approach by a competent salespersopn has always worked and the online companies have a tiny market share.
Level 5 is useful stuff. But what is also needed is more sales training and mentoring; more story telling; more industry engagement with the man and
the woman on the street.
With regard to investment advice, for most folks the advice should be simply to spend less, save more and don't lose what you save by taking unnecessary risks in highly speculative schemes. You don't need a University Degree to get the basics right.