Money

Financial advisers

Updated: 04 Nov 2009

Introduction

Our mystery shop of financial advisers found their advice to be scandalously poor.

Good, bad, helpful, useless – who knows what to believe about financial advisers. We wanted to know what advisers really delivered to consumers. But the results from our mystery shop shocked even us: this is an industry in serious need of reform.

Only 3 out of 17 advisers produced plans that were rated "good" by an expert panel. The remaining 14 were rated as "disappointing" or were "rejected".

What we found

We mystery-shopped 33 financial advisers. We then asked an expert panel to assess the quality of the advice and information in the 17 plans we received in time for assessment. Four plans arrived too late for our panel to assess them; and in other cases our shoppers received only oral advice – or no advice at all.

Table of advisers, prices and plan ratings.

Guide to the table

A = Four plans arrived too late for assessment by the panel. The financial advisers who provided them are not included here.
B = Did not go ahead because there was a mismatch between the shopper’s needs and the adviser or because the adviser wasn’t interested or because the shopper was asked to commit to a service before getting a written plan.
C = The panel reviewed the shopper’s record of oral advice plus documents provided by the adviser in support of the advice.
D = We were unable to report the cost of this plan.

Our panel’s ratings

Good plans gave clear, relevant and specific advice that was supported by relevant analysis and reasons for the recommendations. Implementing the advice was likely to be in the shopper’s best interests.
Disappointing plans lacked good analysis, or there were no or few reasons for the advice given, or the advice or costs were unclear, or the recommended strategy seemed unnecessarily costly. These plans were “fixable” but the panel wouldn’t recommend them without modification or clarification.
Rejected plans contained little relevant analysis and advice or lacked essential information, or included advice that wouldn’t be in the shopper’s best interests.

Industry failure

Our mystery shopping covered all the big names – institutions with in-house advisers or agents, sharebrokers, nationwide adviser chains, and small standalone adviser firms (see What we found). Nearly all were found wanting.

We found so many issues it’s hard to know where to start: poor analysis, unclear costs, advisers portraying themselves as independent when they weren’t, high costs, bad products ... it was all there. It appears nothing has been learnt from the bad press that the financial-advice industry has had over the last few years – it remains woefully wanting.

The industry will no doubt point to the small size of our sample: 17 advisers when the Institute of Financial Advisers alone has 1400 members. But by covering the big players and the national chains as well as the small firms we’ve opened a window into the entire industry: we don’t expect service quality and costs to vary significantly within an institution or a national adviser chain. So we think our results show an industry that’s failing to deliver.

Our shoppers and panel

Our 11 mystery shoppers ranged in age from mid-30s to just 80, and visited financial planners in Auckland, Wellington, Christchurch and Bay of Plenty. Each shopper sought advice from several advisers. These were real people with real financial questions.

Our expert panel

Jonathan Glass is a client adviser with Gareth Morgan Investments. He has 10 years’ experience in the financial industry here and in the UK.
Craig Wylie is an adviser and principal of Financial Fitness in Wellington and Tony Cross is an investment manager with BNZ. They were nominated by the Institute of Financial Advisers and attended the panel on alternate days.
Andrew Coleman is a senior fellow at Motu Economic and Public Policy Research and a lecturer in economics at Victoria University of Wellington.

Our panel members were given copies of the 17 plans, and also the disclosure statements and other documents provided by the advisers. As well, the panel had summaries of both these documents and the questionnaires completed by the mystery shoppers. They assessed the quality of the advice and the information given by the advisers.

Jargon buster

We always try to avoid jargon … but some financial terms are inescapable:

Directly held investments are issued by a company and individuals can buy them on their own account. This term is usually used in connection with shares and bonds.
Balanced managed funds are pooled schemes that spread an investor’s money across different types of investments such as fixed interest and shares. Some 40 to 60 percent of the fund is likely to be in shares.
"Wrap platform" (aka portfolio administrative service) is an administrative service for investors. It may provide “custodial” services (such as holding title to the investments), carry out the buying and selling of investments, and provide reports to the investor.

Poor advice & analysis

Of the 17 written plans we received, 10 were investment plans and 7 were pre-retirement plans. In this article we can’t deal with all the issues our research uncovered for both types of plans, but we can cover some of the worst ones.

Lack of advice

Some of our shoppers were looking for pre-retirement planning advice. They had – or were likely soon to have – significant mortgages and other debts. Some had bank deposits and other investments and most were in KiwiSaver schemes. They were looking for savings and expenditure budgets that would help them meet their short-term goals and eventually provide a retirement nest-egg. Some also needed advice about insurance, wills and enduring powers of attorney.

There was a lack of meaningful advice in plans prepared for these shoppers – most were of little practical help.

Only one (Trustees Executors) had a detailed action plan and gave good reasons for the advice offered. This was the only pre-retirement plan rated as “good” by the panel; the rest were either “disappointing" (one plan) or “rejected” (five plans). The seven pre-retirement plans weren’t cheap – the cost ranged from zero to over $1200. Trustees Executors’ plan was the most expensive. (See What we found for more details.)

Poor analysis

There was little analysis of what would happen if our shoppers carried on with what they were doing now. The analysis of other options available to the shopper was often inadequate as well. Advisers should be providing detailed analysis and a rationale for their recommendations.

Not giving shoppers a meaningful explanation of why they should take up the recommended investment strategy was common. What were the benefits and cost? How did the strategy compare with other options?

This was a particular problem in the six investment plans where the shopper was advised to put most of their money with one provider group. Was the recommended provider the one with the most resources, the best people, or the best-value funds? What was its track record? Who was it compared with? Or did the adviser have a tie to one provider and so would never recommend anyone else?

Inappropriate advice

Some shoppers were advised to invest too much in managed funds at a time when it was likely they would also have a large mortgage.

The panel’s view was that these shoppers were likely to be far better off repaying their debt. Even those who were advised to invest significantly in a managed fund would be paying more in mortgage interest than they’d earn from the fund. (Advisers, of course, don’t receive commissions from providers for recommending debt-reduction strategies.)

Another issue was advisers recommending managed funds that had relatively high fees and were held inside a portfolio administrative service (a “wrap platform”). Our panel thought that, for several of the plans it reviewed, cheaper funds or other investment options would do the job just as well at less cost.

The panel was also concerned that a number of advisers recommended using a “wrap platform” to hold the shoppers existing investments when the only administration required was annual tax accounting. At the very least, a comparison of the good and bad points of the various administrative options should have been supplied.

Ongoing costs

In 8 out of the 10 investment plans our panel couldn’t definitively work out the initial and ongoing costs of the recommended strategies.

Shoppers were given conflicting information about service fees – and sometimes the information they needed wasn’t supplied. In instances where our shopper was advised to put most of their investments in a managed fund, few advisers provided a complete picture of the fund’s expenses.

And when advisers recommended direct investments in bonds and shares, none of them provided information on how often they’d recommend changes to these portfolios. As changes incur brokerage costs, our shoppers had no idea how much these ongoing costs might be.

Such information could easily be provided from the adviser’s experience with similar portfolios.

If our expert panel couldn’t work out the costs, no one could. We think the industry is not coming clean about fees – probably because if consumers knew the true costs, they wouldn’t bother being customers.

Poor-value strategies

Some advisers recommended significant holdings in both shares and fixed interest – a balanced portfolio. Regardless of whether this was in the form of direct investments or managed funds, our shoppers were advised to hold these portfolios inside a “wrap platform”.

We estimated the ongoing costs of this advice by working out the annual fees paid to fund managers or brokers and the annual “wrap-platform” fees (we calculated the cost after tax where appropriate). The ongoing costs were so high that the likely earnings “margin” above what you’d get from a simple cash investment was in most cases small and sometimes negative. What’s more, these shoppers were taking on significant investment risk because they were advised to have at least 40 percent of their investments in shares.

This is consistent with what we’ve found about the long-run performance of balanced managed funds in the past. They rarely do better than six-month term deposits – and that’s without the extra costs of holding these funds inside a “wrap platform”.

What managed-fund providers and financial advisers don’t take into account is New Zealand’s relatively high interest rates. This is a structural feature of the Kiwi economy commented on by the OECD and the IMF – and it makes us unlike other countries. So term deposits here (apart from those with poor-quality finance companies) have been able to hold their own against managed funds. This means there’s a high annual-returns “bar” that the funds have to leap, before they can add investment value.

Managed funds and financial advisers have been able to get away with the repeated mantra that “cash is bad” even though this simplistic claim can’t be justified here.

Poor information

We found many advisers relied heavily on the companies that provided managed funds and “wrap platforms” for the information and recommendations that were then given to our shoppers.

This information was of poor quality. Fewer than half the advisers who recommended managed funds provided investment statements about the funds they were recommending.

Our shoppers also weren’t given info that could help them assess the quality of the advice: the historical performance of the recommended funds or investment portfolios wasn’t reported or discussed, or was incomplete.

Nor was information given to help our shoppers assess the value of advice about directly held investments. It’s likely the shoppers were recommended “off the shelf” (standardised) portfolios that had also been recommended to other clients. But the advisers supplied no information about the past performance of these recommended portfolios.

Investors not only need good information to decide on what recommended strategy to adopt. Once committed to a strategy, they also need good information to decide whether to stay there. Investors contemplating a “wrap platform” need to know the quality of its ongoing reports. Only one adviser provided a sample of such a report.

"Independent" advisers

Many advisers who provided investment plans implied that they could advise on just about any investment. But several of them then went on to recommend using just one provider for both the “wrap platform” and most or all of the managed funds. Was this advice really independent? Or does it show that the adviser has close remuneration links with the provider? With no rationale given for the choice of provider, who can tell?

Several shoppers paid for plans that seemed like personalised advice but were in fact carefully worded sales pitches for the “off the shelf” portfolios of a single provider. Some of this “independent” investment-plan advice cost more than $1200.

Getting good advice

3 adviser heroes

Our panel found 3 plans it rated as “good” – one pre-retirement and two investment plans.

Warren Corston from Trustees Executors gave good service to his shopper. He found practical solutions for reducing debt, saving for retirement and dealing with insurable risks. The analysis was appropriate and comprehensive, with practical actions identified and specific options compared.
The investment plan put together by Glenn Wilson of First NZ Capital was appropriate for his shopper’s needs and was well explained. The investment mix was acceptable and probably relatively inexpensive to implement and maintain.
The investments recommended by Deborah Carlyon of Stuart and Carlyon were good quality and the shopper was (quite rightly for them) not pushed towards a “wrap platform”. Our panel thought the information on risk was excellent. It also liked the clear way costs were explained.

Our 7 tips for getting good advice

1. Get prepared by doing some research first. The Retirement Commission has easy-to-follow and comprehensive info for investors and people wanting to plan for their retirement. It's all free - either as booklets or on its website (see 'More information', below).
2. Think carefully about the areas you need advice on and check the adviser will provide advice on these.
3. Only use an adviser who relies on payment by the hour (or payment that’s a percentage of your investment). That means one who does not accept commissions and has no other relationship with a financial-services or product provider. A straightforward payment system will usually mean the adviser can give a simple explanation of how they get paid. Advisers like this are hard to find but they do exist.
4. Before agreeing to pay for financial advice, check that you’ll receive a written report – and ask for a sample plan.
5. Look through the sample plan carefully. Does it clearly review the client’s current strategy? Does it clearly explain and compare different options? Does it give clear recommendations? Does it explain why various actions are being recommended? Does it show clearly what the initial and ongoing costs are going to be? No? Then it’s a poor plan … and the chances are your plan will be poor too.
6. Financial advice can be clearly explained. If the sample plan is too complicated for you, don’t go ahead. Keep looking for the right adviser.
7. Before acting on a financial plan you’ve bought, check it against the criteria we recommend for sample plans in 5 above. If it doesn’t give our suggested info don’t implement it. The cost of the plan may be money wasted – but at least you won’t waste more by following poor advice.

More information

Retirement Commission:

Investment advice: www.sorted.org.nz
Investment calculator: www.sorted.org.nz/calculators/investing
Investment booklet: www.sorted.org.nz/ordering 0800 767 866

Institute of Financial Advisers: www.ifa.org.nz

Securities Commission: www.seccom.govt.nz

Our view

Most of the plans were seriously lacking in analysis and advice – areas that demand good knowledge and technical skills. Advisers must be required to invest in a higher standard of financial education.
Consumers need access to unbiased advice. But this won’t become an industry norm until commissions are banned. Doing away with commissions is an essential change.
The quality of disclosure about costs and provider-adviser relationships was appallingly low among most advisers we went to. Consumers aren’t getting the information they need. The government must step in immediately, with compulsory requirements for clear and concise disclosure. This should be in a set format of no more than one to two pages and should include standardised reporting of initial and ongoing costs in dollar amounts rather than percentages.
Without adequate information, consumers can’t tell good from bad. This means advisers can over-charge for their services because consumers don’t know when they’re paying good money for bad advice. It also means poor-value advisers and providers can survive because there’s no market (demand) pressure on them.
Of the advisers we approached for pre-retirement plans, less than half provided one. Of those who did, only one out of seven produced a good plan. Access to good pre-retirement advice seems hard-to-get for ordinary Kiwis.

No surprise

Two members who won’t be surprised by our results are Steven and Anne Wilson (not their real names) who in 2008, after more than 10 years as clients of Money Managers, found themselves with half of their investment portfolio in income-producing investments that were frozen or not redeemable. In Anne’s view their adviser had “simply been a shop front for Money Managers’ products, generating millions for Money Managers’ owner and his associates”.

Steven and Anne are particularly annoyed that they paid thousands of dollars each year for modest returns, believing that their savings were in appropriate investments. Salt to the wound is that their ex-adviser appears to be continuing to receive commission from the frozen funds while they receive nothing.

Fortunately, they’ve now found an adviser who gives excellent service. The recommended investments are explained well and the adviser is upfront about what he’ll earn from the investments. Steven and Anne now hold a range of company bonds, term deposits and company shares.

Background report download

For more details about our mystery shop of financial advisers you can download a copy of the background report here.

Download now (Word document 116 KB).

Report by Susan Guthrie.

Research method FAQs

There has been considerable comment, in some cases critical and often uninformed, of our research methods. We address some of the issues which have been raised.

Should mystery shopping be used to research the financial adviser industry?

Mystery shopping is a long-established research technique and it is often applied in the financial services sector. Regulators such as the Financial Services Authority in the UK (FSA) and the Australian Securities and Investments Commission (ASIC) have relied on mystery shopping research to inform their policy making. Mystery shopping of financial advisers allows regulators and others to examine industry practices, assess the consumer experience and decide whether policy settings are appropriate.

In a report released in November 2009 the Australian Parliamentary Joint Committee on Corporations and Financial Services, which held an inquiry into financial products and services, proposed that ASIC undertake annual “shadow shopping” of financial advisers – far from being an irrelevant research tool, mystery shopping is becoming an increasingly important part of the regulatory landscape.

It is not only regulators who rely on mystery shopping. Financial services firms in overseas markets, and here too we understand, use mystery shopping to research their competitors and their own staff. However, the results of this research are not released publicly. Mystery shopping is a reality of the market place as we are sure most New Zealand-based advisers are well-aware.

Was Consumer NZ only interested in beating up financial advisers and looked for bad news to report?

Our purpose in undertaking this research was clear – to document the current consumer experience of the adviser industry. We undertook qualitative research which was capable of identifying issues (good and bad) present in the industry. We had no prior expectations of the outcome.

We felt it was important that relevant, factual information about the advice and information supplied to consumers be collected and reported.

We believed establishing a clear record of the current outcome for consumers would be helpful to other consumers as they seek financial advice. Providing objective, factually based information for consumers is our core business.

We also thought it important to gather factual information which we and others could use to inform ourselves during this important period of policy debate. To our knowledge, no other group or agency has attempted to provide objective evidence to the community, ensuring the policy debate is inclusive.

We, and the agencies that were approached before we began our research, also saw value in documenting the consumer experience in 2009 as it would provide a benchmark by which the effect of reforms could be assessed. Consumer NZ conducted the research and the findings are entirely its own. The research was supported by the Retirement Commission, the Ministry of Economic Development and the Securities Commission.

Did Consumer NZ investigate the industry in the right way?

The approach we took was objective, well-researched and appropriate for the industry being assessed. We asked two simple questions – are consumers being given advice that is likely to be in their interests and are they given sufficient information to make an informed decision. The expert panel answered these questions in each case.

We had no prior expectations of the outcome. That the research was objective is obvious from our use of real people seeking advice about their own situations. There was no pre-set scenario to test the industry. The industry was observed going about its usual business and each adviser had an opportunity to shine.

The approach was similar to that used by ASIC in 2003 in that we asked real people who were seeking advice about their personal situation to be our shoppers. Another important similarity is that the advice and information was assessed by a three-member panel made up of a mixture of advisers and others. Peer-review was an essential part of our approach and ASIC’s.

Despite the fact that our sample was smaller than has been used by ASIC the results are similar. ASIC reported that among the “deficiencies” it found were:

failing to show how the recommended strategy and action was appropriate for the client
plans were hard to read and ‘padded’ with reams of generic information
higher-fee investments (including wrap accounts and master trusts) were recommended without showing why these were better
planners recommended selling existing investments without showing how new investments or investment vehicles would be better.

ASIC also reported the judges commented many plans were “unclear, poorly written, swamped with generic material and difficult to follow”.

Our research turned up similar issues.

That there was similarity between our results and those of ASIC’s (much larger) 2003 study confirms the robustness and relevance of our research.

Should we have chosen different people for the panel?

The panel members selected from the industry represented the range of experience, opinions and business models in the industry today. On any one day we had one representative from the Institute of Financial Advisers, a client adviser from Gareth Morgan Investments and an expert from outside the industry.

While we could quite legitimately have chosen a consumer representative for the non-industry position, we elected to ask a highly-regarded academic with expertise in economics and finance. Complaints about our choosing an academic with this background reveal a poor understanding of the knowledge, analytical and technical requirements of financial planning, finance and economics.

In each case the panel reached a consensus about the advice and information given. No one member could dictate the outcomes. The panel did an excellent job of identifying issues relevant for each plan and we would not hesitate to use any of the panel members again.

We have documented the failings of the material reviewed. No matter who was present on the panel, they could not have produced out of thin air clear cost information, missing analysis or a rationale for the recommended strategies. Many plans were simply missing the essentials. It is time the industry accepted the issues our research has raised. It is also time for the industry to provide a credible solution for consumers.