Do you need a financial advisor?

Sam Kellar is the general manager of Whai Rawa, a non-profit investment scheme set up by Te Rūnanga o Ngāi Tahu. It enjoys high levels of trust from iwi members because of its model of strong engagement based on cultural practices.

The scheme was set up after the Ngāi Tahu Treaty Settlement and aims to build the intergenerational wealth of iwi members so they can pay for key life events, like education, a first home and retirement.

The youngest person ever enrolled in the scheme was just 4 days old.

“There’s not really an investment scheme in New Zealand or anywhere in the world that have members that young,” Sam said.

Almost half of the scheme’s members are aged under 18, he added.

“We believe in educating our members from a young age, with the hope that the information they learn about our investment scheme will be passed onto their own children when that time comes, making a positive intergenerational change.”

Whai Rawa is licenced to provide financial guidance via its online risk profile tool.

With respect to the wider financial advisor space, Sam said, “There’s issues with access, with trust, with authenticity … sometimes [the offices of a financial advisor] isn’t a safe environment for a lot of people, like people may feel like they don’t belong.”

This isn’t helped by a lack of diversity in the industry: “You’re talking to people potentially from all walks of life, though, so how do you gain that connection?”

Why people don’t seek financial advice

Te Ara Ahunga Ora Retirement Commission is charged with increasing the financial capability of New Zealanders. Financial capability is not just about money, but about having the information you need to make the right financial decisions in the present and for the future.

The commission is particularly focused on increasing the financial capability of women, Māori and Pacific people. It has found that financial capability has rarely been designed in culturally appropriate ways.

There is also a perception that financial advice is not for everyone. Research funded by insurer Fidelity Life asked respondents why they hadn’t sought financial advice? Fifteen per cent said they didn’t have enough to invest, while 31% said they didn’t need it, or it wasn’t for them.

Similarly, Consumer NZ research has found that while there’s an appetite for financial advice, people who are facing financial challenges, or are on the verge of making significant financial decisions, don’t necessarily seek it out. One reason may be that people don’t know where to go to find the help or services they need, so rely on advice from family and friends.

What is financial advice and who can give it?

If you need help managing your money it can help to call in the experts. If you want help budgeting, its likely a financial mentor can help.

However, if you’re looking to make financial plans for your future – whether saving a deposit for a house or managing your KiwiSaver – a financial advisor can help.

Some advisors may be able to tell you about a range of financial products, while others may focus on one, like mortgages or insurance policies. All financial advisors need to be licensed and registered with the industry regulator, the Financial Markets Authority (FMA) and adhere to a Code of Professional Conduct.

Financial mentors empower people to manage their budgets. They can work with individuals as well as whānau. Mentors can also put people in touch with social services and other networks if they need help. It’s free to work with a financial mentor. You can find one by calling MoneyTalks 0800 345 123.

Financial advisors have to be licensed and registered with the FMA. To be licensed, they need to show they meet a certain standard of competence and that they treat customers fairly. A financial advisor can help you clarify your goals and design a financial plan with you which may include insurance, mortgages and investments. Any costs accessing the service should be clear and transparent.

You can find a licensed financial advisor by searching the Financial Service Providers Register on the Companies Office website. You can also look at the Financial Advice New Zealand website or the Insurance Brokers Association website, both of which list their members.

Is financial advice just for people with lots of money?

I asked Nick Hakes, the Chief Executive Officer of Financial Advice New Zealand whether financial advice is just for people who have money.

“Not at all, financial advice is for everyone. We all have these life defining moments – our first real job, first house or an overseas holiday, getting married and having kids, we retire, we look after our elderly parents – these are all triggers for seeking quality financial advice,” Nick said.

Financial Advice New Zealand is the country’s largest professional membership organisation for advisors across the spectrum of financial advice – from mortgages through to insurance and financial planning – so you would expect its CEO to promote the services of its members. Yet, Nick’s opinion is shared by financial educators, too.

Tom Hartmann is the personal finance lead at Sorted (sorted.org.nz), which is run by the Retirement Commission. He said he would love to see people seeking advice before making “big financial choices in life, especially borrowing.”

Decisions like whether to funnel your money into your mortgage or your retirement are questions that a financial advisor can help with, he said. “The great thing about a financial advisor is that they can run the numbers and show you.”

While the figures will be a projection, and things like interest rates and investments may perform differently over time, advisors “can make some informed projections, so if that’s the case, what’s the best decision to make now? And that’s really empowering,” Tom said.

You don’t need a lot of money to prepare for the future

The Whai Rawa investment scheme is proof that you don't need a lot of money to be smart about how you use, save and grow it: members can contribute as little as 97 cents a week.

“The significance of that number is that over a year it will equal the $50 which is the amount needed to get the $200 for tamariki,” Sam explained.

Like with a KiwiSaver scheme, at Whai Rawa, if members meet the savings target, the scheme will top up their accounts to a maximum of $200. For tamariki, the scheme gives $4 for every $1 saved, up to a maximum of $200.

“We have some grandparents who contribute to all their grandkids accounts – they may have 10 or 15 mokopuna – so we do see a lot of people putting in very small amounts, which is fantastic because we know this will have a positive impact for them over time,” said Sam.

The idea that people can contribute modest sums to an investment scheme flies in the face of the perception that you need a lot of money to start investing, or to see a financial adviser.

Ensuring clients get advice rather than products

Because financial advisors recommend products like insurance and mortgages, there could be a perceived conflict of interest between the best needs of the client and how the financial advisor is paid.

To address this, the FMA has brought in a licensing and monitoring programme to ensure financial advisors are working in the best interests of their clients and must disclose how they are being are paid, including any commissions they receive. A code of practice has also been put in place to spell out the conduct and customer-care expectations that financial advisors should abide by.

A recent monitoring report by the FMA checked whether financial advisors were playing by the rules. It found that while most were, there was also room for improvement.

In some cases, the FMA found advisers didn’t take reasonable steps to make sure clients understood the financial advice they received, which may have resulted in financial harm. In other cases, advisors didn’t understand their clients’ appetite for risk when it came to investment options.

The FMA also found instances where advisors didn’t disclose commissions or other incentives they received for selling products (like insurance) well enough. This is problematic because an advisor should ensure a particular product is best for their client’s needs, rather than one that earns them more commission.

Also of a concern were cases where advisors didn’t sufficiently analyse or research their client needs or the products they were offering them. This meant clients could be missing out on benefits from a particular product or paying for more cover than they really need.

In other cases, clients were encouraged to switch policies or investments, but ended up worse off because of exclusions or fees.

The way complaints are handled was also an area identified as needing improvement.

In response to the FMA’s report, Financial Advice New Zealand said in a statement, “The FMA monitoring report supports our view that there are many advice businesses successfully operating under the new regulations and operating as the Code of Professional Conduct intended, which ultimately delivers better outcomes.”

“Members of Financial Advice New Zealand have professional obligations beyond the minimum standards, and as an industry there is more work to be done, of the over 4,000 complaint enquiries received by the Insurance and Financial Services Ombudsman last year, only 2.2% related to financial product advice”.

It also noted that “ongoing professional development is a driver of quality financial advice.”

Questions to ask before engaging a financial adviser

Tom, from Sorted, said it’s not rude to ask financial advisors how they’re getting paid. If you’re not paying upfront for the service, the advisor will be getting paid in another way. So you need to find out what that is.

It’s also best to shop around to see what different opinions financial advisors offer regarding your future plans.

If you are recommended a product by an advisor (whether its insurance or a mortgage), they should disclose what commission they are receiving for recommending it, along with any fees and charges.

I asked Sam from Whai Rawa whether the 97 cents people were saving each week would be chewed up in fees.

“No, no, we don’t charge any fees on contributions, aside from underlying investment management fees.”

One difference that struck me between my perception of financial institutions and the service offered by Ngāi Tahu Whai Rawa was its engagement with the community.

“We do try and get out and reach whānau,” Sam said. “We are involved in wānanga and roadshows, across the Ngāi Tahu takiwā and beyond … we stand there and connect with people face-to-face.”

“Potentially events like these are something financial advice services should be looking into. It’s a great way to build up trust and have a real understanding of the concerns people have.”

A good financial advisor will ask you:

• what your needs and goals are for the future
• what’s your tolerance for risk and when you’d want draw on investments
• whether you’re employed, and about your personal situation, such as your age, family and relationships
• whether you have any assets, like a home, savings or KiwiSaver, as well as what debt you have
• what your income and outgoings are
• whether you have a will, a lawyer or an accountant.

Good advice is when the advisor

• talks you through what they recommend and explains why it would be good for you
• tells you how they’re getting paid for the advice they’re giving
• gives you confidence you’re on track to reach your financial goals
• explains how to complain if you don’t feel you’re getting the right advice.

You can check you’re dealing with a legitimate financial services provider on the Financial Service Providers Register.