Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 9 July 2011
Q&As: Reader wants to pay financial adviser according to performance, but advisers not so keen
- Adviser's reason for putting clients into finance companies is not good enough
- RFAs - registered financial advisers - must also operate under stricter rules
- Grandma might want to put conditions on financial help for student grandchildren
Question: I looked at the page on your website, www.maryholm.com, on "Info on Advisers". It's a great start that a few firms seem to value transparency of fees. Let's hope that the new adviser rules in New Zealand encourage that further.
I have looked at a few of the firms you list, and it seems that they all take one of two fee structures: either a flat fee, or a percentage of funds under management fee approach.
Ideally, I would prefer to pay an adviser on performance (i.e. net returns to me). It would probably be linked to an appropriate benchmark - or several benchmarks - with a low "subsistence" fee below the benchmark, and significant accelerators as the performance beats the benchmark by higher amounts.
I would even argue that giving a performance fee of up to 20 per cent or 25 per cent of net returns if the performance was high enough would be appropriate.
This is how we remunerate top sales people in the company I work for, and the overall team six-monthly bonus is very similar - highly leveraged accelerators for above target performance. It works very well. It's amazing how targets that are often initially perceived as impossible are almost always exceeded.
I've worked with various financial advisers in several parts of the world, and have never found one who works this way.
I'd be interested in your comments on this as a fee scheme, and what potential challenges you would see with it.
Also, have you ever come across any reputable advisers who work with a fee structure like this? It would seem to me to create the best alignment between the goals of the client and the adviser.
Your comments would be greatly appreciated.
Answer: No, I don't know of any financial advisers willing to work that way. Anyone else?
I can see why the idea appeals to you. But I can also see why it wouldn't appeal to many advisers. Put yourself in their shoes. Their income would be extremely uneven as the markets fluctuated. Most people would find that difficult.
Also, while an adviser has control over which investments she or he selects for you, they have no control over how well those investments perform. The sales people at your work can get out and work harder, but an adviser can't go out and push up share or bond prices.
Would it be fair to pay a doctor only if you got well - given all the factors that are out of the doctor's control? This would be similar.
Then again, a well off adviser - who could afford to get through the lean years - might take you on, especially if you dangled "25 per cent of returns" in front of them. There's a price for anything.
Given that riskier investments tend to have higher average returns, the adviser would probably go for the riskiest options. So you would probably face a really up and down ride. But you sound like the type to cope with that.
If there are any advisers out there who would like to try this on, let's hear from you.
Question: I, like a number of my clients read your articles reasonably often in the paper and elsewhere.
I guess I am a bit concerned about your attitude towards advisers, and you seem to have little regard for many of them - or should I say us.
I actually think I do a pretty good job of providing financial advice. I try to walk the fine line between balancing theory and practical advice, and also between being compliant and yet still have a business that runs profitably.
Do you speak to many advisers directly to get an understanding of the advice they offer? Or is it more from complaints and comments made to you from clients. Or is it with communication with organisations like IFA?
I ask this because if you don't meet with advisers to get their side of the story, I would be happy to have a coffee with you and discuss.
I am certainly not looking for publicity of any shape or form, and do not want to be seen putting my head up like a poppy! But it seems we get given a hard time for many problems of the past, and I don't think that much of it is fair.
As one example: You state (along with many others) that advisers flocked to the finance companies who paid the highest commissions. I did not even know that companies provided different commission rates. I suspect many other advisers would be the same.
The other point is that many clients who went to finance companies, in 2003 to 2005/7, had come out of the tech Bubble, Worldcom, Enron, Iraq war era, whereby they didn't want to remain in "balanced funds" that declined over that period.
I can give a number of examples of my clients who simply said "get me out of these funds", and put me into something with fixed return and fixed term. So, as advisers, we played a part, but were only a part of it.
Anyway, I'd be interested in your comment.
Of course I agree that some advisers have done clients disservice, but it's also not a "One thing fits all" situation.
Answer: I apologise if I've offended advisers who are competent and who genuinely put clients' interests ahead of their own. I have no idea how many are like that, but I'm hoping it's now the clear majority.
I'm afraid, though, that your example of putting clients into finance companies because they were wary of balanced funds doesn't really inspire confidence.
I just did a search on "adviser" to see what I've written in this column over the years, and I stumbled on this, published July 8 2006 - five years ago almost to the day:
"I suggest you get out of all your finance company investments as they mature.
"I'm not saying that all such investments are bad. But several experts have been saying that many of them don't pay enough interest to compensate for the risk investors take. And it's hard even for advisers to tell which companies are financially strong.
"Better still, take control of your money yourself and put it in bank term deposits. While the interest rates will be lower than from finance companies, you won't be paying commissions to anyone, and you know your money will be safe.
"If you want to go a little further up the risk/return scale, go into investment grade corporate bonds."
This is not about showing how clever I was. I was just passing on what I'd read and heard. All I'm saying is that advisers should also have read and heard the warnings. That's one of the main things clients pay them for.
Okay, on to your point about whether I talk to advisers. If my only contact was reading readers' complaints about them, I would indeed get a biased view. But there's been much more than that.
The first contact of much significance came soon after I joined the Listener as a staff writer, in 1989. Without saying I was a journalist, I went to several advisers and asked for help with my real financial situation. Sort of a mystery shopper exercise. Let's just say that the results were worrying.
But that's way too long ago. Jump ahead to the middle of last decade, when I was a judge of some financial adviser awards for three years in a row. That gave me insight into how the supposedly best of New Zealand's advisers operated. Some were impressive; some were not.
Then, in late 2009, I first set up the list of fees-only advisers on www.maryholm.com. Lots of advisers emailed then, with a wide range of views on the subject.
I also meet advisers at the many seminars and conferences I attend. For example, this past May I presented a paper at the Professional Advisers Association conference in Auckland, and mingled with advisers during the morning break. And I get a fairly steady flow of emails from advisers commenting on material in my columns.
So no, I don't think I suffer from under-exposure to advisers. But thanks anyway for the coffee invitation.
A final word about feeling picked on. As a journalist, I know only too well the feeling that many people don't think much of us all, and that's not fair. We, too, are a mixed bunch.
Question: In your last column you made some pertinent comparisons of the different types of adviser created by the new legislation. As noted by you, the licensing standards for AFAs (authorised financial advisers) are generally much higher than the registration requirements for RFAs (registered financial advisers). However, I would like to clarify some things:
• There is a form of criminal check conducted on all financial service providers under the new legislation. This covers AFAs and RFAs.
• RFAs have the same obligation as AFAs to register with an independent dispute resolution scheme to resolve client complaints.
• You referred to an AFA's duty to act in the best interests of their client. However, the same duty is also owed by RFAs in similar circumstances. In addition, both advisers have the same duty to exercise reasonable care in carrying out their services.
As you noted, AFAs also have extra obligations under the legislation, including an obligation to put the interests of their clients first.
On a final note, I wanted to compliment you on your stance concerning agents receiving commission payments from third parties. Your illustration was most apt!
I hope you find the above comments helpful. Keep up the good work.
Answer: Thanks for this. I didn't say much about RFAs last week as I was recommending the reader use an AFA. But it's good to record that they, too, are now operating under new stricter rules.
The Financial Markets Authority has verified everything you've said - just checking! An FMA spokesperson adds, "In addition all financial advisers have an obligation not to engage in misleading or deceptive conduct."
In short, all the advisers, whether AFAs or RFAs, must toe the line from now on.
Question: Please could you pass on to the kindly grandmother who is going to pay some university fees that it would be a great idea to pay them at the end of the grandchild's first university year, after they pass!
Answer: Fair point. After all, a student can borrow, interest-free, to get through the year.
* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.