Incoming regulation means changes for Financial Advisers

By Milton Jennings, CEO - Fidelity Life Assurance.

People used to run a mile when I told them I sold insurance.

That was 23 years ago when I was starting out in my career, and I’m pleased to say the stigma attached to the industry has changed dramatically since. Today, New Zealanders are much more comfortable with insurance and investment products and more confident in the advice they receive from their financial advisors.

While the strong Kiwi DIY mentality used to see us favour making our own financial decisions, greater complexity and choice in financial products means that more than half of us now seek out expert advice.

That’s also because the industry has done a good job of educating us and helping us to appreciate the need for savings and insurance to protect our families, assets and our lifestyle.

As a result, the role of the financial advisor has become more attractive as a career. Industry membership of associations of financial advisers now number around 3,000.

There is major change on the horizon for all financial advisors, with new legislation looming that will further professionalise the industry and see those working in it face much closer scrutiny in the provision of advice.

The Financial Advisors Act 2008, expected to be in place late next year, will introduce new standards for advisor training, minimum qualifications and requirements for greater disclosure of information.

The Act will establish a compulsory public register of financial service advisers and introduce a code of professional conduct to govern their practices.

It will also require that advisors belong to a disputes tribunal, with an ombudsman to investigate claims of advisor negligence.

For New Zealanders generally, this is a good thing, helping to instill greater confidence in the professionalism and integrity of the people giving us advice around our valuable investment decisions and insurance needs.

We will be able to expect more information from advisors up front, particularly around what they are being paid to recommend particular products.

This will see advisors held more responsible for the advice they give and means that, as customers, we no longer carry the risk of not knowing what we don’t ask.

The looming changes are, generally, well supported by the insurance and funds management industry and no professionally-minded advisors are objecting to new rules intended to promote higher standards of competency within the industry and improve the quality of advice overall. 

But they won’t come without a major shakeup. Heightened risk and greater cost to financial advisors could well drive many of the small, independent operators out of the market, many of whom semi-retired or working from home. Compliance costs could be between $2,000 to $3000 a year to cover the direct cost of belonging to the ombudsman scheme, training, accreditation and fees to register with the Securities Commission. Professional Indemnity insurance costs will rise.

Australia’s finance industry experienced significant attrition when it went through its serious reform in 2002, with roughly half the advisor force disappearing from the industry within a year.

Although we’re expecting New Zealand’s incoming compliance regime to take a more sensible approach, it’s still likely that about 10 per cent of advisors will exit the industry, with some consolidation as numbers of sole traders merge with larger companies.

This information is general in nature and should not be used as a substitute for financial advice. Always consult your financial adviser before making any financial decisions.