Regulating financial planners can be good for the investor

Friday 17th August 2001

Timely debate has opened about whether financial planners and investment advisers should be regulated. Leading Australian planner and advocate of regulation Kathy Paget was over here in July to address the subject at the Financial Planners and Insurance Advisers Association (FPIA) conferences in Christchurch.

In Australia, planners and advisers must have professional qualifications and are subject to strict rules. This is in sharp contrast to New Zealand, where there are few laws governing the profession explicitly (see NBR Personal Investor, Aug 3).

Local advisers do have to provide a minimum of information in a disclosure document but that mainly covers fees and charges and whether the person concerned has a criminal history or has been a bankrupt. There is a low threshold to entry into the profession.

Planners and advisers can earn startling amounts of money, which makes the industry a magnet for those who want the good life. An adviser or insurance broker who has a big client base can earn $150-300,000 a year. That is the sort of remuneration senior corporate management or heads of government departments would earn and they would have to be qualified at a level way above what the typical adviser would reach.

In many cases brokers and advisers get money for jam. This arises with trail commissions and renewal fees. Every year, regular as clockwork, the funds are paid out whether or not any service is actually provided. One example mentioned to me recently was of an insurance agent who gets $100,000 a year in trails alone and that is before he even gets out of bed to do any work.

In an interview with financialalert Ms Paget argues these people should be subject to regulation and mandatory educational qualifications: "We are dealing in most cases with people's life savings - particularly the retiree market. So it's important to protect these people and the way we do that is to ensure that the person who's talking to them and giving them advice is able to do that."

Also of value, according to Ms Paget, is the way in which regulations become embodied in business practice: "If you can take your compliance requirements and look at them in a positive way - that it's protecting your business and protecting the client - then the clients are going to be comfortable to refer other people to you and they're confident that you are the best financial planner doing the best possible job for them. So instead of being negative about compliance we just have to make sure we're getting the best out of these compliance requirements and generating referrals from it."

Not every one agrees with Ms Paget. Financialalert identified Gareth Morgan and Ruth Richardson as speaking against regulation at the FPIA conference. Opponents point to risks of mediocrity and loss of competition. However, it is difficult to see the validity in such an argument when you consider other regulated professions.

Doctors, dentists, nurses, lawyers, valuers, real estate agents and even teachers belong to professional associations, have mandatory qualification levels to practise and are subject to discipline by their peers. In most cases these professions are highly competitive.

There is some criticism about how these organisations tend to look after their own and represent vested interests but the public is probably satisfied that knaves and rogues eventually get pulled up by their professions.

The laissez-faire approach to investment advising might be defended from the ideological ground that any regulation is bad in principle, and that extension of government power should always be opposed, but it does not seem unreasonable to create a professional organisation with statutory powers that self-regulates the investment industry.

Not only would such an industry be safer for investors to deal with but also its profile would be raised as a true profession. Just as bright students now compete to get into law or medical schools, so too would they strive for admission into investment faculties. With the greying of the population, there is going to be plenty of demand for qualified advisers. Investment advice is a growth industry.

Advisers themselves are likely to be divided on the issue of regulation and what form it should take. Some simply would not make the cut, which would be sad for them, but probably good for the industry. It is ironic the government is so concerned about lifting savings - witness the Cullen scheme for part-funding the government's pension payments and discussion over tax treatment for superannuation funds - yet something so obvious as raising the bar for advisers does not seem to rate much priority.

As New Zealand integrates further with Australia it will be necessary to examine all aspects of business legislation in search of harmonisation. It would be worth examining the Australian system of regulating financial advisers to see whether the regime does represent best international practice and in what way the rules might be changed over here. The pattern established with self-regulating professions offers a possible model for what could be done in the investment industry.

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