Bloomsbury newsletter, 31 December 2018
Susan B Anthony, who led the fight for women's suffrage in the United States, once said, "Independence is happiness".
She was talking about the ability to choose - to choose your representatives in government, to set your own course as a free person.
The same is true today. The ability to choose without unnecessary constraint often leads to better and happier outcomes. Unfortunately, in the financial advisory industry, the ability to freely choose is often impeded.
As you may know, Australia's banking, mortgage and insurance industry recently underwent a royal commission inquiry. Here in New Zealand we've followed this inquiry with great interest.
There have been a number of findings related to investment advice.
Vertical integration is the combination, in one firm, of two or more stages of production; stages which are typically operated by separate firms. For example, if an adviser recommends a product owned by their employer, or recommends buying or selling a product where their employer gets paid to process the trade, they are vertically integrated.1
The commission has found this behaviour to be rife in Australia, predominantly in major banks and institutions, and they've suggested it's led to conflicted advice.
For example, the Australian Securities and Investments Commission (ASIC) looked at ten vertically integrated advice offerings. They found that, while only 21% of the products on their respective approved products lists were manufactured in-house, these 21% of products received a whopping 75% of the money from new investors.
You wouldn't imagine this happens by chance. It's more likely it happens because there is either pressure or inducement to put new money into investments manufactured in-house.
Some organisations agree to purchase adviser businesses when the adviser retires. The clients are generally assigned to advisers within the new organisation, but some clients are 'orphaned'. There were instances where an organisation had charged a client an advice fee where no service was being provided,2 or even after they'd died! 3 To cap it off some organisations lied to regulators about the practice, because it was profitable.4
The commission has found other issues related to insurance and mortgage lending as well.
We're proud to tell you that we are not conflicted by material financial inducements from any other firm, but what does that mean exactly?
It means that we are free to recommend and use practically any investment available to investors in New Zealand. It means that we do not receive revenue from any investment we recommend within our investment portfolios, and therefore, we only recommend those investments our research shows to be in our clients' best interests.
It is for this reason the investments we recommend are very low cost, in comparison to averages in New Zealand. The chart below shows the average cost of an allocation fund in New Zealand (data accessed from research firm Morningstar), compared to a 50% growth/50% income portfolio we recommend.
Perhaps now, more than ever, it's clear why transparency and self-direction is so important.
When working with new clients, our client-focused and professional approach can sometimes be seen as a disadvantage. This is because we don't have the high profile brand name of a large bank or institution. Who are we compared to them?
However, if we wanted to continue working for an institution such as a bank or a broker, we could. We don't, though, because we want to be in a position where we can advocate for our clients' best interests without any outside pressure. We want to be in a smaller practice where we personally know our clients and, frankly, we know when one of them has passed away - there is no such thing as an orphaned client here!
Being large isn't necessary an advantage in the advice business, because the advice business is, and will always be, a relationship business.
There are rumours 5 that banks in New Zealand may get out of the wealth management business altogether. Obviously, it's been a rough year for many over in Australia. However, we want you to know that we are committed to this business, and committed to you for the long term. We are actively growing our business and have a strong, relationship driven model which will thrive in the years to come.
We believe that greater freedom helps us provide perhaps the most important thing we can for our clients - their own financial independence.
So, we welcome the scrutiny the industry has been under and sincerely hope it leads to the customers of those institutions being treated like clients, receiving better and more personal advice.