It is imperative we have a finance industry that Kiwis can trust, so yes I believe an enquiry into the Financial Services sector in New Zealand is necessary and overdue.
If you follow the financial news out of Australia you will be aware of the Royal Commission into the Banking, Superannuation and Financial Services Industry. Despite opposition to its appointment, the Australian Commission forged ahead and heard evidence of appalling behaviour by major banks and financial planning companies over the past decade. These institutions have emerged with severely dented reputations due to evidence of systemic customer abuse and wilful disregard for the best interests of their clients. The evidence has been so damning that there is speculation that the Commission may well recommend that criminal proceedings be instituted against those involved in these activities. The fallout has also seen the resignation of senior executives of organisations implicated in these practices.
In my view, the time has come for a similar enquiry into the Financial Services sector in New Zealand, because many of the companies found wanting in Australia are the owners of subsidiaries based in New Zealand, including four of our major banks and some key insurance companies.
If there is nothing to hide, shouldn’t the industry welcome an enquiry to prove they are as good as they claim to be?. An inquiry would go a long way to achieving this aim – it will either confirm there is nothing to see or alternatively (which I believe would be the case) if the industry is found wanting, then inappropriate behaviour can be corrected now so that all Kiwis can get a fairer deal in the future.
With their large marketing and promotional budgets, many clients of these corporates are seduced into believing that bigger is better and that these entities are a safe pair of hands to entrust one’s precious savings and investments. The Commission however has shown that nothing could be further from the truth with behaviour being driven by short term sales targets and incentives dressed up as “advice.”
A while back these organisations discovered that it was highly profitable to sell their own financial products to customers. If they could charge customers for financial advice, and if that “advice” consisted of purchasing their financial products, then this would translate into more profit centres and higher profits. This business model which has been widely adopted by these institutions is known as “vertical integration.”
So, what can you do to ensure that you are not subject to a conflict of interest when you receive advice? Here are a few simple pointers:
• Is the company you are dealing with aligned to any provider/supplier?
• Is the company owned in full or in part by any provider/supplier?
• Are there sales targets in place that need to be met or result in bonuses/incentives?
• Through the advice process, have several options been considered, or only a single provider option?
• Does the recommended portfolio have a disproportionately high exposure to one fund manager. If so, is there a rational explanation?
What is “vertical integration“? In simple terms, this practice almost guarantees that if you consult with a bank employee or an agent tied to an insurance company, the “advice” that you will receive will be to purchase products manufactured by that organisation or an entity owned by such company. The consequence of this is that the parent organisation will be receiving a fee for the “advice” and the security in which you invest will also have management fees attached to it which will also accrue, either directly or indirectly, to the same organisation. If this is not bad enough, such fund management fees are in many instances hugely inflated and bear no relationship to market rates.
These sales practices masquerading as “advice” can never be in the best interests of the client. This is compounded by the fact that this conflict of interest is not appropriately disclosed to the client. This lack of transparency is further clouded by the fact that in many instances the funds management business trades under a different name to the parent organisation.
This practice is widely adopted in New Zealand and a common example is where bank staff entice clients to switch their Kiwisaver accounts to the bank Kiwisaver product – often with little or no analysis done. Similarly, when a bank or a vertically integrated corporate organisation constructs an investment portfolio, such portfolio will more often than not consist of investment funds of the parent or subsidiary company.
Despite calls for a similar enquiry in New Zealand, it has been hugely disappointing that politicians, regulators and the industry have been vocal in saying that a similar inquiry to that in Australia is not needed. The principle reasons for this line of thinking is that our regulations are different, there are not enough examples of wrongdoing and that the management and governance of NZ subsidiaries over here is separate and somehow immune from the influence of their Aussie parents.
The irony is that prior to the Australian Royal Commission, Australian politicians (including the Prime Minister), regulators, insurers and bankers were vocal about there being no need for any such enquiry. Subsequent revelations have been a huge embarrassment for many, with most of the naysayers, including the Prime Minister, saying that they were wrong.
I am totally comfortable that the investment strategy that we follow at Maxim Wealth embodies a practice that does put your interests above those of any shareholder. We have consciously opted to not be tied to any larger parent organisation and our remuneration remains the same regardless of how and where we invest your funds. We believe that this ensures that our interests are aligned – we work for our clients, not any other institution or share-holder.
Remaining non-aligned can sometimes be a challenge as we do not have the financial resources of the big institutions, and the compliance costs can be disproportionately high. Despite these challenges we believe the non-aligned model delivers the best outcome for clients.
Maxim Wealth supports an enquiry into the Financial Services sector in New Zealand.