The Importance of Independence


If you’re interested in understanding why people behave in the manner they do, have a read of Freakonomics. An economist and a journalist team up to provide some pretty compelling evidence to show you that not all is what it seems. An obvious example is whether your real estate agent really is motivated to get you the best possible price on your house. Or in reality, scratching out an extra $10,000 for you is really only worth a few hundred dollars to them, if that – so you really should accept this tabled offer, right?

As a financial adviser, the world is riddled with conflicts of interest. As an investor, it is critical that you understand these conflicts, but more importantly, you need to determine what they are for yourself.

The article below discusses the conflicts around the advice and products that the banks offer to their clients. Rather than give you my opinion, have a read for yourself.


Aussie banks with NZ presence warned over conflict of interest

The financial advice arms of ANZ, National Australia Bank (which owns BNZ), Westpac and the Commonwealth Bank (which owns ASB) have been reviewed by the Australian Securities and Investment Commission.

Banks are being told they’ll need to make clear to their customers any limits on their financial advice, as their parents across the Tasman come under fire.

The financial advice arms of ANZ, National Australia Bank (which owns BNZ), Westpac and the Commonwealth Bank (which owns ASB) have been reviewed by the Australian Securities and Investment Commission.

It noted an “inherent” conflict of interest arising from banks providing personal financial products to retail clients while also selling those products – a situation that happens in New Zealand, too.

ASIC looked at when clients were told to switch to a bank-offered product, whether the advice was in clients’ best interests.

READ MORE: Australian banks cut sales targets, NZ expected to follow

In 75 per cent of the files it reviewed, the advisers did not comply with the duty to act in clients’ best interests.

In New Zealand, the duty to give priority to client interests is being introduced for all financial advisers through the Financial Services Legislation Amendment Bill, which passed its first reading before Christmas.

That legislation repeals the Financial Advisers Act, and moves the rules into the Financial Markets Conduct Act.

The bill also bans incentives being offered to nominated representatives that might encourage them to recommend financial products to clients when that is not in the client’s interests.

A Ministry of Business, Innovation and Employment spokeswoman said that was an important safeguard against potential misconduct, including in vertically integrated organisations, such as banks.

Independent financial adviser Murray Weatherston said the new rules would not be enough to stop the Australian situation being replicated here.

New Zealand banks operated with the same mandates as their Australian parents. “Would we expect their New Zealand subsidiaries to be anything different?”

Customers could not expect to get unbiased advice from a bank, he said.

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was often possible for New Zealand to learn from Australia’s mistakes.

The new advice regime could benefit from Australia’s experience, to improve investor outcomes, he said.

What was important was that the bank made clear what it was selling and customers understood what they were getting, he said.

Disclosure should be clear and easy to understand. “From a consumer perspective that’s probably the most important thing, that they know well and truly whatever they’re going to get will meet their needs.”

Banking commentator Claire Matthews, of Massey University, said there was no clear evidence that poor advice was being given by bank staff in New Zealand.

“Advisers are only too willing to believe it because they tend to have a negative view of bank advisers anyway.

“Putting clients into the banks’ products is not necessarily not in the clients’ best interests, and it requires careful analysis.

“In addition, it’s important to consider what ‘best interests’ means – many investors like to have their KiwiSaver with the bank so they can keep watch online with the rest of their bank accounts – so it’s a trade-off between different needs.”

It’s something the Financial Markets Authority is watching. Conflicted conduct has been identified as a key risk and one of the regulator’s strategic priorities.

In its recent annual corporate plan, it said that in 2017 only one of 33 financial service providers it reviewed had measures set out in its licence application to manage the risk of conflicted conduct adequately.

“The work is focused on vertically integrated firms and conflicted business models. It looks at incentives and sales process, as well as conflict management policies and procedures.”

The FMA’s head of regulation, Liam Mason, said New Zealand banks did not have the same financial advice structures as those in Australia.

Here, the regulator was more concerned at the number of New Zealanders getting no advice at all.

New Zealand Bankers’ Association chief executive Karen Scott-Howman said banks worked hard to put their client interests first, “including when providing financial advice, so customers can make well-informed decisions”.

“Well-informed customers are better placed to make borrowing and investment decisions. It’s also about increasing financial capability. Simply put, well-informed customers make great customers,” she said.

Banks took their legal obligations seriously, she said, and had processes in place to ensure they met them.

“For example, under the Financial Advisers Act, bank financial advisers must exercise reasonable care, diligence and skill.

“That means they have to assess how the product meets the customer’s needs. It also means they need to explain how the product or service works, and any limitations the customer should be aware of.”

“The current review of the Financial Advisers Act will build on these obligations to include more explicit customer-first obligations for financial advisers.

“This means advisers putting customer interests ahead of their own, regardless of their financial incentives and sales targets.

“We support this approach and are working closely with officials to help ensure a practical way of achieving this aim.”

What financial advisers must provide:

The Financial Services Legislation Amendment Bill creates a level playing field for all financial advisers.

– Whether they work in a bank or as an independent, financial advisers will have to give priority to client interests.

– New disclosure laws will require them to declare things such as their remuneration structure and any potential conflicts.

– Providers won’t be able to pay their staff in a way that might encourage them to act in a way that’s not in clients’ interests.

 – Sunday Star Times