Tuesday, April 27, 2010

Hard Sells, Harder Lessons

Jim Parker, Vice President, DFA Australia Limited

Sometimes you need to see the worst practices of the financial services industry to understand why it is worth paying for good advice. Take, for instance, what's been happening in New Zealand.

Huljich Wealth Management is an accredited distributor of KiwiSaver, a voluntary work-based savings initiative set up by the New Zealand government to encourage Kiwis to grow wealth for their retirement.

The Securities Commission launched an investigation into Huljich after the company's founder, principal shareholder and managing director Peter Huljich admitted he propped up the fund with his own money in 2008.

Huljich later admitted his wrongdoing and resigned as managing director and chief investment officer. While the firm insists no member lost money as a result of his actions, the controversy has hurt the company's reputation.

At the same time, the Securities Commission has expressed concern over aggressive marketing techniques by distributors of KiwiSaver, including high pressure door-to-door selling and inducements to sign up right away. Huljich is alleged to have been one such aggressive marketer.

"The commission has become aware of a number of circumstances where KiwiSaver membership has been solicited in an unusual or confusing manner. This type of behaviour is completely unacceptable and damaging to investor confidence," commission chairwoman Jane Diplock said.1

According to one newspaper, Huljich sold the superannuation scheme to two intellectually disabled students who had little idea what they were signing. One was under the legal age and the other had a reading age of 8.

In some cases, investors did not know they were committing to KiwiSaver. Some thought they were purchasing household products. In other cases, inducements were offered for long-term membership. Some people were even offered the chance to win a $100 shopping voucher if they signed up.

The controversy over KiwiSaver is not what the New Zealand financial services industry needs, as it struggles to restore its collective reputation after a series of scandals in recent years involving finance companies.
A total of $1.5 billion of investors' hard-earned savings were lost in those collapses in 2007-08, a blight on the New Zealand securities industry that the commission's chairwoman blames on a patchwork regulatory framework.2

A common theme in the scandals is a lack of understanding among the general public about the difference between an independent financial planner and a sales person for a product distributor. The latter receives incentives to sell product, while the former is paid by their clients to build a customised financial plan — including a diversified investment portfolio - designed around their individual needs, aspirations and risk appetites.

The government is now attempting to address this by putting up for discussion a draft code of conduct for authorised financial advisors, which sets minimum standards of competence, knowledge and skills, ethical behaviour and client care which advisors would have to meet.

At the core of the code of conduct is a requirement that when providing advisory services, authorised advisors must place the interests of their clients first and must act with integrity.

Advisors would not be able to characterise their advice as "independent" when they are being paid by a person other than the client or are under a contractual obligation to recommend a particular product.

Dimensional has long argued that financial advice is best left to independent and professional advisors who are directly familiar with their clients' financial experience, risk tolerances and individual goals.

The relationship between Dimensional and advisors is not tainted by commissions or other incentives. Rather, it is founded on shared ideas about how markets work, a joint commitment to education and a common goal in ensuring clients have a good investment experience.

The investment philosophy is also a sound one. No market timing or forecasting or speculation is involved. It is not about fickle fashion or ego-driven claims by individuals about being able to "beat" the market.

Instead, it is about working with the market to build diversified portfolios around risks that rigorous research shows are related to return. It is about keeping costs as low as possible and about being mindful of taxes. And it is about staying disciplined.

There are no hard sells in this view of the world - just an unchanging commitment to the welfare of the individual investor.

1'NZ Commission Warns KiwiSaver Funds', NZPA, March 24, 2010
2'The System is Broken: We Need to Fix It', Jane Diplock, NZ Herald, March 26, 2010