Financial Markets Authority get it right

 by Tony Vidler.

The Financial Markets Authority (FMA) just gave every NZ adviser a happier Christmas with an excellent piece of guidance to the entire financial services industry.  Give them a bow, and throw a bouquet - they just got a big deal very right.

The industry has been seeking guidance on a number of issues since the advent of new regulations, which came into effect July 2011.  The main piece of legislation governing advice is the Financial Advisers Act, supported by the Code of Professional Conduct ("The Code").  Both are largely "principles" based, as opposed to being overly prescriptive and full of "thou shalts" and "shalt nots".  A laudable and eminently pragmatic approach to creating lasting legislation generally - though it tends to get a bit awkward to apply in its early stages.  The key problem is the very people it applies to are initially left to try and interpret how a principle works and what the regulators or judiciary might think it means somewhere in the future.

In time, a principles based regime tends to be more robust and better able to cope with an evolving society.  On one of the more problematic areas for all market participants is understanding how a theoretical principle applies in the real world however.  Principles don't always translate easily into the day to day actions of human beings, continually changing their minds or wanting things done, like, yesterday.  But theory is grand.  In the theoretical world bumble bees cannot fly.  But they do.  So much for theory.

So today the FMA issued a Guidance Note on the difficult issue of "analysis before recommendation".  First big thumbs up is for issuing a well laid out and very clear guidance note.  The second - and way more important big thumbs up - is for the approach taken in interpreting the law and the Code.

It is practical.  It recognises how the industry actually works in interacting with clients.  It recognises that it is about agreeing to what the client wants.  It places responsibility fairly where it should be when external professionals take on part of the work in research. In fact on this point, it is more reasonable than anyone expected.

It is a great piece of work.  Incidentally, as an industry we have been quick to criticize the regulators.  As an industry we should be equally quick to congratulate them on a very useful and timely piece of work that indicates they have been paying attention and understand (at least some) of the issues advisers and industry are grappling with.

Let's cut to the chase on this particular piece though.  Code standard 6 says that the AFA must "make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation...."  Collectively we have tried to determine the extent of analysis expected, and what evidence would constitute a "reasonable basis".  We have been guided by rulings in foreign jurisdictions, and drawn conclusions from those.

A school of thought had evolved - and been blatantly promoted for commercial gain in some sections - that this meant the AFA must exhaustively analyse every possible product choice in the universe that might be a viable solution for clients.  A ridiculous interpretation - it was never going to be applied that way.  That would logically lead to paralysis through analysis.  Nobody would ever conclusively finish their research and clients would have died of impoverished old age waiting for the research and analysis to determine suitability.  As silly as this line of thought was, it was gathering momentum in the absence of better information.

The more rational industry commentators focused on elements such as a product needing to be "suitable" or "fit for purpose".  This is effectively precisely where the FMA have drawn the appropriate line.  

Better yet, they have recognised that what is suitable for one client is dependent upon the scope of service agreed to with the client, and the nature of the adviser-client relationship (para 17; Guidance Note).  This is a really significant point.  It provides context around what is considered to be reasonable work by the adviser, in each individual client situation.

They go on and provide some certainty regarding the positioning of independent research, or legal documents provided by issuers.  The responsibility for the veracity of the information provided by those documents sits firmly with the issuers, precisely as it should.  They have pragmatically considered the situation for dedicated adviser forces - those in dealer groups or aligned distribution channels - and determined that it is actually reasonable for the adviser to rely upon the technical assessment done by other and more suitably qualified professionals specialising in that work.  Hooray on that point.

FMA:  you have hit a home run here in my view.  Do more of it.  Provide more Guidance Notes on how you think the law should be interpreted and applied.  Especially do more if you maintain this pragmatic and thoughtful approach to making it work to promote and develope fair markets that engender confidence by all stakeholders.

Advisers:  Read this guidance, and digest it.  It is very helpful and should provide assurance that if you do diligently do research and know your products, and use them in a manner that is fit for purpose and suitable for your clients, then you have little to fear.  You can legitimately rely upon other professionals assessments of products, and you can trust that the information put into legal documents by issuers is accurate.  This frees the adviser up to actually focus on being excellent in their field of knowledge and focus upon the client.

That will do me for a positive message at the end of a challenging year, and hopefully set the tone for 2012 and beyond.

Merry Christmas one and all.

(The link to the full FMA Guidance Note is

http://www.fma.govt.nz/media/511496/seccomdocs-_191806-v2-fma_guidance_code_standard_6_d__2_.pdf


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Alphabet Soup is Unhealthy

 by Tony Vidler.

One of the intriguing little debates happening in NZ financial services in recent times has been the use of new (different) acronyms for different types of advisers. Observing the often heated debate got me thinking: who cares?

The answer actually surprised me:  I do.  I care.  

The incessant bickering, the unnecessary market noise it creates, the head-shaking that I am sure these types of arguments provoke in the non-adviser parts of the industry, the distraction and amount of wasted energy and resource that gets pushed into little guerrilla wars...I care because all of these things limit our chances of success, and are a barrier to creating a better piece of New Zealand.

We have plenty to use in the way of acronyms now.  AFA, FSP, RFA, CFP, CLU, IFA, PAA, LBA, NZMBA, NCFS, QFE, NZQA....the list could go on and on....and a vast combination of them can be thrown at the market by the financial services sector simultaneously.  It is an alphabet soup that is decidedly unhealthy. 

It is confusing consumers (well only those that are even interested enough to try and make any sense of it all), and it is clearly confusing advisers.  Like it or not, the more we confuse consumers then the less likely they are to trust and use us.  It creates an unnecessary barrier to achieving confidence.  There are a couple of things that we can do as an industry though to try and take down some of those barriers.

The first is the domain of the regulators mostly - but as advisers we have to take some responsibility too.  That is around the use of the licensing terms. As it stands under the newly regulated NZ environment we have broadly two types of advisers (in the most general terms), one being an Authorised Financial Adviser (referred to by all and sundry as an AFA), and the other is a registered, but not authorised, financial services provider.  That second main type of adviser is a bit of a mouthful to describe isn't it?


The authorities have decreed that anyone wishing to provide advice on complex and potentially dangerous financial products such as most investments, must be an AFA in order to do so. That person is individually authorised, and unable to hide behind the protection of a limited liability trading entity - so they carry full personal responsibility they cannot contract out of for any advice they give. There is a fairly basic education and fit & proper person assessment prior to being authorised, which is a decent starting point for an industry evolving and raising its standards. To keep it in perspective though the entrance education for this is about trade certificate level. Challenging perhaps, and definitely providing technical learning, which is good. The advisers going through that process are undoubtedly more competent for having done so. At the end of it they have a licence to operate in business as a financial adviser, dealing with securities and more complex products.

Where do the non-AFA advisers fit in? Heck, what do we even call them? The industry has settled on calling them "RFA's", which is logical I guess.  After all, they are registered and they are financial advisers.  Ergo:  Registered Financial Adviser!  To date nobody seems to have really cared about that label (including me), and there has certainly been no attempt I am aware of for any party to try and correct advisers to use something else that is legally correct, like Registered Financial Services Provider perhaps.


As an aside, and just so there is no concept that I have any issue with RFA's as opposed to AFA's (I most certainly don't), I observe that I have witnessed more confusion being created in AFA land - but of a different sort.  Disclosure statements and marketing material from newly minted AFA's referring to the authorisation as an educational qualification - which it isn't. To obtain it you have to do some education, but the licensing status is not an educational qualification in itself.  Some refer to it as an "award" - which it most definitely isn't. It is a legal consent to go about your business.  I have even see one adviser refer to their licensing status in their marketing material as one of their "Industry Honours".  THAT is mighty close to being misleading, and is heading for trouble with some authorities somewhere down the track. 

Undoubtedly there are AFA's seeking to use their authorisation in marketing their expertise and standing, and rightly so. They have engaged in additional education and taken higher standard of care obligations willingly, and are able to provide advice in a wider (and arguably more difficult) range of areas.  It is absolutely appropriate that they advertise this if they feel it will provide an edge to confused consumers, or accurately describe the areas of advice they are permitted to provide.

We need to get it clear though in the consumers mind, and be consistent in our own use of the terms.  The long anticipated consumer awareness campaign around the new regulations needs to be educational - and accurately describe both main types of adviser, not just focus on one particular sort. 

The other main area that is entirely within the hands of the advice side of the industry is the proliferation of industry associations and their accompanying acronyms.  I confess that I have a few letters myself - and have used them in a cavalier fashion (guilty!) - but I'll throw them all away and stop using them if we can get everybody else to throw away their letters too.  Beyond personal qualifications, designation and licensing terms there is further confusion over "professional bodies".  I have long contended that there is a place for all of the current industry organizations in the market - though not necessarily all aiming at, or dealing with, consumers.  For instance, there are some groups and organizations where the target market (their consumer) is clearly only the financial adviser and they exist to provide benefits to the adviser business.  An absolutely commendable objective, and one which has commercial benefit it would seem, so you'd conclude there is a legitimate reason for being and a bright future on that basis.

If there was a single area though where there is absolutely no room for competition or confusion it is in the area of "professional standards".  Standards are either professional or they are not.  They are not a competitive point of difference. That is not to say that standards are static and never evolve, as they most certainly do.  However what is a professional standard in the eyes of the end-users at any given moment in the evolution of a profession should be consistent throughout the entire sector.  In this respect the responsibility sits mainly with advisers.

There are some 2,500 advisers out there in NZ - RFA's & AFA's alike - who voluntarily committed to higher standards by joining some type of industry body.  There are perhaps another 5,000 though who belong to nothing and are not perhaps working to the same standards.  It is only "perhaps", as I am sure there will be a very healthy proportion of those 5,000 who actually do operate the same way as those in the industry organizations, and who do care about being seen as professionals, and do care about their reputations and standing.  The association proliferation is a barrier to those advisers belonging to anyone though.

My hope is that 2012 is the year where a single professional body can begin to evolve for the NZ financial advisers.  Whatever it is called, however it looks, whoever runs it are all fairly unimportant to begin with.  The past differences do not matter, and nor do individual ego's.  What does matter is that we begin to gain regulatory and consumer confidence by working cooperatively to reduce confusion, committing to common professional standards, and being seen to stand for something positive.  Let's do away with as much of the alphabet soup as we can.  It is unhealthy stuff.


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How to do it in 3D (Marketing that is...)

 by Tony Vidler.

Advisers typically are focusing their attention on next years marketing refinements about now.   Rightly so, as marketing is everything. The only thing that gets in front of marketing your business is the hand to hand combat of acquiring actual paying customers.

When talking about the issues with advisers it seems they often see marketing as being one of two quite different things - and neither are entirely right. It is either something "strategic" and broad and slightly fuzzy, that is about business branding, positioning, look and feel of a business - the what it looks like and stands for aspects.   The focus inevitably turns to having a clever logo and tagline.  Of course marketing is partly about that.  Alternatively they think of marketing in a much more narrow sense - oftentimes confusing advertising and sales tactics as BEING the entire marketing plan. A point that is often lost in the adviser thinking is that marketing and selling are quite different things, with quite different purpose and with quite different skillets required. 

So a quick recap:  at it's most simple level, Marketing is about creating the opportunity to sell. Sales is about converting the prospect (opportunity) into a customer.  Marketing is about how the battle is to be fought and deploying the right resources, in the right place, at the right time and in the right way to achieve the objectives.  Sales is hand to hand combat, and is where all the smoke and explosions and noise are.  To consider the entire marketing strategy then one has to step back from the cut & thrust of daily business.  

When it comes to marketing strategy for professional services firms it is usually considered in a single dimension. An enormous amount of time and effort is spent trying to differentiate the business and make it mean something in a prospective customers mind - but only in the context of making it look different to every other business promising the same thing.   Financial advisers make a lot of effort to try and look different to other financial advisers - whilst offering the same core value proposition, delivered the same way, to the same target market as their competitors.  The result is they are trying very hard to look different while trying to look exactly the same. (check out the postscript for an example of this!)

What if you thought about marketing professional services three-dimensionally though?

In the 3D marketing mindset there are the dimensions of breadth, height and depth.  Your marketing thinking should extend to all 3 dimensions, and consider strategically how to use all the dimensions.

Breadth to a large degree is about considering the stuff that consumers expect you to do.  It is about your expertise and range of services. For example, the consumer clearly expects the financial planner to be able to do financial planning, and all that involves. The insurance broker is expected to be able to broker a risk management solution. So on one level there is the element of simply having to position your business to meet the basic expectations of the consumer.  In this space there is still opportunity for your marketing to promote differentiation though while doing what is expected, and sought, by the customer. This is where having a strong Unique Selling Proposition (USP) can be effective, or where broadening the services and expertise that get delivered alongside the basic expectations can add value and enhance your brand. The thinking around breadth of offering is how to add on services & skills that are valuable to the customer that they didn't expect when first comparing the market.

Even if you do not extend services or have a USP that customers can place a value upon,  your marketing and brand can be enhanced by building upon your core services through continual improvement or refinement of expertise.  That is building upwards - doing the same things as everyone else, but being incrementally better at each piece of what you do. Being technically stronger, having (and showing) a greater understanding of particular market niches, providing better advice results than others in the same space, stronger/better professional standing, operating to higher standards voluntarily and so on are examples of building your brand and offer to higher levels, whilst still competing in the same broad offering that the competition do.   The basic offering is similar to competitors - still doing the financial plan or finding the right risk management solution - but having better expertise or solutions choices, or providing more consumer certainty and safety than competitors, and being able to demonstrate it.

The third aspect is not often considered as part of the marketing strategy, as it tends to get put into the "service" category. The depth of the customer experience is a vital element of the overall marketing strategy.   At one extreme there may be a business model where the customer relationship is utterly superficial and transactional (think of direct insurance sales online: nothing wrong with it but the business model clearly doesn't provide for or offer any real depth of customer experience).  At the other extreme is the adviser (I know of) who has roughly 170 high net worth clients around the world, with himself and 6 other people (together with outsourced experts) providing the highest level of personal service and personalized financial solutions possible to the chosen few. And their clients pay a lot for that personalized financial planning expertise.  The depth of the customer service and level of personalization are themselves competitive points of difference that are integral to their marketing strategy.

So when thinking through and revising the marketing plan for the next year (and beyond), think about doing it in 3D. Have a clear strategy that covers how you will be positioning yourself in the broader market, and how you will be able to differentiate in the first level of competitive choice. Then have a solution on how to build upon those base expectations in such a way that it provides higher value or greater safety for the consumer that they did not initially expect when first comparing their choices. The depth and quality of the customer experience when engaging you (not just the "after sales service") is a further critical element of the overall marketing strategy.

If you can combine all the elements into a 3D offering you will be able to create a "WOW" customer experience. And people pay more for, and stay longer with, superior performers who exceed their expectations.

(P.S. I thought I'd check out how imaginative professional service firms in New Zealand get with their naming & branding....here's a snapshot. The number of companies using the following words in their name just in little old NZ:

Services - 43,155

Consultant - 18,710

Solutions - 10,953

Associate - 8,554

Financial - 3,450)


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The Secret to Valuing Advice

by Tony Vidler.

Putting a value upon advice is a tough issue - for advisers and consumers.

There is a pretty basic concept as far as "Value" goes for any consumer purchase though, and it can be put into a formula:

"Value = Benefits - Cost"

For a consumer something is valuable if the benefits exceed the cost.


 Whether that is a lounge suite, a car or professional advice.  The real issue is rarely just cost, no matter how much we hear people debating it or questioning the cost of something.  Let's consider a quick example of pure "advice" where the value is rarely questioned.

Consumers routinely pay several thousand dollars to an estate planning specialist for advice on how to keep their assets from prying hands.  The cost is explicit, the benefits easily understood by the consumer, and an assessment of "value" is easily calculated.  To the consumer they have exchanged $3,000 (say) for advice on how to keep $1,000,000 in assets away from future prying fingers.  There is clear value as the benefits obtained from the advice far exceed the cost.

In financial services the benefits obtained from the advice are difficult for many advisers to articulate, and therefore explaining the value generated falls into the too-hard-basket. After all, we are usually talking about "probable benefits" which does make it difficult.  Probably you will receive this type of result by investing this way.  Probably you will receive that type of benefit IF that risk event happens.  Probably, probably....  So generally the advisers problem is being able to describe the benefits in a meaningful way to clients.  Without a clear understanding of the benefit that will be obtained, the consumer simply cannot accurately assess the value of advice.  To answer the value question for consumers, the adviser needs to be able to clearly describe the benefits arising from the advice.

With little research available in NZ we need to look overseas to provide some examples. In 2008 in Australia there was some research on the value of advice, particularly with a view to trying to quantify the value received by a consumer for various financial services. This included services delivered with and without advice. The mere provision of simple tools (e.g. online calculators) costs relatively little to deliver to consumers as we'd expect. Consumers obtaining single issue solutions (e.g. advice on workplace super scheme options) typically paid $250-$1,000 for that advice. Those seeking more comprehensive financial advice (e.g. annual full advice plans) faced fee levels of $1,500 to $20,000 for advice.  Handy information, though not specific enough for most consumers, but the wide spread on the numbers reflected different adviser business models.

So there is the first part of the problem in valuing professional advice. There is such a range of delivery methods and cost structures that there is no possible way a consumer could compare and then value personalized full advice unless they understand what makes it different to other types of "advice", and why it is more pertinent to them. Without that explanation an adviser is firstly competing against a Google search and consumers can only compare costs.

The second element is being able to explain the benefits that will be derived from the advice.  A graphic example came from some different Australian research.  It found that the preparation cost for a typical planner preparing & presenting comprehensive advice was just over $3,000 to deliver.  Unfortunately the clients placed a value of only about $300 on it.  A massive difference between actual cost of delivery and its perceived immediate value.  Why?  Because the clients couldn't see the benefits. 

Consider the areas that were perceived to be valuable to consumers. There were the expected contenders such as budgeting, tax management issues, debt re-structuring, cash flow management, maximizing government benefits, life insurance and so on that presented value to some degree. There were some slightly different perceived benefits as well though, such as better lifestyle, goal setting, financial education and negotiating improved benefits and/or fees that were deemed valuable.

Advisers do all these things so there is little doubt that advice DOES create value at some level. There is a good story there, but how to place particular value on it that can be measured easily by the consumer?

Consulting actuaries attempted to quantify the value of the advice, in present value terms but over the life of the estimated advice/benefits period. It indicated that advice given to a younger family during the wealth creation phase resulted in over $320,000 additional value during the course of their financial planning life. The cost of the advice attributed to this same family over the same period was about $40,000. There were a number of tested scenario's - one with much more impressive numbers (over $600,000 added value), and some with less impressive numbers. All uniformly compared the cost of the advice component with the additional benefits received by the consumer from that advice though.

The conclusion was resounding in all scenarios. Advice added value above and beyond the costs of obtaining that advice.

There were additional intangible benefits that couldn't be quantified in dollar terms that shouldn't be ignored either. Some 66% of consumers cited "peace of mind" as a benefit; 63% felt they had "greater control of finances"; 62% felt they had "the prospect of a more comfortable retirement". These are "value" too.

Undoubtedly the case can be made that good professional advice provides benefits that are well in excess of the cost.  It is valuable therefore.  The secret to valuing the advice component is in addressing two issues clearly - and as early as possible.

The first hurdle for advisers is to be able to explain why their structure and method of delivering advice is superior to other choices for the consumer, particularly the low/no cost choices.  Then the benefits for the consumer have to be articulated, and preferably quantified wherever possible.  

It would seem that experienced advisers would have the very real advantage of being able to draw upon their real life examples and provide case studies showing the work they have done for clients in the past, and showing the costs charged and the benefits obtained (testimonials in this respect are gold!).

Like the estate planning specialist in the earlier example, the cost of good advice compared to the benefits it can produce for consumers should leave no doubt that it is valuable.



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