How to spot a Dinosaur.

by Tony Vidler.

I have wondered if, with all the changes in financial services over recent years, any of the dinosaurs survived our own dramatic financial ice age.  "Surely not", I thought.
But they ARE still out there!

Over a period of some 6 months I have observed a dinosaur up close as I attempted to change its DNA to ensure its survival after the big thaw of the current Ice Age.  Despite (logically) knowing that it was a virtually impossible task, as scientific intervention doesn't change the DNA of the living creature and nor is the creature able to change its own essential nature in its own lifetime, you fool yourself into thinking it just might be possible.  I was plain silly, what can I say?  Mea Culpa!

I did however learn a lot about the topic though from close observation, and there are some lessons here for everyone who ever has anything at all to do with financial services.  We shall begin by identifying the stock standard carnivorous dinosaur (and bear in mind everything I know about dinosaurs has been learned from watching all the Jurassic Park movies - twice.  I am therefore something of an authority on this topic!)  The dinosaur I refer to has the following characteristics:

• it is programmed internally to hunt for every meal.  That is its base instinct.
• it simply eats whatever it kills.  It is not a particularly discerning diner, as long as it gets meat.
• if it cannot catch and kill new prey, it will resort to cannibalism and attack its own kind
• it cannot be tamed or domesticated.  It will always be a wild creature that will turn on any other.
• it has a poorly developed mind.  Logic, rational thought, understanding of consequences are non-existent.
• it has very basic emotional development.  The entire set of emotions consist of "happy" ("have just killed and eaten something"), & "angry" ("have not killed and eaten something").
• it is noisy and attempts to impose its presence with sheer volume.  Of the roaring kind.
• it stomps about crushing things underfoot willy-nilly. It's environment exists solely for its own benefit in its mind.

Comparing this to the small and dying breed of Financial Adviser Dinosaurs (FAD's) - of the sort I inspected closely for a little while - you find distinct parallels.  I provide this list of identifying traits as a matter of public service.

• The FAD has no concept of investing in future food sources
• The FAD lives sale to sale.  Often it spends its commission twice - the day a sale is "made", and then again the day they actually get paid for the sale they made.
• The FAD has no target market (preferred prey?).  If it is still breathing it is prey.
• The FAD will cannibalize its own business for another sale.
• The FAD cannot be improved through regulation and rules.  Like a leash, they are effective only when directly applied to the beast in question and under the watchful eye of a handler.  The leash in itself does not change the animals behavior.
• The FAD has no technical qualifications at all.  Nor does it really want any.
• The FAD operates at the barest minimum legal standard, hovering just on the barely legal side of business. Mostly.
• The FAD has no aspirations for self-improvement, professional development or for achieving any of the higher purposes in life.  The mindset is consistently narcissistic - focused only on what makes them feel good in the moment.
• The FAD has limited emotional development.  Whilst they cover the stock standards set of human emotions, they have not quite evolved to the point of having innate sense of fairness or justice, and the emotional set does not include "guilt".
• The FAD is consistently upbeat and positive and talking enthusiastically - about themselves - to any audience.  A mirror is of course an audience to a FAD.
• The FAD is not interested in creating legacies or thinking of tomorrow.  Bulldozing is a method of movement for the FAD.

Now I really should stress that these FAD's are increasingly difficult to find, there are less and less by the week.  Speaking personally, as a person who has watched Jurassic park movies from under the blankets the first time around, it is not a good thing having dinosaurs roaming freely amongst humans and their pets.  Fortunately for us, there is little doubt that the dinosaurs are totally hopeless at breeding and raising the young - in a purely commercial sense that is.  

They simply cannot build successful businesses with their inherent characteristics, and nor can they congregate successfully for commercial gain with other dinosaurs - or even other non-dinosaur-creatures.  That base instinct of killing to eat, combined with nonchalant cannibalism whenever hunger demands it, puts paid to their commercial prospects.

Regardless of your place in the financial services life - be it a consumer, potential business partner or ally, consultant or coach, or just someone with a spare seat at a conference - it is worth being able to identify a FAD as quickly as possible.

Should you hear one coming (and you usually do hear them first), then spot the predatory look as they size you up as a potential meal while they bulldoze their way into your conversation/life/spare seat, then run.  Quickly.  It is the only safe course of action.

The good news though is that these dinosaurs are dying out.  And if you can stay out of their kill-zone, they will die out even quicker.


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The challenge of Kiwi DIY for Advisers

 by Tony Vidler.

Some telling research was done by Dr Claire Matthews of Massey University that highlighted the Kiwi DIY (Do It Yourself) mindset, and the challenges that poses for financial advisers. 

The research was specifically on "KiwiSaver and Retirement Savings", and explored some of the issues and attitudes of Kiwi's. 

While the research was KiwiSaver focused, it raised issues pertaining to financial advice in the wider context.

Retirement savings are clearly a major issue for the nation given the current projected population changes will have 1 in 5 New Zealander's over the age of 65 by the year 2031.  In 20 years then a fifth of the population will be retired, or contemplating imminent retirement.  So what was revealed?

In brief, what came through strongly was the "reluctance to make use of financial advisers, with the advice of family and friends often preferred".  A mere 4% of those surveyed indicated they had joined KiwiSaver on the basis of a financial advisers recommendation.  Interestingly though, some 11% indicated that their choice of KiwiSaver provider was recommended by their financial adviser.  Clearly a proportion are joining KiwiSaver before seeking advice it would seem.  But more are joining and still not using financial advice.

Perhaps the adviser is unnecessary?  High proportions claimed alternative investments of some significance, with nearly 28% claiming to hold investment property, and over 45% were holding cash and/or term deposits.  A further third had workplace super schemes already.  Presumably mostly all done without financial advice also.

Undoubtedly the big motivator for the DIY investors as far as KiwiSaver is concerned are the scheme incentives.  Some 28% cited "getting the government incentives" as their primary reason for joining KiwiSaver in the first place.  The features of KiwiSaver then rated as important by the consumers had nearly 90% claiming the $1,000 kick-start as an important element, followed by about 85% or so saying the ongoing contribution tax credits were important.  A little further back some 80% claimed the employer contributions as important, and a long way behind that the first homeowners subsidy was deemed important by about 30% of members.

 

This is all interesting perhaps, but the big question is what does it mean as far as the role of the financial adviser is concerned?

KiwiSaver has critical mass, and it is here to stay.  Retirement funding is a looming societal issue, that will not disappear anytime soon.  The Kiwi DIY attitude is a significant factor already, which further challenges the issue of advisers being able to charge directly for their expertise. Add to that, pressure to lower costs, commission and charges of any form within KiwiSaver schemes will only increase in the short to medium term.  So there are undoubtedly issues for financial advisers to work with and resolve.

The truly significant challenge presented to advisers however is that largely they are not even considered a primary source of information on financial matters.  Note I didn't say "source of advice", but a source of information...

As the main source of information advisers are rated number 1 by about 19% of the surveyed population.  Nearly the same as was "books, newspapers and/or magazine articles".  Well done us - we are more informative than the local rag to the public on financial matters!  Just.

Some 27% are sourcing most of their financial information from friends & family, and a further 17% sourcing it directly from the internet.  I'd suggest that as content marketing increases, the internet's proportion as a primary source will rise - probably at the expense of both advisers and newspapers.

There are clearly a number of challenges for financial advisers, not least of which is how to make money (if at all) from advising upon KiwiSaver.  Most importantly, the big challenge presented by the Kiwi DIY approach shown within KiwiSaver so graphically is that we first have to establish ourselves as the primary reliable and credible source of financial information to our prospective and existing customers.

Before we can attempt to work out how to provide KiwiSaver advice in a commercially viable manner, or even before we try to convince the market on the "value of the advice component", we actually have a credibility issue.  The hard yards have to be put in to establish the financial adviser as the primary information source.  Then, and only then, will there be sufficient people willing to consider the value of your advice.  Then there might be a chance of putting together a viable business proposition around advice on KiwiSaver.


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The myth of the Independent Research defence

by Tony Vidler.

 Financial advisers safely relying upon third party (independent) research to defend product recommendations is a myth.  Many currently believe that through the simple act of out-sourcing product research, and then relying upon the research houses rating of a product, is in itself a recommendation of suitability for clients.

Product research houses themselves go to great pains to point out to advisers that suitability is not usually assessed.  Product structure and relative merits compared to its peers are assessed though. 

There is a side issue of course as to whether even that is credible research given the conflicted fee-charging methodology of many research houses.  However, let's put that aside for the moment and assume that all research conducted on financial products is unbiased, utterly independent, and thoroughly academic.  (yeah, right).

So the financial adviser pays his monthly subscription to the research house, checks the product rating/recommendation status, then proceeds to recommend it to clients. In the event of product non-performance, or claims of negligent advice in the future, the adviser points to the research claiming "but I got it checked out by experts, and they said...."

And there is the myth.

Total reliance on third party research to support product recommendations is dangerous ground.  Factoring in that research in product assessment is absolutely worthwhile, and adds to the defense of suitability.  So it is extremely useful as ONE aspect of product selection suitability, but you cannot fully "outsource" product recommendation responsibility safely. 

There have been a couple of cases in Australia that are very pertinent for NZ advisers.  Google and read up on them: "Delmenico v Brannelly & Anor" is one.  The Financial Ombudsman Service's Determination 18959 is another (with a link to the full finding below).   FOS 18959 is particularly revealing over a number of advice issues.  

The key paragraph (for this discussion) is para 148 on page 40 - "The adviser must go beyond this to demonstrate care and detailed understanding of the product before he can assume it suitable for a particular client".  The background in brief is the adviser defended the product selected on the basis that it was suitable as it was on his business' approved product list, and that products going on that list had been independently researched.

The conclusion that was reached by the Ombudsman was that this reasoning alone did not satisfy obligations to a particular client. The adviser had to go beyond this to demonstrate care and a detailed understanding of the product before he could assume it suitable.

Conclusion: a favourable rating on a product from a research house (while good) is not enough to rely on as an advisers defence  for client suitability.  Total reliance upon that rating or research is a myth.

To read the full FOS 18959 ruling click here

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