Consider the context!

by Tony Vidler.

Watching how the market regulator manages change in a principles-based regime is revealing, and highlights the difficulty in implementing the principles.  

That is; the very act of raising questions and seeking submissions from industry provides useful information about the most difficult and dangerous areas for advisers.

Yesterday the Financial Markets Authority (FMA) issued a guidance note to assist the market in putting forward submissions to the regulator on how to interpret a key part of the (relatively) new financial advisers legislation.  (The link to the full guidance note appears below).  The guidance note itself is very helpful in outlining the current thinking and expectations of the FMA, and is worth reading for that reason alone.

The critical question that is being addressed in this guidance and submissions request process is, what constitutes financial advice as far as the advice industry thinks?

The FMA put forth a view which basically suggests there might be broadly three forms of interaction between an adviser and a consumer.  They are:

1.  No Advice. Information only is provided - essentially just facts are given.

2.  Class Advice.  Information, opinion, guidance may be provided by an adviser to a group or collective (e.g. via seminar).  No personalized advice is provided however as the individual consumer's situation is not considered at all.

3.  Personalized Advice.  The clients situation is considered and advice is provided that addresses their needs or desires.

The Financial Advisers Act itself provides some clear definitions, though not drilling down to the detail that provides explicit guidance.  Personal financial advice is essentially a recommendation or an opinion (whether express or implied) to act, or not act, upon financial information and the clients circumstances (and which is also NOT specifically class advice).

Where this all gets tricky - and provides the entire reason for the FMA seeking input from the advisory sector - is that the national retirement savings scheme is a product that not all types of registered advisers are allowed to advise upon.  Only some are allowed to provide "personalized advice" on savings and investment products (of which KiwiSaver is an example).  Yet, with over a third of the country now enrolled in KiwiSaver and an express desire on the part of government to have ALL of New Zealand enrolled in it eventually, clearly it is set to become a significant factor in the financial planning of every citizen some time.

Add to this that a primary objective of the Financial Advisers Act was to promote greater confidence by the public in the use of financial advice and financial services.

So we have a situation where most of our population will one day be involved with the national retirement savings scheme, yet not all financial advisers can talk to them about it even though a prime policy objective is for consumers TO get good financial guidance and use such products.

It is an awkward situation for a market regulator to try and resolve without doubt.  Equally, it is undoubtedly an awkward situation for many financial advisers and institutions to try and work with. 

The extremely valid point raised in the guidance that lies at the heart of the need to consider how to implement the law, is that the "context shapes the customer's expectations" as to what is personalized advice.  Logically, you cannot disagree with this argument.

Look at the picture below for a graphic example of how context shapes precisely the same thing.

 

A financial advice example; if there are (say) 50 different KiwiSaver scheme providers that a consumer might choose from, and a financial adviser gives the consumer a single investment statement from a provider, is it reasonable to think that the consumer could consider that a personal recommendation?

The answer is "maybe". Which is not helpful at all is it?

Scenario 1:  Consumer says: "have you got anything you can give me on KiwiSaver?".  Registered (but not Authorised) Financial Adviser replies: "here's one provider's investment statement".   It is hard to imagine somebody perceiving that to be personalized advice.

Scenario 2:  Consumer says: "I think I should be in Kiwisaver and need to know which one to join".  Registered (but not Authorised) Financial Adviser replies: "here's one provider's investment statement".  It's hard to imagine that not being perceived as a type of advice.

Exactly the same response each time from the adviser - yet the context is substantially different.

Only 1 provider was offered to the consumer out of the full range of possible choices in this scenario.  The advisers genuine belief may be that by providing an investment statement they have merely provided factual information on a particular scheme.  This does not necessarily constitute a recommendation that the particular provider is better or worse than any other - it is just information on a KiwiSaver scheme.  "Frankly they are all much of a muchness and it doesn't matter who you pick" may well be what is going through the advisers mind.

To a consumer though the context is quite different.  Certainly in Scenario 2 there is a real risk that the Consumer's perception is "I told the adviser I wanted to join KiwiSaver and the adviser gave me this particular statement, therefore it is the one they recommended".

Regardless of the outcome of the submissions process just initiated by the FMA here, there is a long-term lesson for advisers that is immediately apparent:

Consider the context. It is the difference between whether you are well on the right side of the battle line, whether you just strayed into no man's land, or whether you have gone into territory that is not yours.

http://www.fma.govt.nz/media/887945/guidance_note_-_kiwisaver_sale_and_distribution_june_2012.pdf


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The good life or financial freedom?

 by Tony Vidler.

The Financial Services Council (FSC) has just issued issued a statement summarising some recommendations they were making regarding national retirement savings, following research it had conducted in New Zealand. The link to the full report is at the end of this article.

The report is extremely interesting, though missed the mark in a critical area. There is an inherent assumption that if the right product solution is created (as envisaged by the FSC), then that will address the issue. There is a lack of focus on the benefits of changing consumer behavior through good education and advice.

The focus of the report therefore is about a consumer attaining financial freedom in their golden years. What about the good life along the way?

The report makes a number of very interesting and useful observations, especially in the area of recognizing the extraordinary convergence of issues facing the under 40's. This included the some core retirement planning issues such as:

• They are likely to be living longer than previous generations;
• They are most likely to have less family financial support than prior generations; and;
• They face more uncertainty than prior generations when it comes to government support.

Some other very significant factors were not cited in the recommendations however. Without attempting to provide an exhaustive list, one should include other factors facing today's workforce when it comes to retirement planning.

• Less subsidization of health & education costs than previous generations; leading to greater strain on today's resources.
• Prior generations had access to "defined benefit" superannuation schemes which provided great certainty for retirees.
• Higher standard of living expectations from the children of today's under 40's - creating additional financial stress.

There is no doubt in my mind that this segment of society (the under 40's) is the "sandwich generation".

Firmly stuck in the middle of change - not deriving the full benefits that previous generations did of having guaranteed retirement, yet they are expected to fund it for those in retirement now. They are not deriving the full benefit of subsidized education and health, so are having to largely pay their own way - and also fully pay the way for their own children. One could go on, but I am sure you get the key point: they are funding the expected benefits for retiree's today, together with the wider benefits demanded by society today, together with their own needs today, and also having to make provision for the next generation on a user-pays basis.

The Sandwich Generation. They are the filling in the middle, that provides all the flavour and much of the nutrition in the meal.

Simply providing a retirement product solution to address the needs of these younger New Zealander's is not enough. Their needs are much more complex, and quite frankly they have half a century of working life to negotiate before they can realise the benefits of a well constructed retirement plan.

While it is important to make provision for the future, and ensure that the final 30 or so years of life are comfortable, dignified and independent (wherever possible), there is the remaining and somewhat important matter of trying to achieve exactly the same objectives in the first 60 years or so of life. Financial freedom (as an objective) has to be weighed up against having a good life along the way.

What will help these consumers do this better than anything else are getting 2 things:

1. Better financial education during their adult lives. They need the best possible information, tools, and understanding about how to manage their resources well, and to understand the impact of the choices they must make. It is an investment in efficiency after all - if they are assisted to make better choices, their resources will go further and it will be beneficial for society and themselves.

2. Professional and personalized advice. Their world IS complicated and they face many competing demands. Good advice will help navigate the competing demands, help them decide when and where (in their lives) products may or may not help, and help them get the best out of their resources along the way. During their working lives financial products are a relatively minor part of the overall financial picture. Advice addresses the bigger picture. Products do not.

Great products and great savings systems may well provide great retirement incomes.

Great advice can help them have a good life along the way as well though. And THAT is what most consumers actually want, and it is the item missing from an otherwise great piece of work by the FSC.

The full report from FSC can be found at:

Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders

http://fsc.org.nz/site/fsc/files/reports//FSC_Pensions%20report%20%20FINAL%20Publication%2017%20June%202012%20copy.pdf

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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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