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Most investors are familiar with the bad practices of a few rogues in the Investment Industry. So, with attendant publicity, it is not surprising that the public asked, ‘Who can we trust?’
Investment Advisers were not regulated until the Financial Advisers Act 2008. Most Investment Advisers did a good job for their clients throughout but onerous supervision is necessary to ensure no ‘bad eggs’ creep through. The Financial Markets Authority is now crawling all over Investment Advisers.
However those incidents were topped for all investors by the Great Financial Crisis of 2008 – 2009 which caught everyone but some more than others. Over a five year period in a high risk portfolio [ equivalent to Sorted’s Kiwisaver 90% in shares], the best Investment Advisers achieved a 17% gain. The bottom achieved a 37% reduction in value. That is a huge 44% variability. Even in a Low Risk portfolio with only 20% in shares the difference was 15%. Only 3% over five years seems low but assuming the bottom is the same as bank deposit rates, the low risk investor could double his or her income by going to the right Investment Adviser. The problem is how do you know who is good and who is poor?
Some Investment Advisers kept crying out for government to do something about restoring confidence in their services. That demand was totally misplaced. The government had clearly laid it out in Section 3 of the Financial Advisers Act 2008. The purpose of the Act is to encourage public confidence in the professionalism and integrity of financial advisers. ‘To that end’, the Act [a] requires Disclosure [transparency] by Investment Advisers leading to consumer investors’ informed decisions; [b] imposes Competency requirements; and [c] ensures Investment Advisers are held Accountable.
The one question most demanded from Investment Advisers by the public to become informed is ‘How do we compare your performance?’ The answer has never been forthcoming. Investment Advisers as a group have failed to comply with the Financial Advisers Act to be transparent by full Disclosure of performance, proof of Competence demonstrated by that Performance, and total Accountability for that performance. The failure is understandable. No-one [until now] has created an independent method of comparing Investment Advisers by their performance. It is a multi-party industry problem. The industry must fix it before the 2015 Act review.
Until people who are in a position to effect change are made aware of such a situation, they cannot change it. After awareness, it is remiss not to act. It is the responsibility of the individual Investment Advisers to Disclose [be Transparent], be Competent, and be Accountable to encourage public confidence. However, most Investment Advisers are employed by the big firms of AMP, the Banks and the Brokers, while Boutique independent firms make up the numbers. With better recent performance, some Investment Advisers want public disclosure of performance. Perhaps confidence in Investment Advisers will be encouraged only by action of their employers. But consumer investors must join to give consent.
Channel Magazine: Issuu 50 December 2014 | January 2015