The End is Nigh…

A typical placard seen on Speaker’s Corner at Hyde Park in London – perhaps more frequently over the past few years with Brexit looming. But in the context of the protracted review of the NZ Financial Services Industry, the end is likely to be welcomed by most.

With the release of MBIE’s paper on the disclosure regime, the final piece of the regulatory jigsaw has arrived.

In general terms, we have landed on a much better place than the restrictive and limited scope of the Financial Advisers Act 2010. Anyone offering regulated advice must either have a Financial Advice Providers licence of their own, or be operating under someone else’s licence.

The abandonment of the AFA, RFA categories are to be applauded – even if the Financial Adviser/Nominated Representative titles seem to be no more than a replacement for the previously confusing identities.

Underpinning this replication is the desire of MBIE to avoid making a distinction between sales and advice. In the Regulatory Impact Statement, the assertion was made that making such a distinction might “create two classes of adviser” – which is exactly what has been achieved with the subsequent FA/NR classification. Go figure! This leaves the consumer no more able to distinguish between a product salesperson acting on behalf of an employer or financial advice provided by an independent adviser acting on behalf of the client.

“I have reservations at the premature declaration of intent by MBIE to discard the notion of creating a clear and explicit identity between salespeople and independent advisers.”

The motivation is important to maximise protection for the consumer in the process of making critical lifestyle decisions on matters financial. So while the legislators failed to enfranchise consumers, it’s now up to financial advisers and their representative organisations to bring this important distinction to the attention of consumers and prospective clients.

The recent disclosure regime presented to the market is an integral part of the transparency and protection framework, but it is by no means a silver bullet, as our colleagues in Australia and Holland have recently concluded. Extensive and credible research from both countries concludes that disclosure is not enough, and while MBIE and FMA are relying on the entire scope of the new regime to provide appropriate consumer protection levels, I have reservations at the premature declaration of intent by MBIE to discard the notion of creating a clear and explicit identity between salespeople and independent advisers.

Similarly, the selective premise adopted by FMA at the outset that entity licensing would prevail as a structure, has proved to be troublesome and far more complex than expected. Selective in the sense that this recommendation in the IMF 2017 Report was adopted while others – such as resourcing the NZ regulatory bodies with insurance-experienced people – have been studiously and continually ignored.

The range of complex commercial entities in the financial adviser space in NZ has also created some unexpected difficulties with a lack of clarity around authorised bodies and interposed persons. At this late stage of the proceedings, clearer and more urgent explanation is required.

Case Study – Lifetime Group Ltd

With the structure of distribution entities in mind, allow me to share the experience of being involved with one particular organisation worthy of consideration.

Lifetime Group Ltd is a result of the merger between Wellington-based Camelot Ltd and Christchurch-based Lifetime Ltd. At an early stage, it was agreed that “Lifetime” more accurately reflected the nature of the client relationships the merged entity seeks to develop.

Also agreed at the outset was the adviser compensation model deployed by Camelot with a base salary plus bonuses and access to shares. The exercise in establishing this structure has recently been completed at Lifetime Group and analysis confirms that this approach creates a sustainable and robust balance sheet. The financial impact of building value based on Earnings Before Interest Tax and Amortisation (EBITA) rather than a multiple of residual (renewal) income is even more relevant with the product providers moving to remove vesting rights. Now that the client can choose which adviser receives the renewal commission, valuations and sales of adviser books based on a multiple of residual income will reduce, as they have in Australia with the abandonment of ‘Grandfathering’.

Of similar significance and of more relevance to the new regime, Lifetime has all but eliminated conflicts of interest around adviser compensation. In order to access reward over and above salary, the Lifetime adviser has to be competent (Level 5), compliant (meeting quality assurance standards), and have quantifiable/robust credible client satisfaction metrics. None of these are based on the ‘volume-based incentives’ so clearly disliked by the regulators.

“Lifetime has all but eliminated conflicts of interest around adviser compensation.”

In addition, Lifetime has negotiated a uniform brokerage structure with all life insurance product providers, with one or two very minor system-driven variances in renewals.

Thus, conflict has been eliminated at both adviser level and corporate level and while this may not suit every adviser in the land, for those seeking a long-term career with a high-quality dynamic enterprise, the model offers reward, security, and sustainability for all stakeholders.

That’s not to say that this model is the ultimate business structure – it’s just the one Lifetime Group Board has committed to and will stick with in the belief that sustainability is more reliably achieved pursuing this path.

The Group offers advice on investment, risk, and lending and with many Kiwisaver balances now into six figures, I’d suggest that conversations with prospective clients will be more easily initiated by financial advisers who have knowledge of accruing wealth for retirement – at least to be able and suitably qualified to talk about the subject knowledgeably.

June 2020

Looking forward to the full licensing regime in mid-2020, I expect the numbers of full licensees to be less than those holding transitional licences. The economic impact of direct and indirect regulatory will push some transitional licensees to seek alternative arrangements of some description.

I also anticipate further rationalisation among the distribution entities as commercial organisations seek economies of scale, width of market coverage, and depth of systems and human resources.

None of this casts a pall of doom and gloom over the financial advice industry, as managed properly, sensibly, and professionally, the opportunities for those who invest time and effort in getting it right are significant.

After all, all the processes and procedures involved in providing financial service advice, are, for the first time in the history of the industry in NZ, approved, supervised, and managed by the Government – that’s some endorsement to be presenting to a client!