Independent or Impartial

Much has been written over the past year about the apparent lack of independence of many investment advisers in New Zealand.  A number of years ago the term “Independent” in relation to financial planning advice, was taken to the Advertising Standards Board.  They deemed that a firm could not be deemed to be independent, if it received commissions.  Because of this some firms started to use the term “Impartial” even though their business model was primarily based on receiving commissions.  Even more bizarre and something that appears to have escaped the attention of the board, is that the vast majority of the investment products that they sold, were in fact from related parties.

It is unfortunate that the advertising standards people got involved.  They may have had the best of intentions.  Commission is simply one of a number of ways businesses and advisers can be remunerated.  What the public really needs to know is if there is any common ownership between the advisory firm and any product supplier.  If there is, this should be disclosed.

Why is the issue of common ownership such an important consideration? This is often the reason why portfolios are dominated by products from the one supplier.  Some hide under different product brand names.  When one of these products looks like it is not performing, an independent adviser would normally act quickly and sell the investment out of their client’s portfolios.  Of course some products do not have any liquidity at all.  This is often the case with property investments and higher risk fixed interest investments.

Common ownership should be relatively easy for investors to check.  A search on the Companies Office website:  http://www.companies.govt.nz can be very revealing.  There are however, some tangled ownership webs within the investment industry.  Some appear to be deliberately convoluted.  It makes one wonder what they are really trying to hide!

Some investment advisers have Buyer of Last Resort agreements in place with product suppliers.  These are not so easy to spot, however this information should be disclosed in the advisers’ disclosure statement.  They may also have a requirement to maintain a certain percentage of a company’s products within their client portfolios.

These are all potentially conflicts of interest and can have a dramatic impact on the advice that an investor receives.  Over the past few years, such conflicts may have cost New Zealand investors hundreds of millions of dollars.  These have, and are still, making the headlines of papers such as the Herald and Sunday Star Times. 

It should be obvious if you go to a bank for example for investment purposes, that you will invariably be offered investments that the bank has an ownership stake in the provider, or has mandated its investments to another financial institution.  For example, ANZ/National Bank has a significant ownership stake in ING, BNZ mandates AXA for its funds management, Kiwibank distributes AMP Capital investments, Westpac uses BT Funds Management whom they own, whereas ASB Bank uses products from the ASB Group.  Given that it is rare for a fund manager to be a top manager over all asset classes, it follows that it is unlikely that these institutions will necessarily be using the top managers across all asset classes.  Similarly an advisory network such as Spicers which is AXA owned, is possibly more likely to offer investments dominated from its large AXA stable. 

It follows then that if investors truly want to be offered “best of type” investments from a quality range of issuers, they should seek out and use the services of a qualified fee based investment adviser, who most likely will be working in an independently owned boutique investment practice.