Trust comes naturally to some professions. Take the recent survey ‘The future of trust’ commissioned by Chartered Accountants Australia and New Zealand (CAANZ) which revealed that the top three trustworthy professions in New Zealand are doctors/nurses, engineers and teachers. It makes sense, at their core we must trust these professions with our health, safety and children.
Down at the bottom, the less trusted professions were news media, religious institutions and political parties. It’s obvious that there is some self-interest with this cohort and according to the survey report often these institutions speak from an ideological position. Their message is less trusted unless the recipient shares the same ideological stance.
Interestingly, it’s not hard to find instances of poor doctor (and some nurse) behaviour, however, they’re not viewed collectively. When trust declines in medicine, there tend to be a few reasons as noted by Roger Collier in the Canadian Medical Association Journal:
“The creep of commercialism into medicine is commonly cited as a reason for the declining trust of the medical profession as a whole. Doctors, after all, often have many ties to the pharmaceutical industry and conflicts of interest abound. Other reasons commonly cited include scandals that uncover gross incompetence or the covering up of mistakes.”
Commercialism and conflicts of interest sound familiar. Financial Services haven’t always featured in similar surveys in New Zealand, but according to KPMG's Head of Financial Services John Kensington, New Zealanders need advice from financial advisers to improve complex investment and retirement outcomes but face an enormous obstacle – a lack of trust.
Personally, I think financial advice is diagnostic. Meaning it should be more akin to those highly trusted professions. Ensuring financial well-being while providing guidance. Unfortunately, financial advice became transactional and now has a long history of commercialism, conflicts of interest and unprofessionalism from a large section of the industry.
With the Australian Royal Commission fresh in all our minds, it’s not just the profession who suffer from bad advisers, vertical integration and the associated conflicts of interest, it trickles down to clients who need financial guidance, but have no idea who to trust. The Royal Commission’s final report concluded that the motivation for banking & financial sector’s poor behaviour was often greed: “the pursuit of short-term profit at the expense of basic standards of honesty.”
Financial Advisers and conflicts of interest
According to Jason Zweig’s The Intelligent Investor column in the Wall Street Journal, “Conflict-free” is good marketing. But it is a bad description of financial advice because it can lull investors into a dangerous complacency.
All financial advisers — like all professionals who provide a service, including journalists, doctors — have conflicts of interest. No matter what business model, service model, or compensation model an adviser has, it creates a conflict of interest with the client. How the adviser operates will determine what kind of conflict they’ll have.
If an adviser claims to have none, either that adviser hasn’t thought through their process well enough, or they’re intentionally trying to mislead you.
The government and the regulator implement continuous improvements with firmer laws to minimize or mitigate the effects of poor advice and conflict of interest on the consumer. But as you can imagine, the obligation still lies on the shoulders of the individual financial adviser.
Be your own regulator
As a client, you should know the answers to all the following questions when it comes to the person or firm in charge of your financial well-being. If you are uncertain of all the answers, then ask the questions of your financial adviser:
How are you paid?
Do you receive any non-financial compensation from other parties such as free vacations, professional training trips?
Does your business have ownership or partnerships in other businesses (insurance companies, fund managers) that might conflict your advice?
Do you disclose conflicts of interest?
Do you adhere to the fiduciary standard? If not, why?
It is also valuable to ask the adviser to give some examples of conflicts that he or she regularly faces and how they are handled.
There is no strict rule about this conflict of interest is good; that one is bad. Though I should point out, I drew my line in the sand when I chose to be a fiduciary and, by law I should disclose any conflict of interests to my clients.
Like most other aspects of personal financial planning, the right answers are going to be specific to your situation: your finances, your family, your individuality and your goals.
Nick Stewart is an Authorised Financial Adviser and CEO at Stewart Group – a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
