Fiduciary Excellence

Thu 9th April 2009 04:54:00 PM

Article printed in the March 2009 Edition of the Journal of Financial Advice.

Download article here

New Zealand Unit Trust Disclosure: Asset Allocation, Style Analysis, and Return Attribution

Mon 10th November 2008 11:31:00 AM

New Zealand Unit Trust Disclosure: Asset Allocation, Style Analysis, and Return Attribution

Research paper available to download here

The Risk in Trust - selecting an appropriate financial advisor

Thu 10th January 2008 03:05:00 PM

Over recent months we have provided assistance to Stephenson Thorner, a Wellington based professional accounting and trustee firm, who had set out to understand and differentiate between financial advisor groups who would potentially serve their trusts and private clients. This is an imposing task, helping the average investor to assemble and weigh up the myriad of jargon laden, crucial information in order to help clients appropriately place their trust in a particular adviser.

The Dominion Post recently ran an article on this journey, given the hot topic of “advice” quality but despite hitting on some key points, those who want more information on a solution require some more detail. Here is my perspective.

Firstly, all credit to Stephenson Thorner for acting in the interests of their clients, at their own cost. Their aim; absolutely not to criticise any advisors, in fact the opposite, to work closely with those who have a “best fit” to a well defined standard of care laid out for use by Trustees and other fiduciaries and also, to encourage those who wish to.

The standard of care criteria (a checklist of sorts) needed to provide a consistent review base was the easy part. The NZ Edition of the Prudent Investment Practices Handbook released here in 2007 is without question the most definitive checklist a fiduciary or investor could follow or more importantly, ask an advisor to demonstrate they can meet, either in whole or in part.

Stephenson Thorner as a trustee and equally as a professional firm simply wanting to give clients a sense of direction on investment matters, recognised that they, like their clients, had no real basis for placing trust. After all, investment is unfortunately not something you can road test, rather, you’re caught between developing trust over time or understanding the nuts and bolts of different offerings at the start. The latter is the only solution to minimise supplier and product risk; too daunting for most, yet the arguments for using advisors to access globally diversified investment are clearer than ever before. Recent history tells us that staying close to home with simple or local product fails a number of prudential tests and that cheap is not always best.

This is where the comments I made to the Dominion about integrity, qualifications and competency versus a standard of care bubble up as critical issues. So what do I mean?

Lets not look any further for a pointer on this than the new Financial Advisor Bill before select committee. This bill is the engine room of the new co-regulatory environment for financial advice in NZ. The explanatory notes make it clear that advisors will be held to a standard of integrity but not a clients “best interests” standard. This could be taken to mean an advisor should be qualified, provide full disclosure of conflicts and fees and act competently but there is clear recognition of the commercial reality that most advisors (often sensibly) have a relationship or are linked with a particular provider for support and products. They may find it contractually or commercially difficult or costly to apply the higher duty of care standard, so this has not been asked for.

The practical implication is that you, your professional or someone independent needs to apply this higher standard of inquiry, particularly where a trust is involved. Yes, skills are needed and so is a checklist to work to in order that roles, service standard, philosophy, costs and reporting can be matched to need.

The impending change in regulations for advisors including new professional bodies, disclosure, qualifications and discipline procedures are an important response to both public dissatisfaction and the need to keep pace with global trends in consumer protection and financial market standards.

Will these measures ensure independent advice or the most appropriate recommendations? They haven’t anywhere else! I personally don’t think that you can expect legislation to provide that, it can only eliminate the small number of shonky service providers that give the many good advisor groups bad press. But no amount of trusting someone’s genuine integrity to help is of use if the particular approach has shortfalls or is not well suited to the specific need.

This brings us to the cries for higher investor literacy and consumer education. Well I’m sorry, I don’t see this happening readily despite the merit. We ran a workshop on Kiwisaver provider selection around NZ in October, with 400+ professionals, investors and employers attending. No-one expressed interest in repeating the workshop exercise that involved finding the juicy bits of a product investment statement, let alone deciding on the implications. How then can we expect consumers to do this plus determine advisor group differences in outcome modelling, product selection, cost control, disclosure of conflicts or performance reporting (a big shortfall area).

Given our stance that investors should retain prudent experts (advisors and fund managers) in almost all but a few cases, and that Trustees are crazy not to, we were compelled to come up with a process and services that can benefit not just investors but investment committees. Several things were achievable;

• Clarity on a basis one could use to more appropriately place trust in a provider. This is all about process!
• Identification of any omissions or shortfalls in services e.g. a group with great implementation may be accompanied by poor performance reporting.
• Feedback to participating advisors to encourage raising the bar in the interests of investors
• Neutrality throughout the analysis with regard to investment philosophy, provider relationship restrictions etc, but achieving clarity on these issues so an investor could apply their preferences, if any.
• Creation of specific governance services to “plug” any gaps, particularly where a client or Trustee values an existing relationship, sees no need to change everything but wants certain issues addressed.

This has now been achieved with Stephenson Thorner and fi360 combining to bring this into effect. We are delighted by the reaction of clients and most advisors. Many advisors, interestingly, are just as frustrated by the prevailing lack of due diligence capability. How can they differentiate themselves and explain the merits of their approach in a low literacy environment? There are numerous groups moving as fast as they can to bring far more efficient, higher quality offerings to investors. To date they really only get a hearing based on extolling the virtues of brand, past performance or personal relationship, all of which are factors but definitely not the best selection basis for enduring trust and a good experience. Such firms are welcoming our efforts and the guidance now available from fi360 and associated professional firms.


Ross Fowler
Managing Director.