Was that a sale or advice? Here is what to watch for when investing. By Janine Starks

When it comes to money, have you been “sold to”, or “advised”

Can you intuitively feel the difference? Despite the regulations, there are still advisers committing a whole host of sins and masking sales practices as a soft version of financial advice:

  • Ordinary Johns and Joans, charities, schools and wealthy families are being signed up as wholesale investors. It’s a route around the disclosure rules and it limits the duty of care.
  • Advisers are double-dipping and taking commissions and advice fees with these clients.
  • They’re presenting a complex layering of fees to create murkiness.
  • Some have inherent conflicts of interest in seeming to “advise” but receiving a kick-back of performance fees from a fund manager.

Most of these sins are committed under the guise of you being a wholesale investor, opening up a floodgate of dodgy practices where regulators have no oversight.

Industry gossip reaches my ears fairly quickly and if it’s to be believed, the Financial Markets Authority needs to undertake a rigorous investigation of those who operate under the shadow of the wholesale rules. Major stockbrokers and well-known advisers in New Zealand push the practice.

Even with smaller-sized retail investors it’s perfectly legal for fund managers to provide advice on their own products and then help themselves to a performance fee.

The conflicts of interest in performance fees are immense, but you’ll be told they’re aligning their own interests with yours. It’s a top sales pitch delivered with a blob of cream and a cherry for themselves.

There’s a reason why the Australian Royal Commission led to the sale and manufacture of funds being separated – conflict of interest. It’s something our own regulator chooses to ignore.

Here are 10 red flags to watch for:

Red flag 1: The wholesale client loophole. You are asked to sign a form to say you’re a wholesale client. This will usually be on the basis of your wealth (having at least $750,000 to invest), or because you have some experience with money. It can feel a little prestigious, but don’t be fooled. If an authorised financial adviser asks you to sign the form, they’ve just become a salesperson, not an adviser. That creates huge confusion when their title and actions are not aligned.

Red flag 2: They’re double-dipping. An adviser works for you and earns an hourly rate or a percentage fee (usually up to 1 per cent annually). Any commissions from fund managers will be rebated back into your portfolio. Wholesale clients are ripe for a rip-off and some financial advisers take the kick-back and charge an advice fee. They are known to take up to a quarter of the performance fee fund managers earn.

Red flag 3: There’s a layering of fees. If you go giddy reading the fee disclosure, it’s not a good sign. There could be an advice fee, brokerage and implementation fees. The best advisers will have very clean fee structures.

Red flag 4: Disclosure statement is buried. This is the document outlining fees and how they are paid. If it is tacked on the back of their advice with no discussion, it raises a red flag. A good adviser will discuss how they are paid and put all fees into one lump sum at annual review time.

Red flag 5: Valuations arrive with a note saying “fees not shown”. Most advisers use administrators like FNZ and it’s just a box they tick or untick. If it arrives not showing fees, the adviser has asked for you to see it this way. It doesn’t bode well for their attitude to disclosure. It’s another trap for the those labelled wholesale investors.

Red flag 6: The feeling of pressure. Advisers with confidence will offer to introduce you to other clients for a testimonial. Successful advisers don’t need to pressurise or slate the competition.

Red flag 7: No mathematical modelling. Those with skills will project your pay rises, life changes, inflation and overlay with techniques like Monte Carlo modelling of market returns. They reverse engineer this into projected retirement income levels to keep you focused on the end game.

If you’re in retirement they continue to model your drawdowns and longevity.

Red flag 8: Slap-stick annual reviews. If you get a phone call with a load of burble about the markets and politics, it wasn’t a financial review. Nor does it justify the annual fee. Your goals, life changes, earnings, health and spending should all be the focus.

Red flag 9: Not meeting face-to-face. You should have met at least once face-to-face and get the impression the adviser wants a lot of information about your family, where you work and where your money came from. It’s basic investigation that assists the money laundering checks.

Red flag 10. Lots of in-house product. Fund managers and banks that sell a large percentage of their own product to you. The conflict of interest is barely masked.

Janine Starks is the author of and a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product

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