Unregulated financial coaches: I’m not sure how they do it!

Sonnie Bailey

30 September 2022

New Zealand has quite a few “financial coaches” whose services are investment-flavoured. Many of these coaches believe they don’t provide financial advice, and don’t need to be regulated in the same way as financial advisers. They either say this explicitly, or by implication – since most people only promote and provide services if they think it’s legal to do so.

I’d like to think I’m pretty switched on in some areas. But I’m also pretty slow in others. I think this area must be the latter, since for a lot of these coaches I can’t seem to square this particular circle.

I’ve been thinking about this in a bit of detail, because I’m completing a Graduate Certificate in Professional Coaching. I’m also finalising some paperwork associated with the new financial advice regulatory regime. In this context, I’ve been thinking a lot about how I’d offer a “financial coaching” service as part of Fairhaven Wealth’s offerings, and in doing so, wondering whether and how I could offer it as an unregulated service in a way that sat well with me.

I’m coming up short, at least for the type of financial coaching I’d want to do.

In New Zealand, there are regulations relating to financial advice that are intended to protect consumers. They used to be set out in the Financial Advisers Act but they were recently updated, and are now in the Financial Markets Conduct Act (the FMCA).

Section 431F of the FMCA states that someone can’t give “regulated financial advice” to retail clients (which is most people) – unless they’re a financial adviser or nominated representative of a financial advice provider.

To simplify: you can’t give regulated financial advice unless you’re authorised to do so. Section 449 of the FMCA says that an individual can be penalised up to $200,000 and a business up to $600,000. (It’s unlikely that fines would ever be this high unless there is some really egregious and consequential behaviour.)

This section, and the sections that relate to providing regulated financial advice, are in place to protect consumers. When someone provides regulated financial advice, all sorts of additional obligations apply as well. For example, the adviser has a duty to meet standards of competence, knowledge, and skill (431I), a duty to give priority to the client’s interests (431K), and to exercise care, diligence, and skill (431L). They’re also subject to a professional code of conduct (431M). Similar penalties to what I’ve described above can apply in each case.

A person can’t just say “I’m not a financial adviser” and then continue on their merry way. Whether someone provides “regulated financial advice” isn’t determined by whether they say they provide advice or not. It’s set out by the FMCA.

There are two parts to whether something is regulated financial advice. First, it has to constitute “financial advice”. Then, the next question is whether it’s “regulated financial advice”.

Section 431C of the Act defines “financial advice”. It includes one or more of the following:

  • Making a recommendation, or giving an opinion about, acquiring or disposing of a “financial advice product”. This includes bonds, shares, managed investment products, insurance contracts, consumer credit contracts, and the like. It doesn’t include recommendations or opinions relating to non-financial products, such as direct property.
  • Recommending or giving an opinion about switching funds within a managed investment scheme. For example, switching from “conservative” to “growth” within a KiwiSaver fund or some other managed fund.
  • Designing an “investment plan”, purporting to be based on an analysis of someone’s current and overall financial situation, identification of that person’s investment goals, and including one or more recommendations or opinions on how to realise one or more of that person’s investment goals. 

Notably, when it comes to designing an investment plan, the recommendations or opinions aren’t constrained to financial products – it can relate to any sort of recommendation or opinion.

Recommendations or opinions to “repay debt”, “buy property”, or even “try to earn more or spend less” are arguably caught by this definition, since any of these can help a person achieve their investment goals.

Section 431C then states that financial advice is only “regulated financial advice” if it’s “given in the ordinary course of a business”.

Whether something is done “in the ordinary course of a business” depends on the circumstances. If a financial coach is providing their services and being remunerated for doing so, I find it hard to imagine them arguing that they’re not doing this as part of a business. In fact, the FMCA has a specific carve-out for not-for-profit organisations that don’t charge, but might still be providing advice in the ordinary course of business (clause 13 of Schedule 5).

There are exclusions relating to certain professionals, such as  journalists, lawyers, accountants, and real estate agents, where the advice is in the ordinary course of carrying out their occupation. There is also an exception for teachers, but only for teachers holding a “teaching position” as defined by the Education Act 1989, which makes it hard to say that you’re only providing advice in an educational capacity.

How can you provide financial coaching without stepping over this line?

This is where I can’t square the circle. Financial coaches will almost always be dealing with retail clients. They are doing it in the ordinary course of business. I don’t think any of the specific exemptions apply.

The only way of providing this sort of service without triggering these regulatory requirements is by not providing “financial advice”, as defined by 431C. Let’s look at the three types of financial advice in more detail.

  • Making a recommendation, or giving an opinion about, acquiring or disposing of a financial advice product.

Note that this doesn’t just include recommendations, but can include opinions. For example, “I don’t like this particular product”, or “this is a good product”, or “you might want to investigate one or more of these products”. It doesn’t have to be specific, like “I recommend investing $200,000 into the growth option offered by XXX fund manager”.

Interestingly, the New Zealand definition of advice doesn’t even require an intention to influence the person receiving the opinion, which is the case with how financial advice is defined in Australia.

I guess you could have a conversation about money, which invariably involves talking about financial products, and not share anything resembling an opinion. Personally, the verbal acrobatics are beyond me.

  • Recommending or giving an opinion about switching funds within a managed investment scheme. For example, switching from “conservative” to “growth” with one provider.

This definition covers a gap from the previous definition. Someone might already be invested in, say, a KiwiSaver fund, and a person could give a recommendation to switch from, say, a “conservative” option to a “growth” option, and not technically be telling that person to acquire or dispose of a financial product.

As an unregulated financial coach, you’re restricted from saying that someone should, say, switch from the current “conservative” KiwiSaver fund to the “growth” option. Or giving an opinion that it might be a good idea, or it would be a good idea for someone in their situation.

Or, if someone thinks out loud about switching funds, you couldn’t give an opinion about whether this is a good idea.

Again, maybe someone with more verbal facility could do this. I couldn’t.

  • Designing an investment plan, purporting to be based on an analysis of someone’s current and overall financial situation, identification of that person’s investment goals, and including one or more recommendations or opinions on how to realise one or more of that person’s investment goals.

This is a tricky one. This definition is important because it doesn’t just relate to financial products. It covers any recommendation or opinion. Because of this, it has the potential to be very wide-ranging.

Having said that, it might be difficult to prosecute someone on this one. Section 431C(1)(c) reads as follows:

A person gives financial advice if the person— …

(c) designs an investment plan for a person that—

      (i) purports to be based on—

            (A) an analysis of the person’s current and future overall financial situation (including investment needs); and

            (B) the identification of the person’s investment goals; and

      (ii) includes 1 or more recommendations or opinions on how to realise 1 or more of those goals

For one thing, does a financial coach design a plan? Or could the coach be helping the client design their own plan? Is that a distinction with a difference? I don’t believe this has been decided in court.

Even if the coach helps to design a plan, is it an investment plan?

If you’re helping someone plan to invest in property so they can retire comfortably, then that seems like an investment plan to me.

I can imagine some instances where someone could be a money coach and isn’t helping with an investment plan. For instance:

  • Helping someone with their budgeting seems like a pretty good example. If the only aim is for people to identify ways where they can save money, or spend more mindfully, or even get more clarity about where their money is, then narrowly speaking, that doesn’t seem like an investment plan to me.
  • If you’re helping someone to plan so they can break free of debt and the cycle of living paycheque to paycheque, you could make a pretty compelling argument that you’re not designing an investment plan. Arguably, you’re designing a plan to get them to a point where they can start to think about having an investment plan.
  • It might be possible to work with someone to identify what their actual money goals are. This might include assessing whether they’re on track or not, making various assumptions (and being agnostic as to these assumptions). Anecdotally, a lot of my clients find this extremely valuable, and often the most valuable part of the advice process. However, I can’t think of a single client who came to Fairhaven Wealth and wanted to pay for that particular exercise on its own.

I think it’s fair that the services above don’t constitute regulated financial advice. I understand the argument for why specific consumer protection might not be necessary.

There are, however, in-between situations. For example, if someone is made redundant, and wants a plan for seeing them through the challenging period of trying to find a new role, then it might not be an investment plan. But what if there is an investment component? For example, an ancillary part of the plan is what to do with a redundancy payout and/or KiwiSaver funds? Would a court see a plan to use resources to retrain as a form of investment?

Is something an investment plan if investing is only a small part of the plan?

These are beyond the scope of this article, and my own interests. If I provided coaching services, I think there would be an investment planning component (even though I’d be helping a client develop their own plan, rather than doing the planning myself).

Personally, I’m pretty conservative. Even if I was helping a client to design their own investment plan, I’d still feel like I was close enough to the planning process to be caught, and I’d want to be authorised to provide financial advice.

When I step back and think about the situation from a policy perspective, it also feels right that specific consumer protection legislation should apply.

How would I do it?

If I wanted to provide coaching services and avoid the “investment planning” line, I could consciously do a few things so that the definition relating to designing a financial plan didn’t apply to me:

  • I could refrain from sharing any opinions or recommendations at all.
  • I could share opinions or make recommendations, so long as they don’t appear (ie, “purport”) to be based on any analysis. That’s a bit like saying I’d just share random opinions and recommendations without any recognition of the context or the information that we’ve been discussing. That would be kind of weird.
  • I could make statements that are based on analysis, so long as it was pretty clear that this analysis wasn’t based on the client’s overall financial situation. I’d have to make clear that I’m ignoring, or being wilfully blind, to something. Basically, I’d need to acknowledge that there’s a good chance (or likelihood) the plan was wrong, since it doesn’t cover their entire situation.

None of this sits with me. But maybe I’m too conservative. And maybe I don’t have the same level of intelligence and verbal facility as others.

If I were to narrow Fairhaven Wealth’s services to a coaching service only, I still feel like I’d need to be authorised to provide financial advice. I would try to be very clear that the service would not be about providing advice. Within the normal understanding of things, it might be accurate to say I’m not providing advice. To the extent “regulated financial advice” was provided, it would be ancillary to the main service.

However, whether I’d be providing “regulated financial advice” isn’t a question of my own representations, or what the normal understanding of things is. It is based on very specific wording set out in the Financial Markets Conduct Act.

Would this be annoying, and more than a little bit inconvenient? Yes! From a selfish perspective, I’d much prefer to provide services without jumping through the hoops to be authorised, and meeting all of the ongoing obligations associated with being authorised.

It’s tempting to think – “Of course I would provide a great range of services, and there’d be no need to regulate me!!”

But there’s a reason these regulations are there. Consumers need to be protected. Of course, my services would be absolutely fine!!!

But what about someone who called themselves a financial coach and was less scrupulous? Or who had great intentions, but knew enough to be dangerous?

My personal view is that most financial coaches should be authorised to do so. Otherwise, they need to contort themselves to ensure they don’t step over the line of providing regulated financial advice, which means they have to limit the value they can provide to clients.

I also think that financial coaching can be enormously consequential – and that the consumer protection requirements set out in the FMCA should apply.

But that’s just me. This isn’t legal advice. My analysis could be wrong. But I personally wouldn’t provide investment-flavoured financial coaching services without being authorised, and in most cases I wouldn’t be keen on a close friend or family member using an unregulated financial coach – unless the service was very narrowly scoped, like providing budgeting services only.

 


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