On May 24 I wrote my first “tweetstorm” (follow me on Twitter here). I made a number of observations about the FMA’s recent snapshot of NZ’s 1,800 Authorised Financial Advisers (AFAs).
One finding in particular sticks with me. Only 3% of New Zealand’s 1,800 AFAs provided direct property investment advice over the course of twelve months. My first thought was that it was “scandalous”, and I think it is: there’s a scandal in plain sight in NZ.
Let me clarify.
There is legislation in place to make sure Kiwis receive high quality advice about their financial affairs (or at least, that advice meets minimum quality standards). The primary piece of legislation is currently the Financial Advisers Act 2008 (the Act).
The Financial Advisers Act regulates the provision of financial advice in New Zealand. More technically, it regulates “financial adviser services”, as defined by section 9 of the Act. It consists of three prongs: giving “financial advice”, providing an “investment planning service”, and providing a “discretionary investment management service” (DIMS).
We don’t need to worry about DIMS for the purpose of what I’m talking about. Nor do we need to worry about “financial advice”, because it relates to recommendations and opinions relating to financial products. Direct property isn’t a financial product.
But it’s when we get to providing “investment planning services” that things get interesting. You see, someone provides an “investment planning service” if they design a plan for someone that is based on that person’s current and future financial situation, including their investment needs and goals, and makes one or more recommendations or opinions on how to realise those goals. For the exact wording, check out section 11 of the Act.
Note that the definition of an investment planning service doesn’t refer to financial products. If you’re preparing a plan that relates to person’s investment needs and goals, you’re providing an investment planning service. It doesn’t matter if your recommendations relate to financial products or, say, an investment in direct property.
Section 18(1)(b) of the Act states that only AFAs can provide investment planning services.
Which means, we have a situation where only 1,800 people in the country can provide investment planning services. And of these 1,800 people, only 48 (that’s less than 3%) actually provided advice about direct residential property over a twelve month period.
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This begs the question:
Where are people getting advice about direct property?
Of course, there are a lot of people providing advice about direct property. Friends. Family members. Next door neighbours.
And of course: Real estate agents. Mortgage brokers. Bank representatives. People and organisations who, as a rule, have incentives to encourage you to buy property and spend as much as possible on these properties.
What type of advice are people receiving?
Are people receiving independent advice relating to whether buying or keeping direct property is in their best interests – within the broader context of their circumstances, needs, objectives, values, and priorities?
Is the advice giving consideration to the very real risks of property – notably, the fact that direct property is illiquid and undiversified, and that these risks are magnified by the fact that lending (gearing) is often involved?
Is the advice considering alternative ways that people can invest money? Including, for example, highly liquid, diversified, low-maintenance investments in financial assets such as managed investment schemes?
Maybe the “advice” people are receiving is limited in scope – for example, presuming that the client has already committed to investing in direct property and the advice is directed towards how to best invest in property. In which case I don’t think the advice is caught by the Act. But advice in this sort of context is limited in nature. It doesn’t consider the client’s broader circumstances, needs, and objectives, and alternative ways of achieving these objectives. It doesn’t consider the big picture.
Perhaps some people are trying to take advantage of the exemptions in the Act. Section 13(1), for example, states that “A service is not a financial adviser service for the purposes of this Act if the service is provided only as an incidental part of another business that is not otherwise a financial service or does not have, as its principal activity, the provision of another financial service”.
So we see a lot of organisations that promote them as specialists in property investments, which may or may not be cleverly marketed real estate agencies. And/or they might be about providing education (such as expensive seminars) to people about real estate investment. In fact, they might even argue that is the major part of their business – and that any other service they provide, which might otherwise be an “investment planning service” for the purposes of the Act, is incidental to the other part of their business. Even if the carrot of “wealth” and “passive income” and “freedom” (*ahem financial investment goals*) is what ultimately encourages their clients to invest in property.
Of course, they don’t usually charge directly for providing something resembling a personalised investment planning service. They make money in lots of other ways. So you could argue that from a revenue perspective, this service is incidental. Even if it might be central to generating the other forms of revenue they receive.
In my view, the fact that in a twelve month period only 48 people who are actually authorised to provide fully regulated investment planning provided direct property advice to Kiwis is astonishing.
It makes me wonder where people are really getting advice about directly property; what sort of advice they’re receiving; and whether they actually realise the limitations and conflicts of interest of interest associated with this advice.
In my view, Kiwis deserve more.
(Full disclosure: I’m one of those 48 advisers. Even fuller disclosure: for most clients, I’ve recommended against investing in property, or I’ve recommended selling one or more properties they already have. Which isn’t to say I’m totally against property: I’ve recommended it, but only in limited circumstances. In my opinion, there are better ways to invest for most Kiwis.)
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