Why Consumer was Wrong

Categorized | Finance

Written by: Liz Koh | Posted on 30 November 2009. Tags: liz koh, money management

Consumer Magazine, once regarded as a trustworthy if somewhat fusty publication dedicated to providing its readers with an objective assessment of the performance of washing machines and hair straighteners, has recently published the results of a major project to uncover something that we already know. The standard of financial advice in New Zealand needs to be improved.

This was clearly a report for which the headline had already been written, aimed more at using sensationalism to sell magazine subscriptions than providing consumers with an objective review.

There are already numerous initiatives underway to improve standards of competence, ethical and professional behaviour, disclosure and dispute resolution for financial advisers, none of which will be enhanced by the findings of the Consumer report. The principal outcome has been the destruction of public confidence in financial advisers, which means that sadly many people who need good advice won’t ask for it.

Consumer asked 11 mystery shoppers to obtain financial advice from 33 financial advisers and then rated the financial plans that were written. The complexity of financial advice is such that a mystery shopping exercise is an inappropriate methodology to test the quality of advice given. Financial advice is a process, not a written plan and the quality of advice is best measured by the outcome of the advice; something that is not easy to do objectively. It most certainly cannot be measured by the quality of documentation.

A major focus of the Consumer report was what were termed ‘pre-retirement plans’. Consumer have correctly identified that there is a huge gap in the market in that people with low equity, high levels of debt and little in the way of savings find it difficult to obtain financial advice.

The reason however, is not as contended by Consumer that the standard of financial advice available is scandalously low; it is quite simply that such people either cannot afford to pay for advice or are unwilling to do so.

Advisers who offer written pre-retirement advice generally do so at a loss and hence many choose not to offer this service, or to give verbal advice only, often with no charge.

Consumer described the average cost of pre-retirement plans (around $700) as expensive. Based on an average hourly rate of $200, this would cover around 3 ½ hours of time, of which at least two hours would be taken up by meeting with the client. Few are willing to pay the $2-3,000 I estimate it costs to prepare a detailed pre-retirement plan. For Consumer to say on one hand a $700 plan is expensive and on the other hand to reject 5 of the 7 pre-retirement plans on the basis that they lacked detail is absurd unless they consider that advisers should be offering a charitable service.

Consumer’s recommendation to investors that they only use advisers who charge an hourly rate rather than a percentage fee is difficult to fathom and would result in advisers being nothing more than transactors unable to give pro-active advice.

Had Consumer intended to use a fair process with this study there are several things they would have done differently. The panel would have omitted those with a known anti-adviser bias; the rating scale (good, disappointing and rejected) would have been objective rather than sensational; reasons for ratings would have been given and mystery shopped advisers would have been offered the right of reply.

It will be interesting to see what effect this Sunday tabloid style of journalism has on Consumer’s credibility.

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This post was written by:

Liz Koh - who has written 25 posts on Business Blogs.

Moneymax was established by Liz Koh, one of New Zealand’s leading Certified Financial Planners, to provide wealth creation, wealth management and wealth protection advice so that you can achieve the things in life that are important to you.

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32556 ResponsesWhy+Consumer+was+Wrong2009-11-29+20%3A38%3A58Liz+Koh to “Why Consumer was Wrong”

Keithw says:

November 30, 2009 at 9:42 am

“..unless they consider that advisers should be offering a charitable service…”

This is exactly where the problem lies.
New Zealanders in general have a problem with paying people for services & don’t believe in business making a profit, as there has been to much profiteering in the past (and still is with SOE’s, Banks Finance co’s etc).
The mentality of the Nanny state, where everyone expects to be given whatever they want for free, without having to work for it, drives expectations in all areas.
This drives all the real costs to be hidden within proposals/ items/ recommendations etc rather than fully disclosed as may happen in Aus & other countries.

The other side is the fierce DIY attitude -why should I pay someone when I can do it myself

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- Hugh says:
  
  December 1, 2009 at 9:58 am
  
  Anyone who uses the term “Nanny state” instantly exposes the limits of their understanding.
  
  Reply
Johan says:

December 1, 2009 at 3:16 am

“Had Consumer intended to use a fair process with this study there are several things they would have done differently. The panel would have omitted those with a known anti-adviser bias; the rating scale (good, disappointing and rejected) would have been objective rather than sensational; reasons for ratings would have been given and mystery shopped advisers would have been offered the right of reply”

Mystery Customer Research needs to be set up properly, from the text above I have doubts about the research methodology.
Selection of credible shoppers, validation, testing etc are crucial to a successful mystery shopping program.

Subjective questions in a mystery shopping research program are a definite NO NO. Mystery shoppers are trained to perform evaluations and will never be unbiased.

Mystery shoppers should never give ratings but answer closed questions and add comments to answers to explain.

We are always happy to advise how a good mystery shopping program is conducted. http://www.helionresearch.com

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Michael Bare says:

December 1, 2009 at 3:41 am

Credible Mystery Shopping is based on objective documentation, not subjective opinions.

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Vince says:

December 1, 2009 at 8:47 am

How come no body questions why the charge should be “$200 per hour” for recycling the same BS to every would be pensioner or advice seeker ? We in NZ have been fed, and buy, the line that the price has to go up and it is X when in every aspect our costs are one of the highest. I see today that the real estate people “have” to put up their commissions ! I can put up with profits but this is daylight robbery. It is everyone.

I spent > $3000 getting advice in 2000 from a well known ‘big 5′ company and being advised by a person who has gone on to become a well known published author. the advice was — set up a trust, sell your investment properties, get diversified, give all money to us to invest. Cant find fault with her but it was generic advise.

I am glad I did not sell property and put it in set and forget investments as suggested by the person. But am pissed off (with myself) that I took their “diversify” advice seriously and did not buy any more property just before the mother of all booms.

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Chris says:

December 1, 2009 at 1:41 pm

Liz, contrary to your unsubstantiated claim, Consumer NZ (unlike the financial planning industry you represent), remains a trustworthy and reliable source of independent advice. And unlike the financial planning industry, it openly discloses where its income is derived from.

So long as financial planners in NZ continue to receive commissions, they will keep recommending investments that may not be in their client’s interests, but which instead enrich the financial planner.

For example, finance company Bridgecorp paid twice the commission of other companies and consequently many, many financial planners recommended it to their clients. Now that Bridgecorp is in receivership it owes thousands of investors all over NZ the sum of $450 million. Liz, how much did you make from recommending Bridgecorp to your clients, before it went bust?

Rather than denigrating Consumer NZ, which for 50 years has been providing impartial and unbiased advice to the public, you should instead use your influence to get your own industry in order, before the Government steps in and does it for you. Already the Government has had to force advisers to tell their clients what their qualifications and experience are; and criminal records checks are just around the corner under the new Act.

Just this week an Australian report has recommended to its Government that it put an end to financial advisors receiving commissions, and the FSA in England wants it outlawed in three years.

Wake up and smell the breeze of discontent Liz, instead of trying to defend the indefensible.

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