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The Trans-Tasman Scoresheet

There is an interesting article on the Australia Financial Review website titled "Advance Australia, Fair and Square" written by David Chaplin. Half way through the article there is a section titled "The Trans-Tasman Scoresheet" which has a comparison of Australia and New Zealand financial advisory regimes done by Angus Dale-Jones.

Here is one of the five measures discussed - "Client engagement: As financial advice increasingly moves from transactional to relationship-based, maintaining client engagement becomes more important.

Australia has acknowledged this in legislation and provided the mechanisms to achieve it – the opt-in and annual fee disclosure rules all act to boost the value of that ongoing engagement.

There’s a big gap there for New Zealand to reflect on."

Click here to read the full article.


Why Are Investment Advisers Prone to Offering Poor Insurance Advice?

A friend who is a financial planner, and highly competent in that field, especially in investment planning but also in all manner of financial decision-making, baffled me with his approach to insurance a little while ago.

Allow me to contrast the difference in approach, between his investment planning service and his insurance advice:

Providers: for investments many options were given, for risk, just two.

Products: investment product ranges were carefully selected to provide many complementary options - a mix of management styles, geographical areas, large and small. No such mix was provided with insurance, in fact, the two ranges closely resemble each other.

Criteria: a page of detailed financial information, corporate information, and even details of management staff were included in the selection criteria for the fund managers - nothing more than the financial stability rating was given for the insurance advice.

Calculations: lots of time and effort had gone into comparing funds and calculations of risk of the recommended portfolio and future possible returns, contrasted with estimates of inflation and benchmarks were included. A bare calculation of cover amounts was included for insurance, and little attention was paid to future-proofing tools such as indexed benefits and special events increase in cover options.

Alternatives: were given plenty of discussion in the investment plan, but little in the insurance plan.

I could go on. Also, I don't think the approach is atypical. It is strange, though, that financial advisers do not always apply the same standards of advice to the secondary advice field offered. But before insurance advisers feel to smug about their superior level of service in their primary area of expertise they should consider how good their service is when, say, offering access to some KiwiSaver scheme.

Wider Definition of "Credit Contract"

Chapman Tripp website writes about the Consumer Credit and Financial Services Law Reform Bill "The Bill expands the definition of “credit contract” by removing an exemption in the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) for contracts which are leases of goods under a financing arrangement.
The change is aimed at “loan sharks” who finance purchases of consumer goods such as furniture or appliances and who - due to their unregistered status - “are likely to be less scrupulous in their dealings with borrowers, and less concerned about complying with other laws such as the Credit Contracts and Consumer Finance Act (CCCFA)”.1"  
Read the full article here.

Pre-screening and Positioning Before Pricing Risk

Quoting the lowest possible price, when most applicants will pay more, is guaranteed to manufacture disappointment. It also sets up the wrong impression of priority: that price is the most important issue in the process of buying insurance. In fact, it isn't: as virtually everyone pays more than the lowest available price virtually everybody must be prioritising another factor.

That being the case here are the main reasons why premiums usually vary - the client will:

  • ...pass a birthday during the underwriting process
  • ...receive a loading for a pre-existing condition
  • ...be assessed in an occupation class different from that immediately thought of
  • ...choose benefits and sum assured levels other than those initially selected

So why is price quoted before a proper advice process is conducted? Usually the client wants to get some impression of what the overall cost could be. That way they know whether they are wasting their time or not. Which is why this is an ideal time to be asking them what their budget for cover is. That way you can have a discussion about what a sensible budget is, and explain to the client what kind of cover can be purchased with the sums they have in mind.

Assuming you st a budget and the client is still keen on obtaining a price early in the process - perhaps because they wish to compare with a price they already have - for existing cover, or a quote issued by a bank, then you might consider some basic pre-screening questions:

  • Have you had any sick leave?
  • Are you in good health now? If not, why?
  • Have you ever had heart trouble, high blood pressure, cancer, or depression?
  • Do you smoke? If not, have you ever smoked?
  • What is your occupation?
  • When is your birthday?

Some advisers would also add: were you asked these questions before being issued the quote you have? It's the obvious next step - as when you issue a realistic quote, with a proper warning about the underwriting process, it will often be more expensive than the quote they are already holding, in which case you should remind them: that quote will probably not take these issues into account.

Which is a good place to start talking about the value of a professional advice process.

Scope of Service: Don't Agree To Fail

Once they have agreed to enter the advice process, most clients are happy for advisers to lead: defining what information to collect, how to analyse, and what to recommend. Some are difficult: immediately severing important areas of their financial lives and marking these off as taboo, or worse they specify just one area of work:

"I only want mortgage protection insurance"

It sounds specific, but given there is no fixed definition of "mortgage protection" it is actually a trap. In fact agreeing to such a limited scope may be functionally the same as agreeing to give bad advice.

Unless the boundary for a limited scope of service can be clearly defined there may be no safe way to engage with such a client, and so it might be better to decline the engagement.

If you accept that then you might as well challenge the client to accept a broader scope of engagement. One way to do that is to point out that the client always retains perfect freedom to decide what they will proceed with. So they get the benefit of the whole advice process even if they only plan to proceed with the 'mortgage protection' or the 'life cover' or whatever limited part of the picture they started to define.

FMA Publishes a Guide for Directors with the IoD

The Institute of Directors in conjunction with the FMA has published a guide for directors. While not exclusively about financial services virtually all the illustrative quotes come from recent proceedings against directors of financial services companies. That in itself is telling: our recent crisis in governance has been in the financial services sector. What the IoD knows, however, is that doesn't mean everyone else is fine. It means that a sector under stress can demonstrate governance failures, especially if Directors are unaware of their responsibilities or lack the tools or expertise to properly meet them.

The guide is clear, well laid-out, and breaks down each major responsibility into parts: what the issue is; how to address it; and then linking each back to why it is an important duty.

You can grab a copy at this link.


The Skills Organisation Report

The Skills Organisation has produced an excellent report on the financial services sector. Originally designed to help them understand the needs of the sector better, the report also provides a helpful post-regulation benchmark on a number of important issues such as:

  • Types of advisers
  • Time in the industry
  • Gender and age
  • Incomes
  • Types of qualifications held by types of adviser
  • Motivations for undertaking study
  • Attitudes towards qualifications

You can find the report at this link. Regular clients of our Quarterly Market Review will receive a more detailed commentary on the report.

Housing NZ Insurance Settlement

There will doubtless be a lot more comment about whether or not the Government got a 'good deal' with the $320 million settlement between a group of insurers, lead by Vero, and Housing New Zealand. Unlike some, I am not surprised at all that the amount claimed initially was higher than the final settlement, that is typical, and therefore not unusual. I believe the settlement is probably very good for getting faster progress on the Christchurch rebuild.

You can read more here. Link.