OPINION: New Zealand’s wealth gap is already growing at an alarming rate, how do we make sure new advice regulation doesn’t make it worse?
Last week, New Zealand’s financial advice regime went through massive change with new regulation coming in to make the financial advice regime fairer and safer for customers.
This change was long overdue, though like all good things if not carefully managed it has the potential for some disastrous side effects.
Broadly, the new financial advice regime is meant to improve the quality and consistency of advice.
It does this by improving disclosure (for example advisers now have to tell you how they get paid), ensuring clients’ interests are put first in any conversation and upping the ante for advisers themselves, by bringing in competency standards and a code for professional conduct.
* ACC, other big Crown agencies instructed to come clean on climate risk to bottom line
* Unleashing the power of New Zealand’s small and medium enterprises
* National forecasts funding start-ups with KiwiSaver draw-downs and tax credits would cost $97m
* ‘The banks don’t care about you, the shops don’t care about you, big employers don’t care about you’
Another significant change in the regime is the removal of class advice, this is a very grey area where a person is given advice on a financial product based on the type of person that they are.
For example, if you are approaching retirement and advised to go into a conservative fund purely on the basis of your age without taking into account your other needs and situation it is class advice.
In effect, we’re seeing financial advice move out of the wild west and into some more civilised, consumer-friendly territory. This is something that is long overdue in New Zealand and like many forms of financial legislation we are a laggard long behind other markets.
However, all of these changes will result in increased process and costs, which will reduce the availability of advice for everyday Kiwis. For a low-cost product like KiwiSaver, the impacts might be especially severe.
What could shrinking the advice market across the ditch mean for us?
Our neighbours across the pond introduced some reasonably similar regulation back in 2017, which has seen financial advisers running for the hills.
According to Adviser Ratings, more than 4000 Australian financial advisers left the sector in 2019, and this has resulted in the lowest number of advisers there since back in December 2015.
The cost of the updated requirements and the administrative burden have left many of them rethinking their profession, including many of the large Aussie banks getting rid of their financial planning service arms entirely.
So why should regular Kiwis give two snags about a few Australian suits losing their jobs?
A shrinking advice market means less advice which is the advice gap
Since the UK implemented tighter financial advice regulation back in 2015, they have seen 400,000 more people finding financial advice unaffordable and the equivalent of five million more being unaware of free financial advice that could benefit them.
It’s what’s become known as the “advice gap”, a class struggle that separates the financially better off and those struggling to make ends meet.
When there are fewer financial advisers, those left around are naturally going to target clients with more money to spend.
Regulators will argue that in improving the quality of our financial advice industry, we’re putting more trust back in the profession which will drive more people to seek advice, but this is out of step with the reality on the ground.
In a recent Financial Services Council survey, 78.1 per cent of New Zealand advisers worried that regulation is going to reduce the accessibility of professional financial advice for consumers.
For me, working every day with Kiwis trying to save for their retirement, I see any additional barriers to financial advice as a huge red flag.
We already know that fewer than one in five Kiwis are getting any official financial advice in first place, and those that do receive it have 52 per cent more in their KiwiSaver accounts.
These are significant numbers that make a huge difference to the standard of people’s retirements.
Considering this against a backdrop of New Zealand’s historically bad wealth inequality, and this regulatory change has the potential to be a recipe for disaster for New Zealand’s poorest.
Could robots be the answer?
One solution that has bubbled up in recent years has been digital (or robo) advice. These clever tools imitate the same kind of advice that an in person advisor could provide, but do this through automation and AI.
Digital advisers have been hailed as a massive opportunity to capture some people priced out of in-person advice with a cheaper solution – particularly important when we consider the potential shrinking of New Zealand’s advice market.
Overseas the likes of Nutmeg in the UK and Betterment in the US have taken the idea of digital advice into the mainstream consciousness, while in New Zealand, digital advice is still in its infancy.
As it stands, we still only have a handful of these providers locally. This is going to need to change, and quickly.
Regulators and financial service providers are going to need to move at pace to bring these tools into the mainstream.
By increasing the barriers to financial advice, New Zealand’s advice gap and corresponding wealth gap will only increase.
Digital advice is the only viable low-cost solution to try and make up for this shortfall, and if the market doesn’t respond rapidly enough, it’s the poorest New Zealanders who are going to be hit the hardest.
Rupert Carlyon is the founder of Kōura Wealth.