Who gives you financial advice?

“Chief executive Charles Anderson said the level of qualification among the SovNet force varied from nothing more than high school exams through to a handful with university degrees.”

Maria Slade, NZHerald

That’s the CE from Sovereign, an insurance company, and he was referring to the need for their 4o0 financial advisers to become certified within the next few months. This begs the question:

Why would you take financial advice from a group that where almost everyone does not even have an undergraduate university degree?

A degree confers two benefits. Firstly it demonstrates to employers that a potential employee has a certain level of intelligence and discipline, and more importantly has the ability to keep learning. Secondly it allows the graduating student employee to send a signal to potential employers that they are serious enough about their working career to take 3 to 4 years out to prepare for it.

While there are plenty of cases where people demonstrate that a degree is an unnecessary requirement for a successful career, it’s astonishing that only a handful out of 400 financial product sales people have a degree.

Insurance is a complex product. To decide whether to buy insurance or not you need to be able to correctly assess your own risk of loss, your ability to mitigate that risk, the cost of the premium, the likelihood of the insurer to pay and the alternative use for money used for premiums. You also need to be able to parse the complex documents that the insurers provide as it is the individual clauses that determine the value of each contract.

Advisers need to take all of this into account, and genuinely help clients assess the options. However insurance agents are usually guilty of instead emphasizing the low probability risks and selling on emotion – and why not, as it clearly works.

But Sovereign and other firms don’t just sell insurance these days. The Sovereign website offers a range of financial products, including investments and homeloans. That means the advisers need to really understand the financial goals, constraints and requirements for their clients. They are dealing in an area that has enormous levels of impact for their clients, and it requires a very high level of trust and competency.

There is plenty of evidence of a lack of honesty and competency in the industry – starting with the horrific advice given to investors in the collapsed finance companies. All in all the new law is necessary.

While I would not expect an adviser to know about Black Scholes or the efficient market frontier, I would expect them to be recommending a well diversified portfolio of assets across asset classes, industry sectors and geographies. I would also expect them to know that churning a portfolio is almost certainly going to result in lower returns, and indeed that funds almost always under-perform the market in the long term.

I believe that the large insurance companies and banks will actually do well out of this new law, at least in the short term. They have the ability and wherewithall to make sure that all of their staff attend the necessary courses and sit the exams in time. AXA has already trained 180 advisers in their own academy, and are tracking to finish before the law takes effect. While some staff will not make the cut in the larger companies, those companies will keep the majority of their advisers, while many other advisers attached to smaller companies or self-trading will fail to do the study.

About Lance Wiggs

@lancewiggs
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6 Responses to Who gives you financial advice?

  1. Simon Lyall says:

    I don’t really follow your reasons for advisers needed a degree. At the start you say it’s a signal from the candidate as to their dedication and staying power but further on you talk about skill and knowledge requirements for the job.

    It would seem to me that the reason that Financial advisor don’t have degrees is that they confer no advantage in the job. Furthermore I would expect that people who have a degree in Accounting, economics or commerce are probably aiming for something better hence don’t get into the field.

    What the article tells me is that the job is primary sales rather than knowledge based. The new qualification indicates that the amount of knowledge required can be picked up with a few months of study.

    If anything the new qualification further reduces the need for a degree since it provides the “dedication” signal that can be used by employers.

    Of course the main idea (as you point out) behind the qualification is to “professionalise” the industry and allow the insiders and big players to get a bigger piece of the pie by effecting barriers to entry.

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    • Lance Wiggs says:

      Yes I agree that the job is primarily a sales one, and that this is a skill that is often not so correlated with having a degree. And yes the jobs may not be that appealing for recent graduates, and employers may want to find cheaper employees that do not have degrees. (I imagine also that the pay is based on sales performance, with a relatively low base and a high commission based income structure.)

      But it does not address the issue – that people are taking advice from advisers that know, essentially, very little. The advisers are selling, they are not advising. So let’s go back to calling them life insurance salesmen/women and the like. At least then we’d know what sort of person is walking into our house.

      I’m concerned that people will take ‘advice’ from an adviser that they would not take from a salesman, and I trust that the insurance companies are taking advantage of that situation.

      For the record I would never buy an investment product from an insurance company – their overheads are generally ludicrous. I do, however, own some shares in Berkshire Hathaway.

      L

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  2. Josh says:

    Lance,

    Surely what’s needed is a standardised statement of compensation on the part of the financial advisor. Prior to any discussion or sale of services/policies. Being able to use the term advisor should generally indicate the advice is independently given without financial implications for the customer’s investment decisions.

    Of course this doesn’t happen and salesman is the term they should be operating under. Nothing wrong with ‘selling’ an insurance policy but the customer knows the nature of the salesman’s interest and that advice typically reflects that.

    I don’t go to the electronics shop to speak to an advisor, I speak to an advocate/salesman/whatever and interpret their comments as such.

    Josh

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  3. Rob says:

    Where have you been for the last 5-10 years. This is common practice, as no qualifies staff are cheaper to hire. How many of these finance company salesmen had degrees. Many marketed themsleves on their award winning cusomter service, rather than the actual products they were selling. This is why intelligent people don’t invest in NZ companies, just property. If you want to invest in companies, intelligent people have put it into Australian companies. NZ just didn’t that the regulation to police these companies. They have now got policies and regulations in place, but only after the horse has bolted, and many mum and dad investors have lost all their money. People still buy stuff all the time, from people who don’t have any real knowledge in what they are selling. Think of all these celebrity endorsed products you see advertised on TV, do they really know what they are advertising, and have the qualifications to know everything about that product?

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    • Lance Wiggs says:

      >Where have you been for the last 5-10 years Investing in the USA and in local private businesses. I have a low opinion of most NZ investment products and the industry here. and yes I agree – efficient regulation and policing of compliance is a minimum requirement, and a reason the USA got into so much strife.

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      • Rob says:

        Thanks for your reply. I was being a bit tongue and cheek, as I know you have been investing in local NZ companies. A pity there aren’t more like you, and a pity this current government haven’t been more pro business either, but this next budget may change things a bit. Still NZ is a property economy, with a small exporting economy tacked on, and that simply isn’t sustainable if we want NZ to become richer. We need to increase wealth, via increasing productivity, and the only way to do that is to sell our stuff overseas.

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