Seven questions you should ask your financial adviser
I suspect that it is one of life’s truisms, that in any profession where trust is given that trust will sometimes be abused. Sadly, my profession is no different. Given that this is a reality, I thought it would be helpful to consider what questions you should ask a prospective adviser (or your existing adviser) about their money handling and organisational procedures.
1 Who holds the ownership of the investments?
The separation of roles and responsibilities plays an important part in protecting your money against fraud. In pooled investments like managed funds and KiwiSaver the underlying investments are not held in your name, but they are held by an independent custodian (e.g. The New Zealand Guardian Trust Company Limited) who also acts as the Supervisor, or who is appointed by the Supervisor. The Supervisor’s role is to hold the assets on trust and to supervise the Manager’s performance of its functions and its obligations as issuer.
The important point here is that there is clear separation between the assets that the investor owns and the person or organisation that is providing investment management services. The investment manager could fail financially but they cannot call on client assets to support themselves as they are held by the Custodian and as such they are out of reach.
The important point here is that there is clear separation between the assets that the investor owns and the person or organisation that is providing investment management services. The investment manager could fail financially but they cannot call on client assets to support themselves as they are held by the Custodian and as such they are out of reach.
2 Where are you depositing your investment capital?
The key matter here is to always make sure that your investment capital is being deposited to a trust account. A trust account operates under strict reconciliation and audit requirements. Funds within a trust account are held separately from the operational bank account of a business.
It is entirely appropriate that any fees that you are paying are paid into the advisory firm’s business bank account, but never any investment capital.
It is entirely appropriate that any fees that you are paying are paid into the advisory firm’s business bank account, but never any investment capital.
3 How can I be sure that the price that is applied to my units reflects their current value?
All licensed managed investment scheme managers are required to have in place documented valuation and pricing methodologies, and processes and controls to minimise the risk of pricing errors and non-compliance with those methodologies. In addition, all managed investment schemes (e.g. KiwiSaver schemes) are required to prepare financial statements which must be audited by an independent auditor every year.
4 Does the firm operate a consistent advice process and how is this reviewed?
Few clients want to receive advice that is based on a ‘one size fits all’ approach. The provision of personalised advice is quite the opposite of this. However, at the other extreme a highly complicated portfolio with difficult to understand investments can make it more susceptible to fraudulent activity.
I believe that there is a lot to be said for applying a consistent approach to how each portfolio is constructed and the type of assets that can be held. A formal peer review system within the business will also reduce the chance that wildly different advice recommendations can exist.
I believe that there is a lot to be said for applying a consistent approach to how each portfolio is constructed and the type of assets that can be held. A formal peer review system within the business will also reduce the chance that wildly different advice recommendations can exist.
5 Does the organisation require staff to take compliance leave?
It turns out that the majority of fraud is not detected by audit processes but is discovered when a staff member is on annual leave.
As a result of this some organisations require that their staff take compliance leave on a regular basis. During a period of compliance leave the staff member must be disconnected from all organisational management and e-mail systems and their role must be undertaken by another person.
As a result of this some organisations require that their staff take compliance leave on a regular basis. During a period of compliance leave the staff member must be disconnected from all organisational management and e-mail systems and their role must be undertaken by another person.
6 Do you receive third party verification of your investment holdings?
By a third party I just mean someone (other than your adviser) who you deal with on a regular basis. It can be frustrating for clients but if in addition to the regular reports you receive directly from your adviser, you also receive a statement of holdings from a third party, this provides a further safety check.
7 Do you have the ability to check your investment online?
Yes, sophisticated fraudsters have created on-line platforms with false reporting, but this is unusual. The transparency required to allow on-line, real time reporting is usually a step too far for New Zealand based fraudsters.
As I mentioned in the introduction, sadly where trust is given trust will sometimes be abused. The questions listed above are not definitive and the inability of your adviser to answer ‘yes’ to all these questions does not necessarily mean that your capital is at risk. However, risk management is a numbers game – the more ticks the better.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 10 June 2019, as ‘Seven questions you should ask your financial adviser.’
