The Changing Landscape

June 2010

In the wake of the Global Financial Crisis, the prevailing sentiment has been that “everything has changed” and a flood of books has emerged seeking to establish the cause of the recession and the lessons learned from it.

At the heart of the discussion has been the question of whether the old rules and assumptions about investment still apply.

Do financial markets and their associated institutions still work in efficiently pricing securities, in managing risk, in helping businesses to grow and investors to accumulate wealth?

The principles of modern portfolio theory (the intellectual underpinning the wealth management industry) have also been challenged. Are markets really efficient? Is diversification still effective in managing risk in a portfolio? Is there a long-term premium from investing in shares?

Other questions about the effectiveness of our retirement savings systems, the level of understanding among the general population about risk and about the behaviour of financial intermediaries in managing people's wealth have also arisen.

A key outcome for most people analysing the crisis has been an appreciation for good, independent financial advice.

Investors are demanding higher standards and greater transparency in wealth management, are more focused on risks and the costs of investing and are starting to understand the value of sound counsel in helping them reach their goals.

The Securities Commission is acutely aware of the need for transparency and is introducing mechanisms to protect the consumer and restore faith in the industry, such as requiring all advisers to be registered and have minimum levels of education.

We see this legislation as positive for the industry, but a lot of Kiwis may still invest without seeking financial advice – primarily because they are reluctant to pay for it.

It could also further alienate some investors from seeking advice as increased compliance costs means it will be more time consuming and expensive for advisers to provide advice. Longer term, advice may only be affordable for the wealthy.

The number of firms providing advice may also decline - some may amalgamate to reduce increased compliance costs, others may be forced out of business altogether. Similar rationalisation occurred in the UK when legislation changes were introduced a number of years ago.

Historically, the New Zealand investment market has been lightly regulated, but overall these changes are a move in the right direction to make the industry more professional and bring it in line with the rest of the world.

The landscape is changing - but for the better.