IFA group seeks to level playing field

PUBLISHED : Sunday, 06 August, 2006, 12:00am
UPDATED : Sunday, 06 August, 2006, 12:00am

A newly formed association of the growing legion of independent financial advisers is hoping to tackle what it sees as unfair practices and imbalances in the marketplace.

The recently launched Independent Financial Advisors Association (IFAA) plans to spearhead a campaign for an equitable financial services industry through advocacy of regulatory convergence in the insurance, banking and broking industries to create a level playing field for all members. The association also plans to act as an industry lobby group and seeks to open direct dialogue with the Securities and Futures Commission (SFC).

IFAA chairman Sidney Sze, chief executive of Midland Wealth Management, said for financial planning to move forward a clearer set of regulatory guidelines and greater transparency across the industry were needed. This would benefit both the public and IFA professionals. 'Transparency and openness leading to better public education can only create an environment where wiser investment choices are made,' Mr Sze said. The IFAA would like to represent the industry by working with the SFC to establish across-the-board best practices.

In a survey carried out by the IFAA, members' said they are concerned they are being squeezed by unqualified bank staff that can penetrate the fast-growing financial planning market more effectively due to wider distribution channels.

They are also concerned the present SFC regulatory guidelines for independent financial advisers are ambiguous and subject to uncertain interpretation. 'It is difficult for an IFA to judge whether certain internal measures are good enough. It would be helpful to have an industry standard that the entire sector can work from,' said Mr Sze.

Members also claim they are competing with unfair practices such as rebates from non-IFA organisations that also offer promotional gifts to clients who invest with them. They say some unit-linked life insurance investment tools have poor disclosures and are being sold to the general public with onerous commission charges and questionable annual fees.

Another area of concern relates to the structure of unit-linked investments, which include both insurance and fund components. 'A lot of unit-linked investments have been sold by insurance agents in recent years, who may have an insurance licence, but not necessarily a licence to sell investment funds,' Mr Sze said. 'At which point are you selling the registered or authorised product or selling a fund or providing investment advice?'

Under general best practices independent financial advisers must give 'best advice'; they must also try to find the best product of all available on the market for a given client and then recommend it, irrespective of the commissions it may or may not pay.

The duties of the 'tied' insurance agent or a bank employee are different. Far from being able to recommend the best available products across the whole market, they are unable to talk about another company's products.

A poll of its members found 80 per cent agreed that the IFAA should represent them on further requirements for different types of unit-linked life insurance. A total of 87 per cent of members strongly agree that the IFAA should help address unfair market practices and imbalances in the marketplace. In addition, 81 per cent of members strongly agreed that there is an absence of a representative body to maintain direct dialogue with the SFC on common interest subjects, while 70 per cent agreed their opinions would be better represented by a lobby group.

According to industry estimates, there are about 3,000 practising independent financial advisers in Hong Kong. The IFAA corporate membership represents about 10 per cent of IFA firms that between them account for about 1,500 practising advisers.

'We knew there were a lot of strong feelings but quite frankly we were surprised by the survey results and the depth of feeling,' said Phil Neilson, IFAA vice-chairman and chief executive of the Henley Group. 'There is a lot of frustration among IFAA members.'

The SFC's 19-page IFA guideline document issued last year caused as much confusion as it did clarify the way advisers should operate.

'There is definitely a clarity issue when it comes to the way IFAs are supposed to go about their business,' Mr Neilson said. For example, the SFC guidelines do not interpret the law and suggest that advisers seek legal advice when offering products to clients. 'If a five-person operation needs to seek legal advice on products that have already been authorised by the SFC, the time and cost involved would be crippling,' Mr Neilson said.

A member of the public can walk into a bank and invest in a mutual fund in matter of minutes. But independent financial advisers are recommended to conduct product due diligence, and document why they are recommending a product, what other options were considered and why the investment product is appropriate for the client, taking into account the client's investment objectives. 'If IFAs are recommended to carry out these processes surely it makes sense that the same criteria applies across the entire financial services industry,' said Mr Neilson.

'We hope the SFC would be able to provide an interpretation of the law so a manual can be constructed that would set a standard the financial services industry could work from,' Mr Neilson said. In the present environment there is no proper interpretation, no solid structure and no consistency, unlike Singapore where the monetary authority offers templates that interpret for advisers and clients.

'If Hong Kong wants to maintain and promote itself as a truly global financial centre it is important that these areas be addressed,' Mr Neilson said.