Financial adviser warned for bad advice to clients

Thursday, 28 May 2020

Tom Hartmann from Sorted answers a few of the most frequently asked KiwiSaver questions.

A financial adviser who gave clients bad advice about how to navigate market volatility earlier this year – potentially costing them hundreds of thousands of dollars – has been warned by the Financial Markets Authority.

The FMA said the adviser sent a bulk email to clients in March, urgently recommending they move their KiwiSaver and other investments to low-risk funds, because of uncertainty caused by Covid-19.

Markets fell by up to 30 per cent in March. But if clients chose that moment to move their money to a more conservative investment, they would have locked in those losses and missed out on the market rebound that has since occurred.

It is estimated that about $1.4 billion of KiwiSaver money was shifted to more conservative investments in the first quarter of this year.

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Clients who followed the advice would have locked in their losses.

A 35-year-old with an income of $55,000 with a current balance of $20,000 making matched 3 per cent contributions, who took that adviser's advice and switched from a growth fund to a conservative fund and then back again after two years, faced reaching age 65 with $32,530 less saved, it has been estimated.

If that person never switched back to growth, they’d end up with over $310,000 less at age 65 than if they had remained in a growth fund, assuming a return to long-term investment returns on asset classes.

FMA head of supervision James Greig said the advice was inappropriate and had the potential for significant harm.

“The FMA has a low tolerance for poor conduct that poses risk to customers as a result of the Covid-19 crisis, especially because New Zealanders are looking for financial guidance at this time.

“If the adviser’s clients acted on the advice, they would have locked in any losses caused by market volatility. This change may not have been appropriate for all clients, depending on their investment plans, risk tolerance and specific circumstances,” said Greig.

The FMA said the adviser should have said the email was only general advice and did not take into account personal circumstances, and that the clients should seek personal advice.

After making inquiries, the FMA concluded the adviser’s actions would likely be a breach of section 33 of the Financial Advisers Act, which says a financial adviser must act with care, diligence and skill.