New Securities Law

for: Investment Advisers

and: Market Participants

Investors entitled to more information about advisers

Investor Magazine January 2008

If you visit an investment adviser from Friday 29 February 2008 you should receive a Disclosure Statement. This new requirement will give you more information about the adviser and the investments they give advice on. The aim is to help you decide whether or not the adviser is right for you.

Securities Commission General Counsel Liam Mason explains.

In New Zealand anyone can be an investment adviser. They don't need any special qualification and don't have to be licensed (except share brokers who are licensed by the district Court).

However, from February 29 advisers must, by law, give you a Disclosure Statement which tells you about themselves, the investments they advise on, and how they are paid.

The Disclosure Statement should be in writing, be dated, and give the contact details of the adviser. It must be given to you in person, or sent to your postal, email or fax address. The adviser cannot simply refer you to a website to look for the Disclosure Statement.

You must be given the Disclosure Statement before the adviser gives you investment advise and before you pay any money.

What an adviser must tell you about themselves

The Disclosure Statement must include the adviser's qualifications and experience for giving investment advice, and whether the adviser:

is a member of a professional body;
has professional indemnity insurance;
has facilities for resolving disputes with clients.

It must say if the adviser has criminal convictions in their professional capacity, or has been:

made bankrupt;
prohibited from managing a company;
placed in receivership or statutory management; or
prohibited by a professional body.

What an adviser must tell you about the investment they give advice on

Some advisers offer a wider range of investment than others. Some specialise in certain types of investment. Some advisers only offer products they are paid to sell and may not suggest other investments that could suit your needs.

From 29 February an adviser must explain the types of investments they give advice on, so you know whether or not their advice covers all types of investments. These could include shares, unit trusts, group investment funds, time shares, superannuation schemes, life insurance policies, contributory schemes, and deposits with banks, finance companies and building societies.

However if, for example, the adviser only advises about life insurance policies then the Disclosure Statement must state this. If the adviser gives advice only on investments offered by specific investment product providers, the Disclosure Statement must state this and name each provider.

What an adviser must tell you about fees

The fees you may have to pay an adviser could include:

a fee from the sum you ask the adviser to invest;
a brokerage fee if you buy shares;
a fee for advice;
a combination of these.

You may also have to pay fees to the fund manager or company that you invest in.

The arrangement for paying fees and/or commissions for investments vary greatly and some are very complicated. Four main types are:

up front commissions - paid by the funds manager or company to the adviser when you invest;
trailing commissions - paid by the funds manager to the adviser each year you stay with that product;
establishment fees - paid by you to the adviser based on the amount you invest;
monitoring fees - paid by you to the adviser based on the amount you maintain as an ongoing investment.

The adviser's Disclosure Statement must explain the fees you will be charged for investment advice - the hourly rate, if the adviser charges by the hour, or the way the fee is calculated, if the fee is based on the amount invested. Also any costs that will be passed on to you, such as brokerage, should be explained.

The Disclosure Statement must say when fees are to be paid, and if fees will be deducted from money the adviser holds for you.

Interests and relationships

The adviser must tell you if they will receive any remuneration from anyone other than you, if you make an investment on their advice.

This includes remuneration from the investment product provider, such as commissions and bonuses. Soft commissions like overseas trips, or goods or sponsorships, or support services in the form of software or technology services, must also be explained.

If there is any agreement that the investment product provider will buy a stake in the adviser's business if the adviser sells a certain amount of the provider's securities, this must be disclosed.

The adviser must disclose relationships that could affect the advice they give you, for example:

a family connection or business relationship with another person connected with the investment;
a business relationship with the investment product provider.

If no relationships or remuneration need to be disclosed, the adviser must state that there are no interests or relationships likely to influence the advice they give you.

Investment brokers

An investment broker also must give you a Disclosure Statement before you pay any money to them to invest for you.

It must say if the broker has criminal convictions in their professional capacity, or has been made bankrupt, prohibited from managing a company, placed in receivership or statutory management, or prohibited by a professional body.

A broker's Disclosure Statement must explain the procedures for handling your investment money or investment property, including:

how you are to pay money to the broker;
how you are to deliver property to the broker;
the arrangements the broker has for holding your money or property in trust;
records that will be kept and how you can access them;
whether or not the broker's handing of client money is audited; and
how, if at all, the broker can use your money or property.

Benefits to you

This new law enables you to chose an adviser to help you make wise investment decisions. Read the Disclosure Statement carefully so you know what you can expect the adviser to do for you, what they charge, and what they don't do.

You could compare Disclosure Statements from several investment advisers to find which is the best for you and your investment goals.

For more information from the Securities Commission visit www.looklearninvest.org.nz or www.seccom.govt.nz .

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