Having someone else manage your investments

If you’re thinking about letting an adviser decide which financial products to buy and sell for you, then this page will advise you on:

  • how you can stay in control of your investments
  • some risks involved.

Stay in control

A smart investor takes the time to understand the basic principles of investing and gets financial advice to help develop and keep to a sound investment plan.

Once you’ve developed a plan, the next step is to choose carefully the investments that best suit your plan. You can implement the plan yourself by buying and selling investments yourself with advice from an adviser, or you might want an adviser to buy and sell for you broadly in line with your plan. This can help take some of the guess-work out of choosing your own collection of financial products (also referred to as an investment portfolio). They can also make investment choices for you as the price of individual investments in your portfolio rise and fall in value, so that you stay on track with your plan without getting involved in the day-to-day management of your investments.

If your adviser makes these types of investment choices for you, they are providing a discretionary investment management service, sometimes called a DIMS.

Generally, advisers who provide discretionary investment management services will not seek your permission every time they buy or sell a particular financial product for you. By entering into a discretionary investment management service you are giving them the power to choose for you and control your investments. So, do your homework, ask lots of questions and keep track of your investments.

Choosing your adviser

Ask them what type of financial adviser they are. You can search for information about your adviser, or the financial services provider they work for, at www.fspr.govt.nz.

Ask whether you are receiving a discretionary investment management service that is tailored to your personal circumstances. Receiving a personalised discretionary investment management service means you can expect that your personal situation and some of your investment goals have been taken into account.

A financial adviser who offers to buy and sell investment products for you under a personalised discretionary investment management service must be an Authorised Financial Adviser (or a Qualifying Financial Entity adviser if they only buy and sell products for you that are manufactured by the person they work for) and must give you a disclosure statement covering that type of adviser they are, the services they can provide, the products they can advise you on, and how they are paid.

To find out more about the different kinds of advisers and kinds of advice that you can receive, click here.

Set the terms of the authority

Most advisers who provide discretionary investment management services will make an arrangement with you that allows them to choose your investments without needing to seek your instructions or asking you to sign any ownership paperwork. Your adviser should enter into a client agreement and written investment authority with you. The written investment authority will give your adviser authority to sign documents on your behalf. It should clearly set out the scope of the adviser’s authority including any limits on the nature or type of investments and on the proportion of each type of assets the adviser can invest in.

Before you agree to anything, and before you pay any money to your adviser, ask questions:

  • Will you hold investments in your own name? If you hold investments in your own name, your adviser will generally ask you to sign a document that allows your adviser to make decisions for you and sign documents for buying and selling on your behalf.
  • If someone else will hold your investments on your behalf:

– Who is responsible for holding your investments and making sure they are where they should be (a broker who performs this service is called a custodian)? The custodian is responsible for making sure that your investments are kept accounted for by keeping an up-to-date record identifying which investments belong to you, checking those records are accurate and getting an independent assurance by an auditor that their processes, procedures and controls meet required standards.  A custodian is required to provide you with information about your investments on a regular basis (at least every six months). The custodian could be your adviser, the financial services provider they work for or a company who is in the business of providing custodial services or ‘platform services’ or ‘wraps’. FMA considers that it is good practice for client money and property managed through a discretionary investment management service to be held by an independent custodian. This will be a legal requirement in most cases under law changes expected to come into force on 1 December 2014. Ask your adviser to tell you whether the person holding your money is independent of them, and if not, to explain why.

Who can change key terms of the arrangement with the broker? Your broker should only change the key terms of your arrangement with your approval. This includes changes to your personal details, bank account, or anything else that you haven’t clearly agreed with the broker up front.

  • When can you expect to receive reports? You should receive statements of the content, value and performance of your investment portfolio at agreed intervals, as well as a summary of transactions recording investment decisions your adviser made for you within an agreed timeframe. Ask how the total value of your portfolio is calculated and who calculates this. FMA considers that it is good practice for your portfolio to be audited by an independent auditor at least annually. You should ask your adviser whether your portfolio is audited. If so, by who and how frequently. If not, ask them to explain why.
  • What are the charges? If you are receiving a personalised discretionary investment management service from an Authorised Financial Adviser, your adviser is required to provide you with a disclosure statement that sets out how they get paid.  If you use a broker separately from the services you receive from your adviser, you may also have to pay up-front and on-going administration fees to the broker. Make sure you understand the charges.

Staying informed will help you feel more confident about giving your adviser control to make investment decisions for you. You can also keep in control by using the tips in the section below – both when giving your adviser authority to manage your investments, and during the course of your ongoing relationship with your adviser.

It’s your money so watch it

Giving control of your investments to your adviser doesn’t mean you should lose control over your money. Most advisers behave professionally and are doing their best for clients.  But keep control and avoid fraud by using these tips:

  • Ask your adviser as many questions as you need to until you’re confident you completely understand what you’re investing in.
  • Never write a cheque payable directly to your adviser, unless you’re paying their advice fee.
  • Never sign a blank document given to your by your adviser.
  • When you invest in a financial product, your adviser should keep a receipt or statement of your investment on your client file.  Ask your adviser if they can show you copies of any receipts or transaction reports at your next annual review.
  • Avoid long-term, open-ended arrangements even if you do have reason to give your adviser power to buy and sell investments on your behalf – set boundaries.
  • Agree how you and your adviser will communicate with each other.  If you have a telephone or face-to-face conversation with the adviser, ask the adviser to send you a written record of that discussion.
  • Keep all your correspondence, statements and reports in one place – track your money and always check for anything unexpected.
  • Keep track of when you’ll receive information – check how often you will get statements and reports about your investments; this is usually twice a year. Make sure all mail is sent to you and not just to your adviser.
  • If you are sick or going away for a long time, authorise an independent person, a solicitor or trustee to act for you and to check what your adviser is doing.
  • Review your investments frequently. See ‘Keeping track of your investments
  • Find out how you can cash in your investments.  Check whether there are any conditions that apply to when you can withdraw money, such as reaching a certain age (for all KiwiSaver schemes) or if you need to wait for a specified period of time (for some managed funds).
  • Choose a discretionary investment management service that uses an independent custodian to hold clients property and money (or ask your adviser to explain their custody arrangements if they are not independent) and an independent auditor to check portfolio management reporting.

Investing through a platform

Platforms (such as a nominee service or ‘wraps’, as they are sometimes called) allow you to ‘wrap’ your investments into one package or portfolio of investments. They are often used by a financial adviser to provide discretionary investment management service to clients.

Here’s how they work, their benefits and the things you should consider before going down this route.

How they work

Platforms can provide access to a wide range of managed funds, fixed interest investments and often to NZX listed shares. It also provides centralised reporting of a whole investment portfolio. There may be legal differences between some platforms, however, they will look the same to a consumer.

Platforms are often used by financial advisers. They allow for flexibility and simpler reporting for the client and may provide cost savings, making it easier for the financial adviser to arrange and monitor their clients’ investments.

Watch out for up-front fees when moving an existing investment to a platform. Ask if fees can be rebated to you or reduced.

Benefits and things to consider

Benefits

  • Investment choice – platforms let you choose between a range of managed funds, investment managers and other investments. You may be able to access some funds at wholesale rates. You may also switch between them easily and buy or sell your investments with lower transfer fees.
  • Cost – some products will offer lower management fees by giving you access to wholesale funds (although these could end up being more expensive overall).
  • Reporting – with a platform, you are likely to receive one consolidated report instead of one from each investment you have, making it easier to keep track of your investments.
  • Convenience – having all the relevant information in one place helps you and your financial adviser track the performance of your investment and makes it easier for you to complete your tax return.

Things to consider

  • Simplicity – if you don’t have a large or complex investment, using a platform may not be the best way for you to manage your investments. If you are likely to stay in one or two diversified multi-manager funds for example, you don’t need the wide choice of funds and costs of investing through a platform or wrap may not be justified.
  • Cost – sometimes platforms can save you money and sometimes they cost you extra.  The fees you could be charged include administration fees, fees for moving money in and out, management fees for investment options and service fees from your financial adviser. Fees reduce the money you can invest, so make sure you are only paying for services you need. Extra fees each year can have a big impact on the value of your investments over time. Extra features may come at a price. You have to decide if you need the extra features and if they are worth any extra fees.
  • Convenience, but be wary of costs – a platform may be more convenient for you, but make sure that your financial adviser is recommending this type of investment for your convenience and not their own.
  • Portability – moving into a platform can affect the flexibility of your investment in the future. Some platforms may only be available to clients of a particular advice firm. This means if you decide to change advisers, you may have to exit the platform, which means you may have to pay exit fees and taxes (if your investment is not a ‘Portfolio Investment Entity’ or PIE). So if you are thinking of moving onto a platform, ask your adviser how many financial advisers use that platform. A ‘unique’ offering could be a disadvantage.

Platforms are good for those who have large sums of money to invest and want the convenience of receiving one report covering multiple investments.  Talk to your financial adviser before you decide if a platform will be right for you.