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.