NZ CFS L5 Investment cheat sheet

Financial advice in NZ is regulated under the Financial Markets Conduct Act 2013 (FMCA); the Financial Advice Service Provider (FASP) transitional regime was replaced by the full financial advice regime from 15 March 2021.

The Financial Markets Authority (FMA) licenses Financial Advice Providers (FAPs). Individuals give regulated financial advice only as nominated representatives or financial advisers of a licensed FAP.

Under the Code of Professional Conduct for Financial Advice Services there are two standards: Ethical Behaviour (client interests first, integrity, transparency) and Client Care (suitability, competence, record-keeping).

Standard 5 (Client Care) requires advice to be suitable for the client; Standard 6 requires disclosure of conflicts of interest, fees, and limitations on the advice.

Disclosure under the FMCA must be made before or at the time advice is given: nature and scope of advice, fees, conflicts of interest, and the adviser's duties and dispute resolution options.

The Code applies to all regulated financial advice; it is issued by the FMA and is a mandatory minimum standard - breaches can lead to licence conditions, fines, or individual banning.

Anti-money laundering obligations arise under the AML/CFT Act 2009; financial advisers are reporting entities and must conduct customer due diligence (CDD) and enhanced CDD for PEPs.

Privacy Act 2020 governs collection, use, and retention of client personal information; the Information Privacy Principles apply to client records and data sharing.

Client discovery must establish: goals, time horizon, financial situation, risk tolerance, existing investments, tax position, liquidity needs, and any ethical or sustainability preferences.

Risk tolerance has two components: risk capacity (ability to bear loss given financial circumstances) and risk attitude (willingness to bear risk); both must be assessed separately.

Time horizon shortens capacity: funds needed within 1–3 years generally should not be exposed to equity volatility, regardless of stated attitude.

A risk profiling questionnaire is a tool, not the advice; the adviser must validate results against the client's circumstances and document any override.

Goals should be expressed as SMART (specific, measurable, achievable, relevant, time-bound) to allow meaningful monitoring and review.

Capacity for loss testing: model a plausible drawdown (e.g. 30–50% equity fall) and confirm the client can still meet non-discretionary expenditure.

Record the client's stated preferences (e.g. exclusions, ESG constraints) and how they were incorporated; failure to follow them is a suitability risk.

Vulnerable clients (age, health, bereavement, cognitive decline) require heightened care and documented consideration of capacity.

Core asset classes: cash, NZ and international fixed interest, NZ and international equities, listed property, and alternatives (infrastructure, commodities, private assets).

Managed funds in NZ are structured as managed investment schemes (MIS) under the FMCA; offer documents and PDS (Product Disclosure Statement) must be provided to retail investors.

KiwiSaver is a MIS-based scheme with default and non-default funds; default funds must meet the default fund settings (currently balanced, with a conservative transition for members nearing 65).

Exchange-traded funds (ETFs) trade on-market; consider tracking error, bid-ask spread, liquidity, and any PIE tax status.

Direct equities: NZX and offshore markets; consider concentration, currency exposure, liquidity, and dividend imputation for NZ shares.

Fixed interest: duration measures sensitivity to interest-rate changes; credit spread reflects issuer default risk; consider call features and subordination.

Collective investment vehicles diversify idiosyncratic risk; systematic (market) risk remains and cannot be diversified away.

Product suitability requires matching product risk, liquidity, fees, and tax treatment to client objectives - not just historical returns.

Strategic asset allocation (SAA) sets long-term target weights by asset class and drives most of a portfolio's return variability; tactical tilts are shorter-term deviations.

Diversification reduces unsystematic risk; correlation between assets determines the benefit - low or negative correlation improves risk-adjusted returns.

Rebalancing to target weights controls drift; use tolerance bands (e.g. ±5%) and document the rebalancing policy.

Risk is commonly measured by standard deviation, but consider maximum drawdown, downside deviation, and tail risk for client-facing explanations.

Currency hedging: hedging reduces FX volatility for offshore fixed interest; unhedged exposure to growth assets can provide diversification but adds volatility.

Fees compound against the client: a 1% p.a. fee difference materially reduces long-run outcomes; compare total expense ratios and any performance fees.

Tax-aware asset location: place income-producing assets in the appropriate vehicle (e.g. PIE funds) to manage marginal tax rates.

Portfolio construction must align with the client's risk profile and time horizon; document the rationale for deviations from a model portfolio.

NZ does not have a general capital gains tax; however, the intention-to-resell, land-dealing, and bright-line rules can make gains taxable.

Portfolio Investment Entities (PIEs) tax at a maximum rate of 28%; investors on lower marginal rates can elect a lower prescribed investor rate (PIR) of 10.5% or 17.5%.

PIR must be based on the last two income years; using too low a PIR results in tax being clawed back, and too high a PIR means overpayment.

NZ dividends carry imputation credits; resident withholding tax (RWT) applies to interest and dividends at the investor's marginal rate unless an exemption applies.

Foreign investment fund (FIF) rules apply to offshore holdings above the threshold; the fair dividend rate (FDR) method taxes 5% of the opening value annually (with the CV method as an alternative).

The FIF de minimis: individuals with cost of offshore FIF interests of NZD 50,000 or less are generally not subject to FIF rules.

KiwiSaver and PIE funds are taxed at the investor's PIR; contributions and withdrawals have specific tax treatment - employer contributions are taxed as income to the employee.

Tax treatment differs by entity: companies, trusts, and individuals face different rates and disclosure obligations; advisers should refer complex cases to a tax specialist.

The advice process: gather client information → analyse → develop recommendations → present and discuss → implement → document → review.

Suitability requires that the recommendation be consistent with the client's objectives, financial situation, and risk profile; document the reasoning, not just the outcome.

A Statement of Advice (or record of advice) must record: client circumstances, recommendations, rationale, fees, conflicts, and the client's decisions.

Product replacement advice (switching) requires a comparison of costs, benefits, and loss of any existing features; switching must not be purely commission-driven.

If the client declines or departs from the recommendation, document the departure and the advice given; the adviser is not liable for the client's informed choice.

The Code requires records to be kept for at least 7 years (or as specified by the FAP's record-keeping obligations).

Conflicts of interest must be identified, disclosed, and managed; commissions and soft dollar benefits must be disclosed before advice.

Advisers must work within their competence and scope; refer to specialists (tax, legal, insurance) where the matter exceeds their expertise.

Reviews should be scheduled at a frequency appropriate to the client (commonly annual, or more often for complex or volatile situations) and documented in the advice record.

A review should reassess: client circumstances, goals, risk profile, portfolio performance versus objectives, fees, and any product changes.

Trigger-based reviews: significant market events, life changes (redundancy, inheritance, retirement), or product changes warrant an out-of-cycle review.

Performance reporting should be net of fees and compared against an appropriate benchmark and the client's own objectives, not just market indices.

Communication must be clear, fair, and not misleading; avoid jargon and explain risk in terms the client understands.

Material changes to the advice (e.g. a change in recommendation or fees) must be communicated promptly and, where required, documented.

Client complaints must be handled under the FAP's internal complaints process and, if unresolved, referred to the external dispute resolution scheme (Financial Services Complaints Ltd or the Insurance & Financial Services Ombudsman).

Record-keeping: retain review notes, client instructions, and communications for the required period to evidence suitability and ongoing service.