With finance companies biting the dust there's a growing demand to do something to stop the carnage. The wipe-outs are being worn mostly by mum and dads investors who thought they were being prudent with their precious savings. This is a politically sensitive topic especially with KiwiSaver money about to flow to a rapidly expanding list of private providers.

But more regulation will not prevent failures. There will always be rogues in the finance business, whether they be people running finance companies; financial advisers directing inexperienced investors into risky products that pay attractive commissions; or deceitful borrowers. It's the same the world over. The trick is to make things really transparent – if you can't understand your investment you run the risk of getting a nasty surprise. A lot of mums and dads prefer property for precisely this reason.

The problem is where do those mums and dads who want something a little safer than houses turn to? A bank or finance company deposit seems pretty safe and easy to understand, and there are plenty of ads talking about how secure your money will be. The sheer number of outfits clamouring for money makes it difficult for folk to decide who to go with. That's where fancy rates and financial advisers come into play and it's a good place to focus some light because it's where much of the current angst germinates.

High deposit rates are very seductive for mums and dads facing escalating electricity bills and council rates demands. But they are vaguely aware that higher returns mean higher risks. The trouble is that risk is a difficult thing to measure and that's why there's growing support for mandatory credit ratings for finance companies. Sounds good, but credit ratings are often slow to react to problems and don't always pick some key factors relevant to the health of a particular finance company. In simple terms a good credit rating does not prevent a finance company going under.

Now let's look at the role financial advisers play in this area. In response to investors blaming financial advisers for directing them into failed finance companies, David Hutton, chief executive of the Institute of Financial Advisers, has said that investors had "…to do their own research, and not rely solely on financial advice". Since a lot of financial advice is "free" Mr Hutton's warning is probably valid – you should be very suspicious of advice that's free.

Financial advice is often free to the customer because the adviser is being paid a commission from those whose products he's flogging. This approach is certainly not confined to finance company debentures – the funds management industry and most Kiwisaver schemes use a network of commissioned salespeople to win customers. Potential investors have a right to know what commissions are being offered but they don't always ask.

Virtually all the finance companies that have collapsed were paying financial advisers generous commissions for pushing their products up to the day the doors closed.

The problem with commissions is that they are a reward for sale rather than compensation for providing quality advice. So the bigger the commission for a product the more likely it will be sold – that's a logical and desirable outcome for the adviser and the finance company, but not necessarily the investor. More importantly, the larger the commission the more biased the advice is likely to be.

What if the commission were added to the returns the finance company was offering to attract depositors? People would then be clearer about just how much the finance company was paying to attract funds and therefore provide a better indication of the risks involved.

This would be similar to the finance rate banks and finance companies must disclose to borrowers, but in this case the disclosure would be to depositors and confirm what finance companies are paying for their deposits. The fact that some of what is paid ends up in salesmen's pockets would be that much more obvious to the investor and would highlight the risk Mr Hutton so nobly raised of relying solely on free financial advice. The "advice" is essentially a sales patter.

Mums and dads, burned by finance company failures, might take some comfort from the fact that professional fund managers have also been singed. Over the last month unit prices for ING's Diversified Yield Fund and Regular Income Fund have dropped around 7% – these funds also have hefty entry and exit fees. There are very few if any riskless investments – no amount of legislation is going to change that. But a little more transparency and simple ethics wouldn't go amiss.