Govt approves new DIMS rules
Advisers have won some concessions in the new rules governing discretionary investment management.
Tuesday, June 17th 2014, 6:40AM
24 Comments
Cabinet has approved new rules for the regulation of DIMS which includes, as expected, a decision to push back the start date of the changes.
While decisions have been made at the government level the finer details of how they will operate won’t be known until the Financial Markets Authority releases its guidance note.
Good Returns understands a draft has been circulated amongst the industry. Some who have seen it have been worried about its contents.
AFAs will be able to operate simple DIMS, however it is unclear exactly what a simple DIMS is.
“To qualify as personalised DIMS, the investment strategy for the DIMS must be personalised to the particular client, based on their situation and goals. This definition is relatively narrow, and AFAs will need to be licensed to offer anything other than this,” the cabinet paper says.
AFAs offering simple DIMS will still need to gain some sort of approval from the FMA.
This incudes an additional eligibility requirement, allowing the FMA to assess whether the AFA is capable of effectively performing the service and whether there is any reason to believe that they will not comply with their legal obligations, Foss says.
He says in his cabinet paper that “tThis requirement will be applied in a flexible manner, reflecting the extent of the service that the AFA proposes to provide, and the extent to which the AFA is using services that reduce risks to investors, such as online platforms and reputable research providers.”
Other key regulatory changes include:
- Alignment of the requirements for DIMS under the Financial Advisers Act 2008 with those that will apply to other DIMS providers under the Financial Markets Conduct Act 2013.
- An exemption for financial advisers who only manage their clients’ investments in limited situations, such as when they are on holiday.
- The base fee for a DIMS licence will decrease by 40% from $3565 to $2139.
- A transition period for existing DIMS providers, allowing them until 1 June 2015 to apply for a licence and until 1 December 2015 to update their client documentation. New providers will need to comply from 1 December 2014.
Good Returns will update this story later today.
DOWNLOAD Regulatory Impact Statement here
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Comments from our readers
These arrangements have been around for centuries........But, extraordinarily, the FMA has decided to outlaw them (or at least dictate the terms) as far as AFAs are concerned.
But what about the hundreds, probably thousands, of POAs in existence that don't involve an AFA ?
Plenty of "ordinary kiwis" hold a POA granted by their elderly parents to handle their financial affairs. If POAs in the hands of AFAs are such a problem, what about the thousands that are completely outside the FMA's tentacles ?
They are worried about Ross ponzi schemes.
You simply cannot build a Ponzi in a platform.
i.e. you cannot transfer one clients money to another, your staff can't steal it, and you can't either
They are super secure
As to efficiencies of owning investments direct vs a platform, that is a debate we could have for a week and no one would win.
I have my money on platform and would not have it any other way, neat, tidy safe custody, data backed up, simple at tax time, and records galore available going back years and years
And no Aegis don't give me a discount either
As to a simplified DIMS, it can only be a step in the right direction
Similarly you can’t transfer one client’s money to another, your staff can’t steal it and you can’t either. In my view the difference comes down to fees and my clients have the options of custodial or direct and most opt for direct.
The system we use produces performance, records galore, blah blah but we had to buy the system which cost about $50,000.
Note it cost us $50,000, not our clients. Aegis gives advisers a system but the customers pay … forever.
I think if advisers ask themselves, "Who is making the buy/sell decision" then most advisers will discover that they are not providing a DIMS service.
cost of platform varies but is about one quarter to one third of 1%, and is tax deductible
for a system run professionally, audited to bank standards, managed externally to our business, no trust account needed, no cheques flying about, one less thing we have to do so we can spend more time on what matters, something we don't have to supervise or worry about, less staff to employ, clients funds super secure, instant nearly paperless rebalancing, ever closer to being paperless overall, , super efficient and more and more and more
21st century technology - Morris Minor vs Lexus Hybrid
See, I told you we could debate it for a week and no one would win
I am happy to pay it and have no client objections of any significance either
I used to do it your way, but made the change 6 years ago to access DFA funds. The added bonus was how good a platform is and I have since become a big Aegis fan
We get awesome service from them too no I'm not an Aegis salesman either
Well if you are not offering a DIMS, then I can see why you don't see the fuss!
As I see it, advisors had two surprises with earlier DIMS guidance.
First, the definition of DIMS covers a lot of advice that many advisors did not think was a DIMS (say regular rebalancing, reinvesting dividends, making a decision only while a client is on holiday and has given their approval).
Second, for those advisors offering DIMS, the definition of personalised DIMS was so narrow it seems not to exist. And Class DIMS licences seem aimed at big fund management firms rather than AFAs.
Now we wait for the next round of FMA guidance to see if any of that has changed significantly.
But if you are operating your business taking no decisions on behalf of a client in any circumstances, then DIMS regulation will not be of any importance.
Thats a lot of money ...their money.
with $650 m you will get a platform for 12-15 bp
Under $1m pa
And if you explain the benefits, probably most of your clients will readily agree - even be impressed with how progressive you are
no certificates
instant transactions
your daily mail reduced to 20 letters from 100
less staff
Huge task to transfer, but once done, it's just way better
So once you are enjoying your Lexus Hybrid, you can remember me with a nice case of central Otago red wine
This point was addressed in the Cabinet paper (see points 48 - 51 Contingency DIMS) and in the Recommendations of the Cabinet paper (point 9).
Also regular rebalancing has previously been addressed by the FMA, i.e if the client agrees to rebalancing within pre approved ranges, then that is not DIMS (see page 5 of the FMA FAQ 20/03/2014).
Have either of you sighted the actual custodial agreement ICSL/AEGIS have (or any other wrap providers for that matter), and the underlying broking agreements they hold with the market participants?
I ask because I’ve always been concerned about prime broking arrangements (such as we saw with Lehman’s), where “custodial” agreements actually permitted the custodian to deal in the underlying assets (such as providing 3rd party leverage or short selling facilities).
It’s always hidden of course in the small print so difficult to say without checking the actual agreement. The only custodial agreement I have sighted does in fact permit this secondary dealing, but that was some time ago, and hopefully industry practice has changed since Lehman’s (but I can’t find any evidence to that effect).
Any thoughts/assistance? Anybody? Any AEGIS employees perhaps?
Sorry I have no knowledge of Aegis or CSL custodial agreements but agree prime broking agreements could be an issue. Aegis certainly makes buying and selling for clients easier but whether that is a good thing or a bad thing I’m not so sure. Once you take the impact of the bid/offer spread, brokerage and other transaction costs into account these can add up to another 0.5% to 1.0% in annual costs to investors.
Regards
Brent Sheather
The 0.5 – 1% transaction fee I referred to has been calculated by John Bogle, the UK Department of Trade & Industry, Vanguard and various other reputable sources. It is total transaction costs expressed as a percentage of the fund. It includes brokerage, obviously, market impact, bid/offer spread etc etc. In the UK and on the NYSE bid/offer spread and market impact were far bigger factors than brokerage. The analysis also uses, from memory, assumed turnover levels of something like 40%. Our clients turnover averages less than 10% and some of that is short dated bonds maturing. To answer your question as to what costs people using platforms are incurring you would need to look at the underlying turnover, costs etc of the funds used then the turnover of the clients portfolio. Good luck getting that info.
Regards
Brent
Assume turnover of 6% of the portfolio at 1.5%..our highest fee..= an annual charge of 9bps..50 plus 9 = 59bps.now
Let's see your numbers Mr Realist....incidentally a name would be a brave move too.
Surely no one pays 1.5% to transact in bonds.
Aegis brokerage on shares is 0.35%
We agree on low turnover, DFA pay this a lot of attention with amazingly low transaction costs
I am fascinated to see how many people in the industry clearly don't know how a platform works
Bit like the Guinness advert "I don't like it because I never tried it"
If everyone got onto platforms, the volume and competition would probably bring costs down to 12- 15 BP pa.
The advantages are innumerable
The FMA can see how it adds a lot of protection to our clients funds too
You have dropped your portfolio turnover from 10% to 6%. Both figures seem low. How do you get such a low portfolio figure?
This is consistent with what you have said Brent in your answer to Realist.
We determine turnover when we recommend clients make a change to the portfolio. If you own direct bonds and mainly exchange traded funds and actively managed funds you don’t need to make too many changes to the portfolio, unless you have made a mistake or you have bought something which has done particularly well. In Australia we typically own just two funds so not much need to buy and sell there for example.
Another point that advisers need to consider is whether to have different implementation fees and monitoring fees for bonds versus equities. We thought about this long and hard and decided to have the same implementation fee for bonds and equities so that advisers and clients wouldn’t be biased one way or the other by fees.
I think if you looked at the average asset allocation of “advised retail” you would see high risk portfolios. Maybe I will sponsor a PhD investigation on this topic. I am sure everybody would be interested to see other people’s numbers. Our low cost strategy resonates with Mum and Dad - $650 million under management with no advertising, no seminars, no nothing.
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Phil, this statement is wrong. With a simple DIMS in terms of Cabinet paper, (assuming its not personalised) AFA or his business will still need a licence but the application may not need to be as full as for a complex DIMS.)