One of the best goals last week was at the Success Forum in Auckland, not the football World Cup in Germany.
I have long argued that some of the finance company rating services in the market are not particularly helpful and in some cases darn right dangerous.

Likewise, I have argued that calling a service a ranking service and not a rating service is meaningless semantics.

Yes, the labels may be true, but punters and advisers don’t know the difference, or don’t care to note the difference.
If someone saw that Provincial Finance had an ABA ranking with AAA being the best possible score and EEE the worst, then they would think it was solid as.

We know that is wrong.

You can put all the disclaimers in the world on the service and it still won’t work.

Why do I say this?

Well the founder and developer of the ranking service got up in front of a significant crowd at the Success Forum and said: “We rated Provincial Finance an ABA,” before hurriedly correcting himself and saying that in fact it was a ranking.
If the founder and developer can’t get it right what hope is there that anyone else will?

I rest my case.

I would love to hear your thoughts on this topic. Please email them through to me at Blog@goodreturns.co.nz

One of the more bizarre things in the Provincial Finance collapse has been the reaction (or lack of) from the Financial Planners and Insurance Advisers Association*.

The Provincial failure is a huge issue for advisers as many, collectively, had a good sum of money in Provincial. Added to that Provincial sponsored the FPIA and Society of Independent Financial Advisers.

If we wanted to add something else it would be that Chris Lee made a public comment that there wouldn’t be an adviser which didn’t have money with Provincial.

A couple of firms (Goldridge and Myles Financial Planning) have emailed us saying they had no money with Provincial.

So what has the FPIA done?

Zip – that we know of.

There has been a communication to members on the subject, which, rather than shedding light on the issue has instead wound up members.

In the email interim ceo Ross Butler made two comments which upset many people. Perhaps the most annoying was this:

People in glasshouses should not throw stones. I and probably most of us have a few skeletons in our personal closets. Some people running to the media with a “holier than thou” approach about compliance, governance and other issues have a few skeletons that tend to nullify the impact of their comments.

Not exactly comments which paint advisers in a great light.

While the FPIA may be spending time talking to its members, it isn’t doing much in terms of communications with external stakeholders such as the public and media.

If the association is serious about its mission to “serve the needs and interests of members and the public” then it should be front footing this issue.

I would love to hear your thoughts on this topic. Please email them through to me at Blog@goodreturns.co.nz

*I note that some people call the FPIA the IFA now. To me this is another example of poor communications. One would expect that if a professional organisation rebranded itself it would at least let media organisations know about the change….I await the press release!

Like most people in the financial advisory industry I have pondering the collapse of Provincial Finance. The questions at the moment are not why it fell over – as we have a pretty good idea already, rather it is the reaction of competitors and advisers.

Once news of the receivership was announced people moved pretty fast to talk to each other and get together to put together a rescue plan.

I know the publicly stated reasons sound good and convincing, but is it good business sense for competitors to try and prop up a failed company to save their collective face?

At first I thought it was, but now I am not so sure.

I have to say it has been quite surprising how quickly others rallied around the fallen, especially since it is an industry that traditionally is fiercely competitive and takes a spare-no-prisoners attitude.

While South Canterbury Finance were the ones most publicly associated with the failed rescue attempt, others were in there too.

I would have thought the idea only stacked up if the Provincial has a sound business proposition and can generate sustainable margins between its borrowing costs and lending returns.

The answer has to be reasonably obvious at this point, so does it really make sense to put good money after bad? Is Provincial really recoverable? (And if it is, would you give them your money next time around?)

Assessing the raters
The issue of ratings is also raising its head. As Good Returns reports government officials are not too keen on imposing mandatory requirements for ratings on finance companies, apparently on the grounds of moral hazard.

But hang on a minute don’t they force insurance companies to have claims paying ratings? Could someone tell me what the difference is?

On this topic it was curious to read the Sunday Star Times piece. Full credit to Chris Lee for talking openly and frankly about his views. Likewise Grosvenor gave a good account of itself. Pity the same can’t be said for Interest which gave Provincial, arguably, the most positive score of anyone providing rankings/ratings.

I felt that the article should have asked some more questions about this. To me it seems saying a system is a ranking and not a rating and that it shouldn’t be used as a rating is disingenuous.

The punters see a company given an ABA (with the highest possible score being AAA and the lowest EEE) as being a fantastically safe company.

I am on record as saying ratings from reputable agencies with credit analysis skills should be mandatory. I repeat that call again…and again…and again.

My message here is that people (investors and advisers) need to understand issues such as what a rating means in terms of probability of failure, as well as whether they are getting adequate return for risk and thirdly if a company falls over what are the prospects for recovery.

It’s a difficult set of sums to do.

As Grosvenor’s David Beattie pointed out to me this morning you can get some contrary outcomes. For instance there are some companies with a G3 Bondwatch rating that do not adequately reward investors for risk and others at the opposite end of the table (G7 and G8) which do provide returns commensurate with risks.

The Provincial Finance receivership raises some fascinating questions along with challenges for financial advisers.

This is probably the first finance company failure where advisers have recommended the products of the failed company. (I assume no adviser had used National Finance 2000 – if they did well…..). I make this Provincial assumption as they have sponsored FPIA Conferences (including this month’s one) and are, I understand, a partner to SIFA. (SIFA has partners not sponsors now!)

It will be interesting to see how advisers handle the fallout and whether anyone will take action against them.

As this is the second recent finance company failure it raises the question of how do you pick a finance company?

Before moving onto some observations it is worth noting that this is a question the Herald’s The Business section tried to answer today.

I spoke to them about prudent diversification and owning a bunch of finance companies rather than one or two. These comments were twisted somewhere along the line and my prudent diversification point was described as Russian Roulette! Let me assure readers that is not what I said and I will be asking the paper for an apology and correction as it implies something I did not say.

The diversification point is interesting in this case as it appears from the numbers the average investment in Provincial was around $23,214 compared to $12,500 for National Finance 2000. The assumptions being that the latter appealed to smaller less sophisticated investors (TV ads, high rates etc) while many investors had significant portfolio allocations to Provincial.

Coming to the question of how do you pick a finance company I proffer these thoughts.

Think about the endorsements a company uses. Provincial used All Black legend Colin Meads and his wife to endorse the company in telly ads, with a comment (something) like…. “For my money, I couldn’t do better than leave it with Provincial”.

The question is what does Colin know about financial accounts which would make you feel comfortable with the investment? I bet he doesn’t now.

Secondly research. My firm belief is that you should only take notice of ratings from reputable, experienced firms like Standard and Poor’s, Moodys and some of the other firms which have proven expertise in this area (FundSource, Rapid Ratings and Grosvenor have expertise). As an aside on this topic, I wonder whether Provincial is one of these companies who sought a rating from Rapid Ratings, but then decided not to publicly release it?

The ranking systems like the one which gave Provincial an ABA rating should be ignored at all cost. This collapse illustrates this.

Any adviser who has used this system to make investment recommendations is a mug. Ditto punters.

I have been on record before as saying these systems are more dangerous to investors than helpful.

It is interesting to note that the ratings provided by Grosvenor (G6) and Chris Lee (C) are more realistic of the risk involved with investing in this company.

There is a high risk that advisers who recommended Provincial will suffer a loss of reputation and potential loss of clients. Not exactly a great outcome for the industry as a whole, especially with bureaucrats looking for reasons to regulate the industry.

I would love to hear your thoughts on this topic. Please email them through to me at Blog@goodreturns.co.nz

Peter Dunne’s speech yesterday to a KPMG seminar appears to be the Minister of Revenue inviting people to force change to a bill he has responsibility for.

To put it a little more bluntly the minister seems to be saying he doesn’t like his bill. Because he is bound by collective cabinet responsibility he can’t dissent on it, so he is taking the next best option and saying, one crowd forced change by using full page newspaper ads. Here is how you can force changes for yourself.

The speech is an open invitation for you to get stuck in. What are you waiting for?

His speech is a manual for setting off a bomb, albeit it on a lesser scale that what the Osama and his mates write!

I understand (second hand) that Dunne and his party aren’t that happy with that is being proposed and they are prepared to back any practical solutions which would result in investors in international investments being taxed at their marginal tax rate.

The challenge for fund managers, advisers and investors is to come up with an alternative solution. IRD hasn’t managed to dream one up. Can someone else?