Chris Lee is one of those characters many in the industry love to hate. However our survey of advisers show that many follow his research and comments on finance companies.

I find it is useful to observe his comments. Some seem good, but others I can’t agree with.

In saying that I fully support comments in yesterday’s newsletter re Interest’s SQP scoring system. Regular readers will know that I have never been a fan of this system. I would go so far as to say it is one of the most irresponsible things I have seen in the financial services industry in my 20-plus years covering it.

And no my comments are not personal, nor sour grapes. I just think it is an incredibly shallow, misleading and useless tool. I know people have taken the rankings to be ratings and made investment decisions based on that information – and lost money.

What was pleasing in our survey was that it appears very few advisers take notice of SQP. Rather their emphasis is on the big international companies; Standard and Poor’s and Fitch.

The rating question is becoming a bit of a vexed one as it appears the Ministry of Economic Development is hell-bent on only allowing the big international agencies be the providers when mandatory ratings of finance companies come into effect.

There is absolutely no doubt they have the skills and experience, but I do wonder whether some of the smaller, more local organisations like Bondwatch and Axis, should be considered. Neither of these are perfect, but I am sure they could develop and be refined. One thing I like about Bondwatch is that it covers a good proportion of the market and it tends to pick up trends. Axis rates fewer companies and potentially it drawback seems to be that its ratings appear a little generous.

Recently I listened to Marac’s Brian Jolliffe and he expressed concerns about some of the raters, particularly that they were making their decisions on old historical information and without talking to the companies.

They are good points and I would like to see a good local rating company, which was “kicking the tyres” of the companies and providing reports. At the moment much of the rating information is just a rating and no reports. While S&P comes out has the most popular in our survey, it only rates a handful of companies (UDC, Marac, South Canterbury, Geneva and the banks) and I very much doubt anyone has read their rating reports.

I ran into a guy at the airport the other day who holds (and has held other) significant senior management roles in the savings industry.
We got talking about the state of affairs – as one seems to do these days – and the role of advisers, particularly with regards to Bridgecorp.
Both of us agreed that advisers and the leadership of this sector have not done enough to sooth investor sentiment. As I wrote on the Weekly Wrap two Fridays ago, all advisers are coming under attack at the moment. While I believe this is unwarranted there is a need to front foot the issue.
Bodies like the IFA – who pitch themselves and their members as the peak professional body representing advisers – have two broad tactics they could employ.
One is bury their head in the sand. The second is get out there and stand up for advisers.
I will leave it to readers to suggest which option has been taken, indeed it maybe somewhere in between.
My challenge to the advisory industry is this. If their proposition to the public and one of the “unique-selling points” is that advice is good and the public should use the skills of someone who is professional, abides by a code of ethics and belongs to an organisation which has a complaints process then they should be out there and be saying, loudly, to the public if you have a complaint come to us and we will promise to investigate it.
It’s well and good saying to your members yes we have a complaints service and we have very few complaints. But if you don’t let the investing public know it’s there and what it does then they won’t use it.
Perhaps the downside is that an organisation could end up losing members and end up in a weaker bargaining position when adviser regulation comes into play.
But, hey, if you promise to represent the best in the business, maybe it is worth shedding some members who don’t come up to scratch.

Talk of rushing legislation into action to avert finance company collapses is meaningless.

The reality is legislation won’t stop finance companies collapsing, nor will it stop investors losing money. Finance companies are falling over for a number of different reasons. The most common are a lack of money coming in the door, from whatever source a company uses, and the point we are at in the market cycle.

Coupled with these are the lending and management practices of the companies involved. In some cases, such as Provincial Finance, the two issues are management lending in a market they didn’t understand and possibly some fraud. With Bridgecorp there appears to be questionable lending and a reasonably sudden fall in support from advisers. Many of the most recent collapses are small companies who can’t in this environment get enough money in.

I would not be surprised if this rate of collapse runs at one little company a week for the next month or so.

The reality is legislation and regulation won’t stop failures. Likewise, mandatory credit ratings are no panacea either.

Credit rating don’t always get it right and they very rarely expose fraud and mismanagement.

The most important thing investors and advisers can do is understand what each finance company does, before committing money.

One thing which will help is the proposals yesterday for finance company trustees to have greater power. This is something which will help.

My question is will trustees use these powers and will they be able to publicly express their views? An issue they may have is that a company will seek to stop them publicly exposing issues when they are discovered.

This is a little like the issue where the Securities Commission banned Bridgecorp’s prospectus and investment statement, but couldn’t say anything until the company had a chance to respond.