This week I have been fascinated by the goings on in the advisory industry, and some of  the things that make it look silly.

It started with a statement from Commerce Minister Lianne Dalziel that the government was working with the Institute of Chartered Accountants to provide free advice to Blue Chip clients.

I say good on both parties for doing this. I wish they could have done it earlier as it seems to me that many are preying on these Blue Chip “victims” and making money from their unfortunate situation.

The obvious question the ICANZ/Govt release raised was how come the Institute of Financial Advisers wasn’t selected as the partner? I don’t know the answer to this question, however its release the following day seemed to suggest they were in catch up mode.

But the story hasn’t stopped there. None other than Chris Lee has added fuel to this little fire turning it to bonfire status.

In yesterday’s newsletter he ripped into the minister castigating her for supporting the IFA (when in fact it was the ICANZ she did a deal with). He says “minister Leanne (sic) Dalziel (is) urging investors to get their advice only from the very same groups who have so often misled investors.”

“Dalziel has consistently opted for the lazy solution, the one that will seem clean and tidy, and she has done so again in urging investors to go to the members of a selling group (in this case the IFA) as their means of obtaining good financial information or advice.

“I will demonstrate in a minute why such a suggestion is lazy, facile and incorrect.”

He goes on to say that Dalziel thinks that “pretending that membership of a selling group, and reciting of academic mantra, is the certification of competence that an investor should seek to avoid problems”

I have no problem with what Lee says about good advice, but  he  then launches into major criticism of various people which is factually incorrect in places, has incorrect name spellings and is vitriolic.

I am in no way going to pass judgment on the named persons as it is unhelpful. Yes some of them have chequered careers. Some may have made poor decisions. But what is the point of tarring the whole advisory industry with the work of 10 individuals. Sure Lee does give some credit to other advisers (some IFA members, some not).

He also is critical of the process that led to some of these people winning Financial Planner of the Year Awards. As the organiser of these awards I can assure you the process was rigorous. I give these people credit for coming forward and being prepared to be judged on their work.

One of the named people – Mike Shaw (who has been having an on-going battle with Lee)  – made his position clear:

This is part of his email: “Having read Chris Lee’s latest Taking Stock, I hereby nominate Chris Lee for the position of President of the Marxist Financial Advisers Union. This is the Union for Advisers who think they are too  good to be members of every other professional financial advisory organisation in New Zealand. The bully Chris Lee has yet again thrown his considerable weight and ego around the confines of the email margins.

As usual his research has got it wrong. Shaw has never been or aspired to hold the privileged position of President of any IFA chapter. Nor has Shaw ever had the wish or inclination to follow in Lee’s footsteps and appoint himself baron of any kind of New Zealand territorial financial advisory fiefdom.

Lee referred to his departure from General Finance in 1985. I wonder whether the door hit him on his ample behind on the way out or the back of the head resulting in convenient memory loss. It seems Lee has forgotten the reason he left. As this happened some 23 years ago it seems irrelevant to some, but for those there or near at the time I guess it is hard to let go.

Lee talks a lot about no research or ratings for Bridgecorp. Has he conveniently forgotten the two favourable rating reports prepared by Ron Keene of Rapid Ratings latterly Axis Ratings? Has Lee also conveniently forgotten about the favourable Morningstar ratings reports for the ING funds?

Is Lee asking for these reports to be ignored and passed into irrelevance?

Lee also accuses Shaw of being out to discredit him. Shaw’s view is that Lee is doing a fine job of that himself. What Shaw is merely doing is asking Lee some questions which Lee has extreme difficulty in answering so Lee reverts back to his usual tactics of being the school yard bully.

Have you been trying to get your mind around the closure of the TOWER Mortgage Fund? I have and this is my take on it.

My immediate question, and the one readers posed to me, was whether this is another finance company or ING credit fund. While some portray it that way I think they are wrong and this is something different.

Finance company issues tend to be around asset quality, management and liquidity, particularly getting cash in from retail investors.

ING’s credit funds are directly related to the international credit crunch, while TOWER’s fund is more remotely related.

The biggest relationship between TOWER and the others is that the credit crunch is changing market conditions.

TOWER Investments CEO Sam Stubbs described it to me as being like the perfect storm. The fund had weathered 18 years of changing market conditions, but could not get through this one. It’s just too big – sort of like the Wahine storm.

Perhaps the biggest factor to bear in mind is that banks are aggressively chasing capital. This is great for investors but I wonder whether the pendulum has swung too far.

Not long ago risk was repriced and banks were giving away money without charging enough interest for the risk (read US sub-prime crisis and NZ lo-doc lending). Now they are, arguably, paying too much for capital. Just look at the offers from Rabobank, BNZ and ANZ National.

Poor old TOWER can’t compete with these rates in its mortgage fund, and I suggest not many others can too.

Stubbs agrees with me that it is weird for an asset manager to be giving money back to clients, but suggests new funds to keep the money within TOWER are not far away.

He also reckons that TOWER will earn big brownie points from customers for taking this stance and acting early.

The comments on Monday which most surprised me were the ones relating to the level of arrears. The company said it was just over 9%, which sounded incredibly high for a fund that has a conservative lending profile.

It seems, after talking to Stubbs that that is the arrears rate which is actively managed and that the actual non-collection or default rate is around 1% and 2%.

He says the 9.1% rate dropped to 8% on Tuesday after just one loan was sorted.

The other point which is worth making is that the fund isn’t being closed because of a run on redemptions, as others have reported.

“That’s absolutely not correct,” he says.

The past week was always going to be a useful one to get a fix on the state of the finance company sector.

As Monday was the end of the March quarter companies were due to send out payments to debenture holders and if there was any bad news it was likely to come out during the week.

For a while I thought it was OK, but then down came Lombard.

Was this a surprise? On balance probably not.

Lombard was an average finance company that tried to look extraordinary.

It didn’t appear to offer any clear competitive advantage and if you measured it against a set of criteria I produced last year you would have stayed clear of the company.

The company, through its name, its TV advertising and use of former MPs, puffed itself up and made it look bigger, stronger and more important than it in fact was.

Perhaps of more concern is that the company had some black marks to its names including problems with contributory mortgages and the not-too-pretty sight of its chief executive ending up in court over various matters.

Thirdly, and this is the bit which is harder for investors to see, is that some of its lending was not too flash and there was a huge concentration of loans. This is yet another warning bell.

At a finance company sector level, the Lombard situation is being portrayed a number of ways. One being that it was the first property lending company to run into trouble. The conclusion then being that maybe this is the first of a number of collapses.

I don’t buy that line as Bridgecorp was clearly property-related.

Secondly, Lombard blamed the property market. On balance it seems that has had an impact, but one can’t dismiss the observations about how the company itself.

Perhaps the most salient point is that companies who aren’t well-prepared and don’t have contingency lines of funding in place, are the ones which are going to struggle.

It’s a no-brainer to realise that reinvestment rates are down and will stay down, and that new retail money is scarce.

Added to that wholesale money in this credit crunch constrained environment is almost non-existent too.

A key to success is having lines of funding.

Asset quality and loan repayments are vital, but in some ways the latter is nearly out of the control of the lender, sure if someone doesn’t make a payment they can get whacked with penalty interest, but that isn’t much use if they have no money.

Thirdly finance companies need to focus on what they are good at and manage the size of their business.