The scary thing about this Blog is that it shows my age!

All this turmoil in the investment markets – with finance companies and mortgage trusts – reminds me of a major event that happened back in the early 1990s.

Back then, investors on both sides of the Tasman, loved unlisted property trusts. Indeed it is where many firms made their name.

This property sector imploded in spectacular fashion when investors suddenly lost confidence and demanded their money back.

Then the key issue was that you had long-term illiquid assets, matched with investors who had short-term expectations and expectations that they could redeem their investment at will.

What happened is that investors sought to cash up their funds and managers responded by freezing redemptions. To get the cash they would have had to sell assets at a discount.
To me there is very little difference (or lots of similarities) between what happened then and what is happening now.

The two factors at play are investor behaviour and a depressed property market.

Something many people will have heard me say in recent months is that markets work in cycles. We have been through these parts of the cycle before. The good thing is that we know, particularly in investment markets, that we come out the other side.

The stuff we are seeing now is not brought about by shonky schemes, or rubbish management. It’s brought about by changes in the market and investor sentiment.

What companies like Hanover and these mortgage trusts are doing is the right thing.
As long as the underlying assets are OK, people shouldn’t panic. Sure it is frustrating, but be patient.

Hanover Finance’s partial demise has forced me to answer a question I have tried to answer before.

The question is simple: Is Hanover’s default on interest payments a surprise?

While it’s a simple question it’s actually hard to answer.

Some say it was inevitable. I’ve always hoped that Hanover, as one of the bigger finance companies, and one of the better run ones, could outlast the finance company meltdown.

In some ways I now think that its “situation” (and I deliberately use that word) was nearly inevitable.

As Hanover part-owner Mark Hotchin said to me; you can fight the market, but when it goes like this it’s pretty hard, if not impossible to beat.

Think about it: a total lack of investor confidence plus no alternative funding lines plus a stuffed property market all equal a formidable opposition.

The issue for investors is that the company isn’t accepting new deposits (that’s easy to handle), but more importantly that interest payments have been suspended.

The next interest payment isn’t due until September 30, and the company has money in the bank. That money, plus anything it can get back from lenders, may actually give it sufficient for a payment at the end of this quarter.

What is worth noting, and something that others will miss, is that suspending interesting payments, and rolling them up into later payments, matches what is happening with lenders.

The issue there is that they can’t on-sell their properties and repay their loans, consequently the interest payments are capitalised. When they are repaid there is then a reasonable probability that there will be sufficient for debenture holders.

I take a different view to some of the uninformed populist stuff seen on TV and the likes about the state of Hanover.

Hanover is nothing like Capital + Merchant, Bridgecorp and some of the other finance companies which were poorly run with awful assets.

Hanover has good management and, from insiders I know, had a good quality loan book.

The other point I want to pick up on is that some of this comment has referred to the shareholders, Hotchin and Eric Watson, taking a fat dividend cheque last year.

From what I know these guys have the most to lose in this situation and they want to preserve as much of Hanover’s equity as they can.

The move today is as much about them protecting themselves as dealing with investors’ interests.

What Hanover has done is probably the right thing and arguably could have been done earlier.

Getting the company to manage its way out of this situation is probably better than handing it over to a receiver who, in all likelihood, would sell the assets at fire sale prices leaving investors with a poor outcome.

My guess is that Hanover will live to fight another day.

I’ve commented before about the tortuous process adviser regulation has gone through and now it appears to have gotten to the mad stage.Discussion on how the sector should be regulated has gone on for years. There have been task forces, discussion papers, U-turns – the lot.

The road has been as windy as crossing the Southern Alps, rather than being straight, sharp and direct.

It appears the government is pretty hell-bent on getting this through Parliament before the election. While there was some thought this would be a piece of legislation which lingers, the fact that the select committee hearing it sat on a Monday (very unusual) and reports officials are advancing plans behind the scene, a pre-election passing looks highly probable.

That’s fine, but as we report today it appears there is a whole new model being promoted which hasn’t had much discussion in the industry, particularly by the people who will be regulated – advisers.

Under this accredited institution model advisers would have to belong to a product provider who would be responsible for regulating advisers who sell its wares.

I’m struggling to see the benefits for consumers with this model.

It seems that institutions are making a land grab for distribution; that they could shield poor quality advisers from scrutiny; and that they risk brand damage if an adviser goes off the rails.

I met someone yesterday who told a story about an adviser putting all of a couple’s retirement savings (around $150,000) into one finance company. Under this regulatory model that company could be the accredited institution, and one would question (especially if it was someone like Bridgecorp) what sort of investor protection there would be.

This new development, is major for advisers. I would like to hear your views on it, how much if anything you know about it, whether there has been any consultation and what you think the regulatory model should look like.

Use the comments box below to leave your thoughts or email them to thoughts@goodreturns.co.nz

The introduction of disclosure statements (DS) is something I have watched with more than a little interest.

The idea of the DS regime was to add more transparency to the industry and therefore help build a bit more confidence in the advisory sector.

So it was pleasing when the regime came in, how many advisers I spoke to who were quite happy to send a copy of their disclosure statement. It’s been useful to see the different approaches taken and what level of disclosure advisers gave.

One of my initial thoughts on seeing statements though, was surely the remuneration model for the industry is wrong.

In the spirit of disclosure these documents list everything the adviser may use and the remuneration levels. In some cases the list of products and commissions ran to pages.

To the uninformed investor they would look at this and be amazed at all the fees and percentages. You could be excused for thinking some of the beat-up stories in the media maybe right. You know, “commission-driven salesmen” etc, etc.

It just looked like advisers were clipping the ticket left, right and centre and there was little left for the client. (Remember this is the perception from the docs, not necessarily the reality).

My thoughts are that the sooner we move to fee-based advice, the better.

My second line of thought on disclosure documents comes from some work we have been doing in ASSET Magazine. We have asked a number of advisers for their DSs, yet some have point blank refused to provide them and others, including senior advisers (that’s in terms of experience, not necessarily age) have been quite hostile to these requests.

There appears to be a moot point whether DDs have to be given to a member of the public if they ask, or whether they just have to be given to clients and potential clients.

I don’t think that is the issue.

The action of advisers to withhold DSs make it look as though these advisers have something to hide, and that may be their remuneration model is something they actually don’t want to disclose.

If the industry wants transparency and to build its reputation, then advisers need to be upfront about what they do.