The Green Party released its KiwiSaver policy yesterday which has all the hallmarks of a nice idea but probably not that realistic.

The crux of the plan is to introduce a seventh default fund to the mix, which they call the Public Option, and have the money managed by the NZ Superannuation Fund. In addition to this the administration would be provided by either Kiwibank or Inland Revenue.

The details of the policy are a little scant at the moment. However it appears to be predicated on the NZ Superannuation Funds’ performance and Kiwibank’s track record in challenging the big Australian banks on price.

The policy sounds good and resonates with this view that KiwiSaver fees are too high. Co-leader Russel Norman says “KiwiSavers’ nest eggs will be significantly higher, up to $142,000 higher in some cases ($64,000 in today’s dollars).”

The issue of fees is certainly something which all the main political parties want to look at. Our view is that yes working out how much people pay in fees is difficult. Yes they are an important part of how much an investor really makes. And there is lots of variation.

The NZ Superannuation Fund does a good job in managing money but one has to remember it has a mandate to die for. It essentially has one client and it has a long-term investment strategy where there are no draw downs for years. Commercial fund managers on the other hand have to deal with day-to-day redemptions and new clients. Investors are chasing short term returns and will move managers or investments if they aren’t delivered.

If people were to get access to the NZ Superannuation managers then they should also be made to lock their money in for a long period of time. Maybe even until they are 65.

Otherwise the managers won’t be able to continue with the strategy they use.

Having Kiwibank or IRD managing the administration is an interesting one too. Kiwibank already has is on scheme and probably isn’t that interested in being administrators and earning discounted fees. Likewise there is an emerging view IRD should be doing more with KiwiSaver. As we reported here there is a view it should manage hardship requests.

Such a move certainly takes IRD away from its core job of managing the tax system.

Is it ethical for fund managers to continue to get management fees on funds that have been frozen?

Fund managers should not get paid management fees – or at best should have them severely discounted – for the period the funds are frozen.

It is immoral that trapped investors are forced to contribute to the profit of their tormentor, against their will and with no option to get out and prevented from making new investments of their choice.

Further, a fee cut would serve as a disincentive for fund managers to get in that position or to keep funds closed.

Currently it is quite attractive (especially in a bear market) to close funds indefinitely. This forces investors to withdraw from other liquid investments or when rebalancing, funds have to come from elsewhere.

It also retains a handsome profit for incompetence.

Maybe a receiver should be appointed to determine if the manager continues?

It seems incredible that investors are still trapped after three years in mortgage funds, infrastructure funds and other hedge funds etc, and with no say whatsoever and paying full fees for non-performing investments.

Regulators could include in the new legislation that fund managers who fail to provide the liquidity promised should forgo profits.

In many cases, when funds are frozen management fees are fixed at the old high levels. That’s not right.

Of course the corollary would be that advisers should not assess fees on frozen funds – and certainly not at moratoria value, not that many of those are left.

Moratoriums didn’t work did they?

The poor suckers who invested then voted for the perpetrators to stay in the existence to manage something they couldn’t manage in the first place – another bite at the cherry.

We all learned from the finance company debacles that valuing a portfolio with a capital item that remained at the same value, lulled many financial planners into a false sense of security. That is, using finance company debentures in investment portfolios reduced volatility and so they assumed this was reducing the risk in the portfolio.

The capital value of a debenture in a finance company never reflected that company’s strength or otherwise. Unfortunately for their clients, a permanent loss of capital was a massive risk.

So, why do research houses still use volatility as the only measure of risk?

Correct me if I am wrong but quantitative research and hence technical analysis is the sole basis of most ratings. And, what does that measure – the past.

Sure, volatility is one measure but it is not the only answer to understanding risk in a portfolio.

I believe the clients’ of financial planners have a very clear understanding of risk, “Will I lose my money?”

What does not seem to be in the forefront of minds with those who construct portfolios, is whether the selected investments can battle through a huge storm without total loss?

The true test of risk – the survival of a Black Swan Event (of which we seem to have quite a few in recent years). The Black Swan Theory was developed by Nassim Taleb and he argues the silliness of trying to predict the unpredictable.

Nissim Taleb said: “We Don’t Quite Know What We are Talking About When We Talk About Volatility”.

If you believe the investments you have chosen will survive severe storms (irrespective of the volatility they may suffer during the storm) then you have de-risked your client’s portfolio.

If on the other hand something is dropped into the portfolio because the capital value is stable, maybe it is actually stagnant (i.e. difficult to value or not regularly valued), then risk persists.

For this very reason, some of the hardest hit during 2008 were the ‘so-called’ conservative portfolios.

You would be better off in most circumstances ignoring volatility – it is probably one of the contributors to many losses incurred since the jolly measure was introduced as a proxy for risk.

Sorry Mr Markowitz.

Can anyone enlighten me on why so many slavishly follow and utilise research house material which is a regurgitation of the past with one of the main measures applied being volatility?

Anecdotal evidence would suggest we would be better off without them. Maybe it is just simple ol’ human nature: “Got to have someone to blame when the going gets tough?”

Was I surprised that Alan Hubbard has be charged with 50 counts of fraud relating to the way he ran his investment vehicles? No.

I was surprised though by the number of charges? 50. Yes.

Do I think he deliberately set out to defraud investors? No. Did he do it for his own personal gain? No, as long as you don’t consider the reward for helping other people personal gain. I guess it is personal gain in an old fashioned, South Island way, not an Auckland, bling, bling way.

While the charges relate to the “funds management” and investment companies he ran, they have been compared to the finance company situation.

The poison in most of these finance companies has been the related party loans.

Many of these companies have been used as the personal banks of the owners and managers.

There are plenty of examples of this happening.

If Hubbard has done something wrong he deserves to face the consequences.

He can’t be given “special treatment” because he is old. Or because he helped lots of people or because he is on dialysis.

On the other hand he shouldn’t be made a scapegoat for all the wrong doings of finance companies.

It is quite amazing that the authorities can take so much time and effort over the likes of Aorangi and Hubbard Funds Management and yet the people behind some of the truly dodgy finance companies still live the life of Riley.

If Hubbard did anything wrong it was that he thought he could run things as he wanted and as he had done for many decades. He, for whatever reason, didn’t notice that the way things were being run in world of finance was evolving to better and higher standards.

PS: You have to wonder whether Hubbard will get a fair hearing on these charges. There is an excellent piece on this by Fran O’Sullivan over at the Herald.

The fact that the Securities Commission have made a decision to exclude organisations and advisers promoting property investments from the requirements under the Financial Advisers Act is outrageous.

It’s hard to fathom how a decision of this nature could possibly have been made, given the past record of over confidence and hence over investment in property being one of the major drivers behind the global financial crisis.

So much confidence in property values only ever going up, that most of the failed finance company’s promoted themselves as only investing in property, it didn’t matter what sort, only that it was property!  Such was the confidence, one of the largest insurance companies in the world couldn’t write enough credit default swap business, and ended up being bailed out. Such was the confidence, banks and lending institutions were more than happy to lend over 100% on a LVR.

A leveraged property investment has a significant amount more risk attached to it than an unleveraged diversified risk profiled investment. There are considerations of liquidly risk, interest rate risk, capital risk, specific risks, over concentration in a single asset class risk, to name a few and now in Christchurch and potentially throughout NZ, natural risks and disasters which have led to rent risks, insurance risks and the like, and there is now no legal imperative to disclose any of this or bring it to the potential investors notice? To treat those promoting one form of investment over another without a prescribed process for all personal investment leaves me with little faith in the Securities commissions understanding of the advisory industry.

Under  the FAA anyone promoting property syndicates and other property schemes are exempt from prosecution from doing what every other adviser needs to do, and that’s explain risks associated with different investment classes. Every adviser registered as an AFA is liable for failing to put the interests of clients first, log over 20 hours of professional development, annually, keep records for 7 years, be part of a disputes resolution process, be audited by the securities commission, produce disclosure documents setting out qualifications, and importantly any vested interests, disclose the fees that are paid through a supplementary disclosure document. All of this on top of doing a complete analysis of investment options available to the client, risk profiling and providing evidence and calculations for each option and the rationale behind any assumptions made.

If the securities commission is now about to allow every charlatan that can’t meet the above due process prescription and allow such people to operate in the investment property market, then we as an industry will again continue to bought into disrepute as the people operating in this market are likely to hold themselves out as property investment advisers or financial advisers of some sort.

In my view, if the objective of the securities commission is to increase financial literacy in NZ then this is a step in the wrong direction.

All financial advisers, the IFA, and any other body which adheres to the principals of professional due process in investment advising need to object strongly to this move. There appears to be a lot of vested interests groups who seem to have found favour with influential people in the securities commission to push their own book.

Phil Harris
Partner
Camelot NZ Ltd Partnership

It was good to meet Taranaki advisers today and I’m looking forward to meeting Northland advisers next week as the roadshow draws to a close.  It will be interesting to see whether they have similar questions and comments relating to the authorisation process and the regime more generally.

In recent blogs I’ve responded to questions about what’s likely to happen in the post-licensing period and on adviser monitoring visits.  We’ve also issued explanatory notes on the Standard Conditions for AFAs which can be found on our website.

Some have asked who will do the visits?  With regard to our monitoring staff, they are based in Auckland and Wellington but will clearly be spending a lot of time on the road covering the whole country.  Almost without exception we come from private sector financial services backgrounds including financial advice, investment management, insurance, compliance, systems and processes, accounting etc. And of course several also have regulatory experience both here and overseas. So advisers will discover during monitoring that Commission staff speak their language and understand advice models very well.

Some have also asked about any impact on advisers of the transformation of the Securities Commission into the Financial Markets Authority (FMA).  In the context of financial adviser regulation – it will substantially be business as usual in coming months.  Day to day you’ll see the same people and processes, but there will be a new name appearing on business cards, media and correspondence and of course on AFA certificates because the FMA will replace the Securities Commission as the licensing authority.

Financial adviser regulation will continue to be a major part of the work of the FMA which will license and supervise other areas too, such as reporting entities under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act.

The AML legislation will impact financial advisers and this is something advisers will need to start getting their heads around over the coming months (look out for invitations to a roadshow later in the year to help with this).  There will be annual reporting requirements but the good news is that it presents an opportunity to look for regulatory efficiencies - we’ll aim to streamline AML compliance obligations with financial adviser reporting requirements as much as possible.  An AFA’s Adviser Business Statement for example will be an ideal place to describe the adviser’s client risk assessment practices for AML purposes – but don’t worry, it doesn’t have to be in your first ABS!  The AML team here at the Commission is also preparing to roll out educational material to help.

Mel Hewitson

It’s been great to see how well engaged roadshow audiences have been. Most seem to be fairly well sorted in terms of licence application readiness and are putting the finishing touches on their Adviser Business Statements or Set C files.  They are also getting stuck into preparing for the new disclosure requirements.

It’s therefore no surprise that these advisers are now thinking about what happens next in a post-licensing world.

When will the regulator visit me? Will they just arrive on my doorstep unannounced?  How much of my time will they take? What will they want to look at?

Some thoughts on that:

The Commission may contact an adviser any time. Several factors will influence who we choose to target, such as acting on intelligence or investigating a complaint, a risk assessment, investigating a particular theme (perhaps Kiwisaver sales practices for example) or simply knowledge building about this industry. So a visit by the regulator won’t necessarily signal a problem.

This is a newly regulated industry. We need to focus on the areas where there’s the risk of greatest harm, ideally picking them up early. To do that we have to correctly identify the main problems through a combination of intelligence gathering, signals picked up from complaints received and the fact-finding we do through our monitoring programme.

In most cases you’ll get good notice of a visit and generally the precursor will be a request to send us your ABS. So the first thing you can do to reduce the likelihood of a visit or a request for more information is to adequately address the matters we ask for in your ABS.

The ABS is about you the individual, how you have thought about your obligations under the law, the Code and the Terms and Conditions and how you will comply.  We’re more interested in knowing about your advice process and what you personally do than the business itself. Make sure you read the AFA ABS Guide to help. We’ve updated the tables in the back to reflect the final Code’s 18 standards and the standard terms and conditions.

What we do once we’re in your office depends on the reason for our visit. We may be concerned about a particular aspect of an adviser’s compliance. We may wish to verify that an adviser is doing what their ABS says they’re doing. Or it may be a discussion about an industry-wide theme we’re interested in understanding better.

We understand this is new territory for everyone. Those who behave like professionals can expect to be treated as such. The Commission will be helpful towards those who take compliance seriously and are clearly on board with the spirit of the law for the benefit of their clients.

On Tuesday I had a good day. Flew to Wellington then headed up the road to present my social media show to the IFA in Palmerston North.

The presentation is all about helping advisers understand Facebook, Twitter and LinkedIn as well as talk a little about mobile technology and the mobile version of Good Returns (type m.goodreturns.co.nz into your phone’s browser to see it)..

The IFA in the central North Island has lots of wise heads who have been advising for a long time. It was good to catch up with many of these stalwarts of the advice world.

They were a great audience to present to only letting me get a couple of slides into the presentation before the questions started. From there on it was a lively discussion answering all sorts of questions (and telling some stories that shouldn’t be told).

I talked about many things and examples of how social media can be used including the comments in this presentation from Gen-I chief executive Chris Quin about how he used Twitter to keep up with last year’s earthquake in Christchurch.

While I had a good time that changed quickly. Right at the end of the presentation adviser John Doolan announced there had been a big earthquake in Christchurch. The magnitude of this didn’t sink in till I jumped in the car and started driving back to Wellington and tuned into Radio New Zealand. Then it hit me.

While my day started off well, it didn’t finish that way.

To all our readers, advisers and their families in Christchurch we hope are well. Our thoughts are with you.

PS: if you are on Twitter you can follow the newstream at #eqnz and #christchurch

Over the next few weeks, I’m going to be on the road with the IFA Professional Development seminars.

The seminars go the length and breadth of New Zealand and anyone can attend so I hope to catch-up with as many advisers as possible to hear first hand about your experiences of regulation so far.

I’ll also be addressing your questions and any concerns about the application process – and about your relationship with the regulator in the post 1 July world.

As I go I’ll be reporting back on what advisers are saying and if there are common questions coming up I’ll answer them for you here.

The first stops are Balclutha on Thursday 24^th and Christchurch on the 25^th.

Five advisers in Christchurch were amongst our very first AFAs, but we’ve still only got a couple in Invercargill and one in Dunedin so far (see the list).  So I’m expecting there could be a lot of interest at our southern-most stop.

Mel Hewitson
Director Financial Adviser Regulation

GPG’s announcement last week that it intends selling all its assets – bar the biggest is a bombshell for Tower.

Tower has been happily sitting there getting on with business while it seemed like there was change swirling all around its competitors.

Now it is essentially in play and will potentially have a new owner.

GPG has been clever over the years and managed to get its holding in Tower above the 30% mark meaning that if a suitor was to buy all the company’s shares it would, under takeover laws, have to make an offer to all Tower shareholders.

There are other options of course including one where GPG could try and place its shares with institutions.

Or maybe the company could be sold off in three pieces; life insurance, general insurance and funds management.

As we reported earlier in the week (and other media picked up on yesterday) Fidelity Life is keen on the life insurance business. I’m told one could buy the investment side for around $35 million too.

One wonders if the Fidelity interest in Tower is a way of getting back at the company after it attempted a hostile takeover of Fidelity last year – or if it’s serious. I suspect it is serious but don’t know what it’s capacity to fund such an acquisition is.

GPG’s announcement comes at an inconvenient time for Tower too. The company is moving from its silo based model of having the three divisions, to a functional model where it’s all one happy family across the two insurance operations and investments.

All the work that has gone into the restructure could end  up being wasted.

As I say, GPG’s announcement is rather inconvenient for Tower.