If you ever wanted an example of how not to introduce regulation look no further than what’s happening with financial advisers.

The current process is a joke, is poorly conceived and is wasting the time and resources of everyone in the financial services sector.

The problem, in my view, can be clearly sheeted back to one fundamental issue.

There is no clear idea of what the regulations are trying to achieve.

You just need to look at the preamble in the latest bills to emerge from the Commerce Select Committee last Friday.

As I have asked previously, will all this extra cost and regulation really ensure the public get better and more accessible financial advice? The answer is no.

This government is building bureaucracy, increasing the size of the public service, adding costs to industry and providing insufficient benefit to investors.

It is not what National promised to do.

My sympathies are to many people: advisers and firms trying to do the right thing; education providers and others rushing to get the necessary services to market, but also to people like Angus Dale Jones at the Securities Commission. Who would envy his job, with the politicians and officials rewriting the script faster than he can learn the words.

The latest news this week that insurance advisers and mortgage brokers won’t be allowed to become Authorised Financial Advisers is ludicrous.

Many I have spoken to say they have started along the path of upskilling and want to keep going, even though they don’t have to.

Good on them, I say – but now they aren’t allowed to be AFAs.

It seems politicians and officials still don’t know what they are trying to achieve. The buck ultimately sits with Commerce Minister Simon Power.

I’m not an adviser, but if he wants some advice, it’s this: Take a tea break; work out what you are trying to achieve and how it will help investors and extend the time lines.

Take the time to get regulation right, rather than rush it through urgency in Parliament.

Code Committee chairman Ross Butler said a week or so before the select committee report came out that when it did the s**t would hit the fan. He was so right.

Something unusual happened yesterday. I got excited at a conference!

Yes that sounds scary (and strange) but let me explain. I spent the day at the Responsible Investing (RI) conference organised by Matt Mimms at The Investment Store (and ably support by Jen and the AMP Capital team).

For years I have been a supporter of RI. I always figured it was a no brainer for Kiwi investors. We are clean green. We are proudly anti-nuclear and anti-whaling. We were the first to give women the vote. The list goes on.

To me these values are part of our collective DNA. But do we transport those values to our investments? No.

For years we have written articles in ASSET Magazine and www.goodreturns.co.nz about how big RI is around the world, yet it remains a small part of our collective investment universe.

There are changes starting though. Our big institutional funds like the NZ Super Fund are leaders in RI. More and more KiwiSaver funds which invest responsibly are in the market. Added to that there are a number of fund managers who have signed up to the UNPRI.

The group gathered yesterday was also a change. RI has been a very quiet space in the past couple of years. However there is now renewed interest in it.

Yesterday’s conference was well attended. Indeed I understand they had to turn people away.

One of the sessions which resonated with me was what I would call a keynote speech from the head of the Responsible Investment Association of Australasia Louise O’Hallaron.

The presentation was modelled on Al Gore’s movie An Inconvenient Truth, and the message was (as you’d expect) simple and stark.

Everyday we read about things like the oil slick in the US, the global financial crisis, climate change and wars. We are concerned about what is happening with our planet and change needs to come. We can’t rely on oil and fossil fuels forever. We need to ensure there is food and water to sustain the population growth. We need to deal with climate change and global warming.

One of the things we can do is change the way we invest. Instead of filling portfolios with “sub prime” assets we need to spend more time understanding what the companies we invest in actually do and we need to invest in the other areas like alternative energy.

The price of carbon will have to be accounted for at some stage.

Maybe New Zealand is sensible to adopt and ETS as it may make our companies more attractive in the long term.

On top of this throw in the changes to the financial adviser world. Under a regulated advisor world talking to clients about RI may become a requisite of a good financial plan.

Here at Good Returns we are keen to help advisers understand more about RI and how (and why) they should consider it as part of their business. One idea is to build up a network of advisers and get some discussion going. Included in here would be the ability to ask others advisers about how they use RI. If you would like to become part of this group then drop me an email (philip@goodreturns.co.nz).

The ISI’s surprising announcement that it was introducing a voluntary standard to ban commissions on investment products, including on KiwiSaver, will do more damage than good.

My position, as I have said previously, is that commissions are fine. The caveat being that clients’ interests must be put first and that there is transparency, around remuneration.

Removing commissions will in all likelihood have a number of detrimental impacts on the industry. One is that it is another force against the small advisory firms. There is already talk that such a move will be beneficial for the large vertically integrated firms, like banks, who will be able to cross subsidise advice for some customers.

Don’t be surprised to see “free advice” from these firms as they will make their money from other parts of the process like asset management.

Banning commissions will kill many of the KiwiSaver businesses. They are modelled on paying advisers commissions to give advice around KiwiSaver.

There are bound to be many other detrimental impacts. Some of the other bits I have trouble with are:

The ISI is trying to force a remuneration model onto advisers. Whatever happened to the free market and choice? I could understand it if fund managers all voted for Labour, the Greens or some other left wing party, but I suspect they don’t.

Secondly the ISI makes this argument that consumers should be able to negotiate remuneration levels with advisers. This is a nice idea, but bizarre. Who negotiates fees with their lawyer, accountant or doctor? Surely a consumer could negotiate fees with an adviser on commission?

Thirdly, they say because the international trend is towards banning commissions New Zealand should blindly follow these other countries. (No wonder there are so many sheep jokes about New Zealanders).

I have no doubt that there are instances where commissions have influenced an adviser’s recommendation process. There are lots of comments along these lines and it seems to be accepted wisdom in some circles that is the case. However there is little empirical research to support this proposition.

On the other hand one can argue that investors make bad decisions all by themselves. Just look at what happened with finance companies. By far the majority of money that went into failed finance companies was placed there directly by investors, not by advisers. Commission had little to do with it.

My guess is that this voluntary standard won’t be widely used and that ISI members will have options for fee based advisers and those on commissions.

I was asked this week by a radio reporter whether the Securities Commission’s guidelines for KiwiSaver providers went far enough.

It sounds like a simple enough question but the funny thing is it was hard to answer, as the guidelines seemed to be a knee-jerk reaction to one incident. Also it seemed this is the sort of thing which should have been done years ago.

The guidelines weren’t the Securities Commission taking enforcement action. They were like a reminder note to managers.

One of the more important and bigger (but relatively unreported) parts of the guidance note was around performance measuring.

The commission is right that there is no consistency at the moment and this doesn’t help consumers.

I know the ISI has been working on developing a new standard for some time. When we see it is a moot point. Hopefully soon.

One could guess that as it is taking so long there is probably a lack of agreement amongst members on what is arguably a critically important event.

Even if the ISI did come up with a standard, what use would it be when around half the KiwiSaver managers are not members of the body?

Then again, you could ask why reinvent the wheel when there are already globally accepted standards for reporting performance?

It leads to the point that maybe it is time for the commission or government to take the lead and set the rules for the industry. The commission alluded to this in its guidelines.

It said: “In the absence of a consensus (on investment performance reporting) the commission may need to consider the need to recommend legislative intervention in this area.”

But will it have the bottle to do so? And how long will it take?

The other point which was pertinent was what the commission said about directors taking responsibility for documents they sign.

As one KiwiSaver manager said to me, a director should be shaking in his boots when it comes time to sign off an investment statement or prospectus.

In the past fortnight two advisers have hit the mainstream headlines for their dodgy operations.

Stephen Versalko, the former high-living ASB adviser, has dominated  headlines over the past 24 hours with his unbelievable spending on hookers and nice wine.

A week before, the Herald wrote about Mike and Jackie Bradley.

I’ve been pondering these and it seems that both advisers have been living the high life in Auckland and spending their ill-gotten gains

Secondly, neither of them are names that have been well know in the advisory industry. In some ways you expect the advisers who have done well to be known by other advisers. You expect to see them at events like IFA conferences and roadshows. Yet our enquiries suggest that both had almost no industry profile.

Another thing, and one which is concerning, is that both advisers had, let’s say, “interesting” approaches to documentation.

Reports suggest that the Bradleys had no records at all and the second had a set of highly doctored and controlled records.

I do have to wonder aloud (again) whether regulation will help tidy these sorts of things up. As I said in the Weekly Wrap, if someone can work within a highly controlled environment like the ASB Bank and commit this level of fraud, what can be done to stop it?

I think the answer is not a lot. If a person is truly interested in committing a fraud they will find some way to do it no matter how tough the rules and regulations are.

The other side of the coin is that there just has to be better financial education for the public. The people who suffered in these cases should have been asking more questions and should know what sort of information they should be given.

This may seem like a big ask, but one could assume, considering the sums of money involved, that the clients were successful and intelligent people who should have known better.

Isn’t it odd how one rogue event can taint a whole lot of people and cause government’s into knee jerk reactions.

Yes I am talking about KiwiSaver and the Commerce Minister’s statement this week about bringing forward a review of some of the regulatory functions.

Some of the ideas such as having the same reporting requirements for default and non-default providers makes sense.

But the idea of a “super-regulator” seems to be a huge over-reaction. Why not, instead of creating another government department, make sure the rules in place now are properly enforced?

You have to look no further than the trustees on this one. It’s hard to argue against the proposition that trustees failed in their supervision of the finance company sector and their duty to protect investors.

Unfortunately we are seeing re-run of this situation.

The trustees’ role with KiwiSaver should be more than just making sure the scheme adheres to the trust deed. They should be looking at more than that and looking after investors.

I have spoken to some KiwiSaver providers and they are quite amazed at how little trustees do with KiwiSaver funds. The point being you wonder why they are there at all, except to collect fees.

There has also been talk about what happens when you have one firm that provides both fund administration services and trustee services to a manager.

The argument they can’t tell each other what is going on because of Chinese walls is fine in theory, but looks like a conflict of interest.

Maybe the fund administrator should alert the trustee to anything it sees that could be marginal (let alone outright dodgy).

Surely that is not too hard to do?

Power tells us he has fast tracked work being done by officials on KiwiSaver regulation. Sure they may report back in four weeks time. But when will anything be done? Let alone asking the question does anything need to be done?

Finance companies is the theme I was am going to start the year with. Originally I toyed with the idea that maybe we should rename the survivors in this sector. Instead of calling them finance companies – such a tainted name now – that we could call them something like non-bank deposit takers.

Not a particularly eloquent name, I must admit. Then I thought about it a little more and figured that’s the role of a PR guru, rather than me.

Instead I have warmly welcomed the moves by some finance companies of offering non-guaranteed product to the market.

So far only Marac and PGG Wrightson have done so, but others, I hear, will follow soon.

It’s good for a number of reasons.

Firstly it shows you how much the guarantee really costs. This is something like 100 basis points. To my way of thinking it is far better the investor gets this rather than the government.

It also makes investors and advisers return to basics and think about the risk reward equation. It’s been too easy just to say take the company with the highest guaranteed rate.

Who needs an adviser to do that?

Advisers and investors should be researching any company they plan to invest in before giving them their money. It doesn’t matter if it is a finance company, a managed fund or a listed share. Do the research.

The challenge for advisers though is they have to start doing some work rather than take the easy option of saying to clients, take the guaranteed product.

At some stage the guarantee will go. The sooner the better as it just distorts the market, and encourages laziness.

My predictions that Allied Farmers would get its deal on Hanover through the vote today turned out to be correct. However it was a close, very close, call.

After hours counting the votes the key group voted in favour of the deal by just 0.4%. To succeed 75% of Hanover investors had to vote in favour of the deal. The biggest group, Hanover debenture holders said yes with75.4% voted in favour.

The meeting was far more sedate than the moratorium decision meeting a year ago, with fewer investors turning up.

It seems there was a bias in the audience. The anti brigade fronted. The acceptors didn’t.

I suspect part of the reason is that those who wanted to taste the shareholders’ blood are the ones who turned up.

They probably left dissatisfied as shareholder Mark Hotchin wasn’t involved in the meeting too much, and when he was he fronted strongly. Fellow shareholder Eric Watson did a no show leading to accusations he was a “shyster” and “chicken livered”.

What struck me about the meeting (except for how young I felt amongst all these investors) is that emotion over-rode intelligence.

Instead of baying for blood investors should try and be objective and look at the merits of the deal.

Allied, Grant Samuel and others have been straight up and said if investors take shares there is a strong likelihood (I’d say 100%) that the share price will tank in the short to medium term.

Also Allied Farmers MD Rob Alloway, while talking positively, acknowledged the Hanover book was a mess.

The outcome of the meeting swung on the knife edge judging by the performance of some players.

Here we rank how the key players performed – a little like how All Blacks get rated after a test match.

• Meeting chairman; Charles Darlow ; 6 – A solid performance like when he chaired the moratorium meeting. No nonsense, in control and organised. Let himself down by allowing “statements” at the end. Here a group of investors, most with scripted speeches, gave rousing performances extolling investors to vote against the proposal. These statements took the meeting to the knife edge. He shouldn’t have allowed them.
• Hanover chairman, David Henry, 2 – As he acknowledged he isn’t “an elegant speaker”. Ran the risk of putting all the old dears to sleep. His closing comments could have been stronger and more persuasive. Poor performance.
• Allied Farmers managing director, Rob Alloway, 7: Mr Nice Guy. Addressed most people by first name. Wore his heart on his sleeve. If anything too nice.
• Hanover shareholder Mark Hotchin; 8; Couldn’t believe he wasn’t involved in the meeting much until well into the second half when adviser Ton Watson challenged him to put in $20 million cash. Hotchin gave a passionate response, giving a frank assessment of how they first viewed the deal and why it was good for investors. Hotchin doesn’t like public speaking at the best of times, however necessity has seen him develop into a good speaker.

Reserves

• Hanover independent director Des Hammond – Didn’t have too much to do during the meeting, but kept the media at bay when they quizzed Hotchin in the stand up press conference while votes were counted.

Reserve Bank governor Alan Bollard made a remarkable comment at yesterday’s MPS/OCR announcement which stunned me.

He said that at the start of the year New Zealand was in a highly vulnerable position, facing much uncertainty and was surrounded by high risks. We were teetering on the brink.

All it would have taken to bring the country down would have been one irresponsible headline in the media.

Then he thanked the media at the press conference for being responsible and not triggering an economic disaster.

This showed how perilous things were at the start of the year. Secondly, the same couldn’t be said in regards to how the media have handled one of the other big business stories this year.

Those stories were about Hanover and the treatment of shareholder Mark Hotchin.

It has been quite stunning to see what has been happening in some of these investor meetings around the country. Read this piece at the Herald to see an example.

These investors are quite rightly and understandably upset and emotional.

But, in my view they didn’t get to this point by themselves. Their anger has been fuelled by the media, and in particular TV3’s John Campbell and Shareholders Association chairman Bruce Sheppard. The latter in particular has been a disgrace making ill-founded and incorrect comments on prime time telly.

Last night TV One’s Close Up presenter Mark Sainsbury signed off the show acknowledging comments made by Sheppard were false. The media should stop using these rent-a-quote, barrow pushing people as the voices in their stories.

I will defend Hotchin to the point that at least he has had the courage to front up in person to investors. Likewise he and fellow shareholder Eric Watson have come to the party and put additional money into the company, which they didn’t have to do.

We have seen first hand on Good Returns the sort of mob behaviour which has been fuelled by this sensationalist reporting. Some of the comments posted to stories have been unbelievable, highly emotional and in some cases threatening violence. We haven’t approved those comments and they won’t see the light of day. We encourage discussion, but we won’t be part of this orchestrated campaign of hate and vilification.

This whole public debate about commissions is so misguided it’s enough to drive one mad.

For the record, I don’t mind if advisers earn commissions as long as it is disclosed and customers have choice.

Also to get things clear, there are different remuneration structures for the various disciplines of advice, namely; investments, KiwiSaver, mortgages and life insurance.

I think the debate is only about investment products, however it seems that some commentary has included all financial products and services.

With life insurance I tend to agree that remunerating risk advisers on a commission basis is probably the default setting. If you take the argument insurance is sold, not bought, then a commission basis is fine; just disclose it.

Mortgages are similar. There is a slow trend to an advice model here and that is encouraging to see.

Investments are where things get interesting.

This whole idea about banning commissions seems to have come about due to the collapse of various finance companies and perceptions that advisers poured clients into finance companies because of the commission they were paid.

There is a slight element of truth to this. However the big over-riding fact which is being ignored in the debate is this:

The large majority of the money which went into finance companies that collapsed, went in directly from investors. This money did not get there through advisers.

By my reckoning, around a third of the money in collapsed finance companies came through advisers, yet they are getting 100% of the blame.

Banning commissions isn’t the answer. It’s investor education, as I argued here. Also it’s up to the product manufacturers to change the way they reward advisers and the regulators to make sure dodgy operators are closed down.

Yesterday I sat in on an AMP briefing about what it is doing with its advisory business. One of the interesting things was when CEO Jack Regan talked about the attributes needed to be a successful adviser. I won’t list them all, but what is worth noting is that the whole package was wrapped up by acknowledging advisers were sales people; the term used was “professional salesmen”.

Many sales people are remunerated on a commission, or partial commission basis, so why can’t advisers?

Another ignored point which bothers me is around share brokers. Hello, these people have been commission-driven salesmen since Adam was a cowboy. Do they get the same opprobrium as financial advisers?

Nope.

I bet if you looked at many of their portfolios over the past couple of years you will see some significant losses.

Apparently that is OK.

Very strange.