I attended the Morningstar Fund Manager of the Year Awards during the week and there was one topic on everyone’s lips. It wasn’t who was going to take out the gongs that night, but what was going on at Huljich Wealth Management.

A couple of people did wonder if Peter Huljich was going to turn up on the night. Who knows, before all this news broke of what had happened Huljich could have been in the running for one of Morningstar’s awards.

The unanimous theme is what had been done was wrong.

The funny thing though is that it was wrong, but wasn’t a situation where investors were being ripped off. The closest, I think you can come, is that people signed up to the fund under false pretences. They were sold on returns which it turns out are questionable.

There are still unanswered questions though. For instance, why didn’t Brash and Banks know what was going on in the business? They are directors and sign off accounts.

They are not scot-free on this one and have some explaining to do themselves – although I note an explanation is not likely to be coming anytime soon.

Brash makes a point in his press release that says “some of these allegations (made against Huljich) are unfair and some are untrue.”

It would be helpful if he explained them.

Secondly I don’t think changes in the rules around funds would ever prevent this sort of thing happening in the future. The only likely outcome is that penalties for anyone caught could be tougher.

I also note many people have jumped on this story to push their own agendas – particularly the business presses page three pinup Gareth Morgan. Surely we can find someone with less conflicts of interest?

Added to that, Morningstar used it as a hook to push its call for fund managers to disclose all their holdings.

I do have to defend the research houses though. They can’t be expected to audit every managers’ books to confirm the data sent to them. That is ridiculous.

The other oddity here is that Brash is now running the show and is chief investment officer. Sure he ran the country, and used to print money, but can he manage money for investors?

We will be watching the returns to see.

It was a bit of coincidence yesterday that we were finishing an article on what the government’s utterings about tax and property investment really meant when it put out the response to the Capital Markets Taskforce.

The story, for the NZ Property Investor Magazine asked, amongst other things, whether changes to tax rules would end the Kiwi love affair with residential property.

It will come as little surprise that the answer was no.

Kiwis will continue to place their faith in bricks and mortar.

There are many reasons for this but one which came up a number of times was that there is little faith in other assets like shares.

Also distrust came through of corporate, big business and managers. The coincidence here was that the government’s response to the Capital Markets Taskforce addressed this very subject.

In looking through the responses it seemed there was little there which would change Kiwis attitudes.

Sure they the government supported a few ideas like putting investment statements into plain English, adding warnings when products were “particularly risky or complex” and a few other things provide a bit better quality of information to investors.

However, some of the things which are key to improving New Zealanders investment outcomes is better financial education and literacy.

The taskforce recommended that initiatives are employed to raise investment literacy including a targeted campaign promoting key investment messages.

To this the government said “further consideration required”. Then there was this one: Include investment literacy concepts in the school curriculum and resolve the issues preventing approval of the Personal Financial Management unit standards.

The government says it doesn’t need to as schools are self managing and they can include financial literacy if they consider it appropriate. Surely the government can be more proactive than this?

If it wants economic growth and a step change in the economy then having a financially literate population is a must have.

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.

After a little absence I’m back! I wrote this post a little while ago as  it touched on a theme that had been on my mind for a while. Also once I started sounding it out on others I realised many agreed with the thoughts. As usual would love to know what you think.

My other little – pre Blog announcement – is that since Blogs had been a little thin on the ground I thought I’d add a Twitter account too. This way I can give you some other thoughts on things as they happen.

You can follow me at http://twitter.com/PhilMacalister

Now for the Blog! There is this view at the moment that adviser regulation is the answer to all our financial woes. Woes could stand for “when over-excitement strikes’ and examples include people losing money in finance company investments and dodgy property schemes like Bluechip.

Sorry, adviser regulation is not the panacea for preserving us from future ‘woes”. I support raising the standards and improving the quality of advice (and have argued overall it isn’t bad in New Zealand). The harder problem to solve is investor education.

No matter what the powers-that-be say about recent “issues” an underlying problem is people making dumb decisions to invest in dumb products.

I am a little tired of hearing about investors calling themselves “victims”. In many cases their woes are of their own making. They looked in the paper for the highest finance company rate and invested their money there. No advice was given. Things weren’t helped by unqualified self proclaimed experts providing ratings for these investments that may have given encouragement to the investor.

The recent case Bluechip court case makes the point the law isn’t there to protect bad investment decisions – nor should it be.

Now don’t get me wrong. There are things that can be done to improve the advisory industry (and make it a profession).

But if you are going to put an ambulance at the top of the cliff it is regulation of product manufacturers. Someone should be looking at finance companies, CDOs and these other non-mainstream offerings and making sure they are properly represented to investors.

Yes there should be an ambulance at the bottom of the cliff dealing with the dodgy investments and their fallout.

The curious point here is that neither of these are about the advice process; it’s at the product and regulation levels.

My biggest concerns are that advisers are held out as the scapegoats when there are others that are more culpable – mainly Mum and Dad investors who take no advice.

There are plenty of advisers who do a bloody good job for their clients. Yes, there are some who don’t do such a good job too.

But what is being proposed is going to drive good advisers away from the business and add significant costs to those who stick around.

Making it harder isn’t going to automatically produce the outcomes some want.

I don’t hide the fact I am pro- advice and think it is in an important part of the process.

If regulators and others want to fix the problem start with financial education. Punters are often their own biggest enemies.

Financial advisers have been widely vilified in recent times and have become a divining rod for derision. If you believe the media, all financial advisers are Madoffs.

Recent case in point, the just published report by the Capital Market Development Taskforce reads like a diatribe on the financial advice industry.

Almost a third of the report is devoted to the deficiencies of financial advisers when in reality advisers control only a fraction of the assets invested through our capital markets.  Somewhat perversely, the entities the authors of that report represent collectively wield far greater influence over New Zealand‘s capital markets than the entire financial advice industry. But they seem to have chosen to deflect rather than reflect.

It seems to us that financial advisers are punching well above their weight.

Granted, the financial outcomes for investors the world over have been poor in recent times. But, while convenient for some, it is wholly inappropriate to lay the full responsibility for those outcomes at the feet of what is a critical but still relatively embryonic industry in our country.

We profess to know a little bit about, and a lot of, financial advisers. NZ Funds, is the only investment management group in New Zealand that makes its living exclusively from working alongside financial advisers. We have followed that course for more than 20 years now, from the genesis of our industry to its currently troubled point.

We work with advisers of all denominations. From one man bands to large national chains; from the truly independent (I will come back to that hoary old chestnut) to those that rely on us for a wide array of investment and business services; from those qualified primarily through experience to those who hold doctorates in finance.

They are generally good, honest people of strong integrity and ethics. They do not need to be told to put their clients’ interests first. They are acutely aware morally, if not necessarily technically, of their fiduciary duties. Their recommendations are not, in our observation, tainted by remuneration factors. But we do frequently observe their genuine concern for their clients’ financial outcomes and well being.

The distribution curve of financial adviser capability is no different than that of any other profession – some outstanding, many average and a small minority whose less than exemplary behaviours draws all of the others into disrepute. Ask any lawyer, priest or male primary school teacher about the stigmas of association.

People’s wealth is second in importance only to their health and their families. It is a source of enormous anxiety and uncertainty for them. This is especially so as the average client of a financial adviser in New Zealand generally has a significant shortfall between the life they desire to live in retirement and their current and prospective financial resources. They have an unfunded superannuation liability.

It therefore follows that as a profession, financial advice should be held in similar regard to the other profession that deals with the issues of our life enjoyment, namely, medicine. But it is not. Far from it.

The maligning of financial advisers has three primary legs to it:

1. they pursue their financial interests ahead of their clients
2. they are underqualified to perform their role
3. they lack independence.

With respect to the first issue, if it were true one would expect to see abhorrent remuneration and great wealth being accumulated amongst advisers, much like that which has occurred in the investment banking and sharebroking industries globally. This has not occurred. Most advisers make a living, not a killing.

With respect to the second there is strong and unequivocal basis to this criticism. Most advisers we talk to would dearly love to see a stronger professional qualification criteria develop.  But, like any industry in its relative infancy, the availability and level of professional qualification takes time to develop. It requires concerted investment from industry participants and government.

With respect to the last, there is much confusion and obfuscation around the issue of independence. There is no evidence that we are aware of that supports the contention that a wide range of choice (commonly referred to as independence) improves a client’s financial outcomes. To the contrary, there are very strong arguments and evidence that fully integrated advice and investment management services can deliver a superior outcome.

Advisers’ remuneration or commercial arrangements are not matters of independence, they are matters of disclosure. It goes without saying that they should be disclosed. But to say that an adviser delivers a lesser service because they utilise a narrower range of investment providers implies that is possible to fully understand all available products and securities – which is nonsensical.

Independence should be defined as the ability for an adviser to recommend what they believe to be in their clients’ best interests. Nothing more, nothing less.

Much of the noise in the media directed against financial advisers comes from those who hold a vested commercial interest in maligning the advisory industry (read their competitors). They are often advisers in drag. They, more than those they malign, are exploiting the investing public’s inability to discern the veracity of the distinctions they are making – many of which are spurious at best.  They are patronising those they purport to protect.

An example from the Capital Markets Development Taskforce report bears this out. The report argues that funds are flawed investment vehicles because “individual members’ asset holdings may be distorted when other members buy or sell units in the fund”. Given that this same flaw could arguably apply to all traded securities (the circularity of which is perplexing given the Taskforce’s stated aims), one can only assume that the statement represents the interests of one or more of the contributing parties, not those of investors generally.

The real destruction of wealth that has occurred in New Zealand has been driven much less by the direction of advisers and much more by the lack of it. Most of the investment directed to failed finance companies for example, was and still is, made without the benefit of advice. There is strong empirical evidence globally that it is human behaviour, not bad advice, which is the primary enemy of individual investors.

The poor financial outcomes achieved by investors over the last decade have been exacerbated by the laying bare of the imperfections of modern portfolio theory. While modern portfolio theory is beautifully elegant it is flawed in its application for individuals. The returns from risk assets are not as predictable as the theory implies over the investing timeframe of most individuals; the outlier events occur more often and to greater extremes than the theory accommodates; and diversification does not provide the protection necessary to sufficiently smooth the ride. Despite all assurances, investors can not cope with the true volatility of the assets in which they are invested and their self defeating behaviours prevail.

These are failures on the part of academics and investors, not advisers.

One factor on which most will agree is that New Zealand and New Zealanders would benefit enormously from a widely accessible, professional, efficient, profitable, and client centred financial advice industry.

We believe that investing in the advice industry is a better means to that end than deriding it.

Richard James is the chief executive of NZ Funds Management

Yesterday we held the ASSET Magazine Insurance roundtable. This is where we get together a group of people from various parts of the life industry to discuss current issues.

I wasn’t going to discuss this until a little closer to when we publish the Round Table discussion in ASSET.

However an item on TV3’s Campbell Live last night picked up on one of the issues discussed.

The issue is simple – the public perception of life insurance and risk advisers.

On Campbell Live there was a piece getting stuck into Sovereign for not paying a claim made by a guy who was dying of prostate cancer.

It seems the key issue is the man had failed to disclose a number of important conditions when he filled out the application form.

What was fascinating is that although Sovereign’s clinical director John Mayhew tried to put the case, it was impossible to make any headway as Campbell clearly didn’t understand how life insurance works. Rather he played on a strong emotional line: How can you deny paying a claim to a man who  is dying?

This isn’t the only example of bad press for life insurance. The whole financial sector took a hiding in the Sunday Star Times this week when it published results of a survey. The key point, and it is little surprise in this market, is that there was little trust of the either advisers or the firms who provide investment and insurance products.

Perhaps most galling was a comment no one trusted insurance advisers anyway so it was no surprise there wasn’t a positive public perception.

When things go wrong it makes headlines. It’s really easy for the media to be critical of life insurance.

Also when things go wrong there are plenty of willing outlets for the story where it is current affairs shows like Campbell Live or Fair Go.

The point is that the media totally ignore the great work life insurance plays and the thousands of claims they pay out each year worth many millions of dollars.

What the life insurance industry needs to do is get out and sell its good news story. It has a great story to tell. It has thousands of people who have benefited from having life insurance.

It’s time the industry put aside its differences and works together to get the facts out there.

The sooner it happens the better it will be for everybody (except the uninitiated who want to tell sensationist stories).

The eagerly awaited announcement of who is on the “Code Committee” has landed. The announcement of the 10 names this week is bound to generate some debate and I suspect quite a few grumblings.

The future of the financial advisory industry rests in their hands to some degree. They are the 10 who will write the rules around regulation.

I know most of the people and have nothing personally against any of them, but I do have to scratch my head over the make up of the committee.

The main point, as has been made in some comments to this story, is that there appears to be no one with any experience on the life insurance side of the industry. Likewise the mortgage broking community seems to have been ignored too.

A second point which has been raised is that the committee has a strong feeling of lawyers and managers rather than practitioners.

Is this committee really representative of the advisory industry?

I’ve heard many of these people speak before and also discussed issues with some of them individually. Unfortunately in some cases there is a lack of understanding of the advisory world and even some hostility towards it.

I understand many, many people put their names forward, and some of those turned down were, in my view, excellent candidates.

There is no point pre-judging what the committee comes up with, but I, like many others, hope that they are workable and sensible rules which ensure we have a robust, professional advisory industry.

What do you think of the make-up? Let us know by commenting below.

This week’s wrap starts with a little promo. Good Returns, New Zealand’s number one news website for advisers, is continually evolving and developing. From today we have added a new function where you can comment on articles. To do this use the comments box at the end of each article.

This is a great way for readers to comment on issues when they arise and give feedback to issues.

Two stories this week which you may like to comment on are the Commerce Commission’s heads-up in its ING funds investigation and the Ministry of Economic Development’s discussion papers on a complaints scheme.

It seems to me that the Commerce Commission announcement that any decisions on whether ING’s frozen funds were mis-sold are months away, and that even if it did think there was mis-selling, action may not be taken giving investors a clear steer on how to vote.

The MED’s proposals on a complaints scheme, and news that many organisations are interested in setting up suitable schemes is one of those necessary discussions. Since we published the story earlier, we have added copies of the discussion documents. You can download both here.

It seems having a robust complaints scheme will be good for the industry. It was interesting to see the latest Financial Knowledge Survey which said that less than 20% of New Zealanders have sought advice.

A couple of our other news stories this week have been strongly investment focused. These include a report on hedging strategies used by New Zealand managers, and also changes to tax rules with international bond funds.

On the life insurance product front we have the latest stats from the Health Funds Association which paint a positive picture of the health insurance market and also Russell Hutchinson asks a question: What is trauma for?

Today we also report that the move to separate the Asia-Pacific life insurance assets of AIG into a new company have taken another step forward.

Another story which you may like to comment on is this one where the ISI suggests the days of commissions are numbered. While the comments relate to investment products, particularly superannuation, one wonders when insurance products will be brought into the argument.

In depositrates.co.nz this week we report on the wind-up of the Auckland Mortgage Trust due to its inability to get a government guarantee, and the Rates Round-Up looks at what is happening with rates and the latest on Fortress Notes.

Have a great weekend.
Philip

One of the themes to draw out of the news this week is around economic growth and those “green shoots”.

The Reserve Bank talked about the outlook for the New Zealand economy in its monetary policy statement yesterday and during the week we have run a couple of stories reporting on what fund managers think.

One of the new things we have done this week is launch a new website totally dedicated to home loans. The site at www.mortgagerates.co.nz also has a section on What the experts are saying. Here you can see a summary of economist views and also read their reports.

We also introduce a new home loan rate blog. Its first posting questions whether MPs should be telling banks their rates are too high.

Have a look at the site and if you know anyone wanting home loan information give them the mortgagerates.co.nz address.

Another trend at the moment is that we are seeing lots more investment product development – well, far more than last year.

Today we report on Brook closing its Alpha fund to new investment. Fisher Funds has also added another fund to its range and Liontamer has its latest fund in the market.

On Good Returns we have a Special Report on Liontamer’s Australian equities fund which tells you more about this offering. This one is different from earlier Liontamer funds as it has both protected and unprotected units.

KiwiSaver has also been in the news with the closure of the eosaver fund, as Good Returns predicted many months ago.

Our depositrates.co.nz site is running a regular round-up of news on Mondays now.

The other key story in the section is around the preferential share offer from Alan Hawkin’s Cynotech group. This offer has had a fair bit of attention as Hawkins neglected to mention his past, including the Equiticorp failure of the 1980s, in the prospectus.

We speak to Hawkins about this and what he is prepared to do.

One does wonder where the authorities are on these sorts of issues.

One area where there has been much news recently is new appointments in the industry. This week has been more active with ING appointing a CFO, insurance old-timer Trappy taking on a new position and a few other appointments pending.

Commentary by Pattrick Smellie, BusinessWire.co.nz

I think I need some new pills. Last year’s Budget from Labour’s Michael Cullen was all about tax cuts. It looked like the Budget Bill English would like to have delivered.

Instead, English’s first Budget in the Key Government is all cancelled tax cuts, home insulation funding, new roads, school construction and preserving social welfare entitlements during the harsh recession. It kind of reads like a Labour document. There’s even a press statement from the Greens in it, for goodness sake.  Far from slash and burn, Government spending continues to increase, just not as fast as before.

There’s plenty of scary rhetoric about the potential for Government debt to explode and the Budget documents  show 10 years of deficits ahead – we haven’t seen anything like that for at least 20 years and this year’s will be the first deficit since 1994.

At first glance the forecast Budget deficits for the next two years look particularly scary as they approach $10 billion. Put that in perspective though. Peaking at a bit over 5% of gross domestic product, these forecast deficits are still lower than in the last Muldoon Budget, in 1984, when the projected deficit was peaking at 6.5% of GDP.

In other words, this may be the most crapulent time for any Finance Minister to have to write a Budget since the 1930’s, but New Zealand’s been in worse shape than this far more recently.

In response to that outlook 25 years ago, the incoming Finance Minister Roger Douglas introduced fundamental economic reforms which eventually tore his Government apart, even as those reforms produced the kinds of productivity gains that the 2009 Budget says it wants to achieve.

That was then, this is now.  New Zealand’s politics no longer favour crash-through economics, so the question becomes whether Key and English’s first Budget really does enough to set New Zealand up for faster, smarter growth once the recession ends.

Some investments are admirable.  The $323.3 million home insulation fund is a welcome acknowledgement that there are big health and productivity gains available simply by helping people live in houses that don’t make them sick.  But it’s still an old Labour policy recycled.

Likewise, the Primary Growth Partnership is ultimately Jim Anderton’s Fast Forward science investment fund in drag. The creation of a $1 million Prime Minister’s Science Prize is a stake in the ground signalling that this Government recognises how important new discoveries will be to the New Zealand economy in the future, and there appears to be some welcome new funding for Crown-backed research.  However, there is barely a word in the Budget to acknowledge the vital role of universities in creating wealth-producing knowledge.

Tertiary education will have to wait till next year.  For the moment, the only action there is to pull back about $200 million of annual spending which the Government says Labour never set aside money for.

An extra 600 police and 246 more probation officers is no doubt politically attractive, and may make sense since crime and recessions do tend to go together.  However, there’s something just a bit depressing about this being the single largest source of new job creation in the Budget, accompanied by major new prison funding to house what is already one of the largest prison populations in the OECD, per head of population.

The appearance of an additional $90 million to support the operating expenses of KiwiRail also underlines low quality investments which this Government remains saddled with.

At his Budget press conference, Bill English described the quest for the elusive grail of higher productivity as a matter of “getting 200 things right, not just one or two”.  In that sense, this Budget is barely a start.

Productivity forecasts assume that fewer people will do the same amount of work over the next two years, creating a short-term jump in productivity on an hours worked basis to around 3% annually.

However in three years’ time, that rate drops back to 1.5% a year, and flatlines from there.  Given that the Budget disparages New Zealand’s average annual productivity growth of 1.8% over the last decade, we have to assume that there is more, better, cleverer policy to come.

To the extent that the Budget lays out a credible path for Government debt control – always assuming there isn’t another big jump downwards in the world economy – English’s first effort does represent “a plan”.

What the Government’s economic policy doesn’t yet represent is a credible vision for what New Zealand should look like once it comes out the other side of the recession.

Labour’s Helen Clark and Jim Bolger before her struggled with “the vision thing” and got away with it because they both governed during periods of generally strong economic growth.  The 2010 Budget therefore represents a test of whether this Government, led by the charming and possibly visionary John Key, can paint the big pick seat as English delivers debt-control budgetture any better.