Here’s a curly one you can give me your advice on. Clearly financial advisers are  not particularly happy with the FMA and its advertising rolled out this week.

You just have to read through the comments on this story to get a feel for how strongly people feel about these ads.

The little dilemma we face at Good Returns is that before we saw these ads the FMA’s advertising agency had booked to run these ads across Good Returns and some of our other websites.

We could say that these ads are inappropriate for Good Returns and not run them. However there would be a cost here financially, and quite possibly on our relationship.

We could say the ads are  not illegal – possibly in poor taste – and we should accept the revenue. This advertising revenue is important as it allows us to provide you the readers with a high quality free news service.

I look forward to your advice on the matter. Of course you won’t need to provide a disclosure statement or anything like that!

New Zealand would have an untapped source of energy if we had the ability to harness the hot air that’s permeating the insurance industry. That’s if the comments arising from the article “Changing channels” (Good Returns June 3) are anything to go by.

It couldn’t be labelled “clean energy” though, because the public scrapping generating it is masking a dirty little war for territory that has engaged the industry for far too long.

Nor could it be called sustainable, because the spectators, aka consumers, are going to wonder if their needs are really being managed or if it is more about their adviser’s needs and wants.

The sector’s unabated introspection is getting in the way of delivering better service to consumers.  It’s time for the sector to reconsider its reason for being. It needs to be collaborative in terms of its value proposition for people.

Don’t count on regulation to be the panacea of the sector’s woes, or the public’s desire for improved confidence.

Competitors first should take a customer focused attitude and then their differentiated offerings to the marketplace. Attitude is everything. It’s time the hot air bubbles burst.

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 MED discussion document on FMA levies landed quietly in my inbox last Friday. However its arrival had created a big bang in the industry.

The mainstream media may have ignored it, but it is big news for our readers.

The idea around the levy was no surprise – we had all been waiting to find out how much it would be and whether having a smaller number of AFAs than earlier predicted was going to inflate the cost for those that remained in the industry.

Here the officials have done a good job of managing the situation as they never gave any clue to what they thought the quantum of the levy would be.

Likewise we had been told, quite some time ago, that the FMA would have to be funded by the industry.

Maybe that idea hadn’t really sunk in until now. I recall we had written about it but until we saw the proposals the magnitude of this idea has only just dawned on everyone.

It seems absolutely wrong that the FMA should have to get all its funding from participants and none from the government.

What’s worse is that the government is proposing that all its recent funding is recovered. That is it has given everyone an interest free loan for a couple of years to set up the FMA and all the FAA bits now it wants its money back.

One person described it to me as like getting the criminals to pay for the justice system. Probably not the best analysis but the concept is right.

The government has foisted all this change on one sector of the industry – at huge cost in time and money, and now wants to add to that cost.

Advisers had no choice about it, other than to walk away and many have done just that.

The bottom line of all this is that advisers will have no choice but to recover the costs through increased fees to customers.

The other thing that gets me is the way this whole thing has been handled. I’m already on record expressing doubts about the necessity of all these changes and whether they will actually achieve the goals the politicians have set out. Likewise I am on record saying that the wrong part of the industry is being regulated. The problems have been with product manufacturers like finance companies.

What we see now is a proposal to get millions of dollars from advisers to pay for the FMA. Yet I see in the papers on the weekend the FMA isn’t even set up. It looks like all the staff have been chucked out and now are reapplying for their jobs. Frankly you would expect that the regulatory body, which advisers are paying for, would actually be set up and running by now. After all adviser regulation starts in 15 days.

Those who attended the PAA conference would have heard FMA’s Chief Executive Sean Hughes talking about how, at its heart, regulation is about getting better outcomes for the people who need and use financial advice.

Giving the public information about regulatory changes is a key part of FMA’s role and, over time, will help give investors more confidence because there is really good news for investors in the changes that are taking place.

• Providing clients with care, diligence and skill is now mandated in law for all advisers.

• There are clearer guidelines on the different types of services different advisers can provide and disclosure rules should make it easier for investors to choose an adviser who’s right for them.

• For the first time, there is a public register people can visit to look up an adviser or financial service provider.  Investors wanting to work with an AFA can also look them up on FMA’s website – check out our new, more searchable list.  QFEs are listed there too.

• And if an investor experiences a problem with an adviser there are now clearer pathways to help them get those resolved.

We’ll be using a mix of activities to get these messages out to the public.  We’ll be taking a positive, engaging approach. We know many New Zealanders struggle with financial literacy so we want them to believe that getting advice from an appropriately regulated adviser is a good idea.

If there are opportunities you’ve spotted or particular messages you think it’s important for consumers to know, send us your ideas. We won’t be able to action all of them but they may spark a thought about how best to explain what’s changed.

We’re also working on some specific initiatives, such as updating the old Securities Commission’s Using an Investment Adviser flyer. We have FMA branded Codes of Conduct now available for AFAs.  Would AFAs like to be mailed copies automatically or is this something you’d just request if you need it?

I welcome your thoughts.

Mel Hewitson

So this was a savings and investment Budget.

Lots of attention has been focused on the KiwiSaver changes and quite rightly. It’s one of the most successful products the country has ever seen and has $8 billion of funds invested in it.

The government is proposing to cut the member tax credit in half, which is what I predicted last week.

What’s more worrying is that employers are the losers. They lose the tax-free status of their contributions and they will be forced to increase their contribution rate from April 2013.

These changes aren’t going to be popular with the 1.7 million KiwiSaver members or with employers. I wonder whether the government has underestimated the backlash they will generate, especially from the business sector which is a core constituency group.

What interests me is how several other changes will impact on investors. The government wants to partially privatise state assets; it wants to have an earthquake bond and it plans an inflation indexed bond.

I have spoken to a number of people since the February 22 earthquake arguing that the government should have quickly put together a bond to help fund the rebuild of Christchurch. It is an excellent funding idea and if done earlier could well have been sold offshore, particularly to investors who were sympathetic to what happened in Christchurch.

Index-linked bonds are useful too. There is a view emerging that there are growing risks of strong inflation growth coming.

Deepening capital markets and getting more New Zealanders investing is a good thing. But what we really need to do is wean people off fixed interest investments and into growth assets.

Unfortunately there is nothing in the Budget which does that. You could argue listing bits of state assets on the NZX falls into this category.

The reality is the companies suggested aren’t really growth stories. They are income plays and reinforce the fixed interest addiction.

One thing I was hoping for was a rearranging of PIE tax rates to slightly advantage PIE funds for all investors over other forms of investing.

That hasn’t happened but is something which would have been worthwhile.

Overall the Budget moves KiwiSaver more towards being a true workplace savings scheme. The next thing will be ever increasing compulsory contribution rates. It’s a plus that the government talked about resuming contributions to the NZ Superannuation Fund, but it missed the target in some areas. It will also, I predict, be a hard sell for the government.

The NZ Superannuation Fund’s results for the 12 months to March 31 were truly impressive I thought and also an interesting lesson in investing.

While some media reports focused on the month of March (a return of 0.41%), the real story was the 23.04% return for the year.

It also brought up the question of whether the government should be contributing to the fund or not at the moment. Radio NZ asked me the question and I said that they should still continue to contribute, maybe not at the rate used previously, but they should continue to do so.

Part of my argument was that if the government is expecting individuals to save for their retirement, despite the tough economic times, then it should lead by example and continue to save.

There are bigger arguments around this idea. Of course they are economic. The main argument is that any contributions would be borrowings. The government already borrows too much at the moment and its interest bill is too large.

I guess one could be pedantic and say borrowings are only part of the government’s finances and that money is used for other purposes. Things like plastic whaka, America’s Cup funding, BMWs etc and that contributions to the fund come from other government revenue.

However on a bit more serious note if we considered the contributions as borrowed money is that really a bad thing with this sort of performance?

I haven’t done the maths but a bit of leverage in the fund, especially when the markets are rising (and interest rates are low) could be beneficial.

It is important to put the borrowing into perspective. Overall it would only be a small portion of the $19 billion fund and when you have performance like the past year then it would be a positive investment outcome.

I thought it was useful too looking through the fund’s major holdings. While it has been acquiring long term assets it also appears to have a focus on infrastructure and income producing assets too.

While there can be a discussion around the contribution question, the fund is also useful to illustrate to investors the importance of a diversified portfolio, the need for equities and how being in the markets, especially after a big downturn, can provide good returns.

The IFA roadshow that recently ended has reinforced to me how valuable professional bodies will continue to be in a regulated world. Let me explain.

First, I’ve talked before about this being a principles-based regulatory regime. The regulator will set expectations and guide where necessary but we won’t prescribe advice practices down to the last detail. Professionals will work this out in the interests of their clients, with knowledge of their obligations under the law, including the Code.

Secondly, we all know that the Code sets out minimum standards of professionalism but that too, deliberately, doesn’t get overly prescriptive with regard to ethical behaviour, client care and Continuing Professional Development (CPD).

Thirdly, while the Code was written for AFAs, the Act’s ‘if not why not’ section 66(2) requires Category 1 QFE advisers to provide investor protection equivalent to that provided by advisers who are subject to the Code (ie AFAs).

Finally, and I’ll borrow an analogy from Ross Butler (Chair of the Code Committee), an AFA licence gets an adviser a ticket to the game but then it’s how the game is played that matters – and it matters a lot.

The combination of all these factors has created both a need and an opportunity for professional bodies to fulfil their true potential – set, share and uphold standards, provide top drawer CPD opportunities and raise the bar over time – for the benefit of their members and ultimately their members’ clients. And by members, I mean all types of advisers, including those within QFEs. There’s an opportunity for QFEs to capture the benefits of signing their advisers, not just their AFAs, up to professional body membership.

On the subject of CPD, this is an individual responsibility.  AFAs need to make decisions about what sort of training will comprise their CPD for each year and where they’re going to get it from.  They need to make sure that any professional development they undertake is suitable and adequate to meet the Code requirements.  Their professional body can help make these decisions and accessibility to training easier.

On the question of what counts as structured CPD and what doesn’t, I believe true professional bodies have a good handle on this principle and there are examples of it being implemented pretty well.  In fact in response to the submissions of industry and professional bodies, the Code Committee stopped short of a prescriptive approach to CPD in the Code.  Instead it specifies a broad framework within which NZ professional bodies, QFEs and DAOs (Designated Assessment Organisations) can determine what courses will be acceptable for their CPD programmes.  This creates a real opportunity for these organisations to decide what courses will be acceptable, including whether training is structured or unstructured and how many hours of CPD many be attributable.

Finally there is a potential regulatory benefit to advisers who are members of a strong professional body. As I’ve blogged recently, we will take a risk-based approach to setting our monitoring priorities and deciding where to focus our attention.  Professional body membership tends to convey a positive signal about an adviser’s attitude towards professionalism.

The Commission is keen to continue working with professional bodies – helping them to help their members – not only to influence but also to learn as the regime matures – what’s working and what’s not?  Professional body membership gives advisers another voice with which to talk to us.

Mel

An article published about a ‘loophole’ in regards to property investment advisers has raised some concerns and questions.

It might be helpful if I clarify a few points:

Cabinet signalled in November of last year that “Blue Chip- type schemes” should be included within the Financial Advisers regime.  This has been reflected in the recently promulgated regulations defining ‘land investment product’ and brings such products firmly within the financial advisers’ regime as category 1 products.

This is an important step to regulate a previously unregulated product as most blue chip type schemes fall outside of the Securities Act.

As many of you will be aware, the Financial Advisers Act does not apply to some occupations, where they are providing financial services in the ordinary course of that business. This exemption applies to real estate agents who would have been subject to dual regulation had they been included.  We expect a professional approach to determining what constitutes the ordinary course of business for real estate agents. This will vary from agent to agent and therefore in the new world of regulated financial advice, real estate agents need to ask themselves whether their services in each case could sensibly be seen as part of a real estate agent’s job or not.

A true professional in any field always puts their clients’ interests ahead of their own.  Therefore a real estate agent, a professional, would also ask themselves whether they have the competence to be able to provide the advice, which might include the ability to conduct a proper suitability analysis for their client. If the answer is no (as we’d often expect it to be in the case of complex property investment schemes) the agent should recommend that their client sees an AFA.

It is worth noting a couple of other relevant legislative developments, such as a new power, proposed in the Financial Markets Authority legislation, to make regulations disapplying exemptions under the Securities Act in relation to certain products.  Recent Cabinet decisions on the broader securities law review also propose to allow the FMA to designate a financial product or service as being subject to securities law.  There will also be an opportunity to review how securities law deals with real estate investment later in the year when the Securities Law Bill is introduced.

Overall we think the position in relation to advice on complex property investment has come a long way since Blue Chip. We now have these kinds of investment schemes clearly defined and within the scope of the Financial Advisers Act.  We will have some new powers under the FMA legislation to deal with product issues when they arise, and there will also be opportunities to discuss what further regulation is needed for property investment under new Securities Act laws.

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