Here is one of our first videos. In it Philip Macalister asks Darren Pratley about the NZMBA/PAA tie up; what it means for members; whether it’s a merger and what the possible roadblocks will be.

Too many advisers remain fixated on the outmoded income or growth bias when constructing portfolios.

This is short-sighted and leaves the client losing out on returns they could achieve in many economic cycles, as well as living less comfortably than they could.

There is only one optimal way to construct a portfolio – to maximise Total Returns (within a given risk profile).

Then all one needs to do is manage drawings as an annuity, keeping the portfolio in line with future financial planning.

The objective is to put the investor’s needs first.

The individual’s cost-of-living does not change with the fluctuations of a portfolio’s ability to produce income, and nor should it.

Those still trying to construct a portfolio looking for income investments to match clients’ cost-of-living are doing their clients a disservice.

They may also be subjecting the client to more taxes than is necessary.

Part of this misguided mode of constructing portfolios comes from old trusts that were structured with ‘Income’ benefits to surviving partners and residual ‘Capital’ to other beneficiaries.

We all know the court cases of this misguided approach when trustees focused excessively on the surviving partner not taking sufficient account of capital beneficiaries’ rights – and hence not growing capital to even modestly keep pace with inflation.
‘Income’ and ‘Capital’ beneficiaries’ interests must be, and can be balanced.

Another reason for some advisers not pursuing total returns may be that they do not manage the cash component of their clients’ portfolios very well. Cash is an asset class.

Beyond receiving interest, coupons, dividends and distribution, a cash component to a portfolio is essential to facilitate rebalancing and re-investing.

People giving free advice in the mainstream media have recently bewailed a perceived ‘gap’ exists in New Zealand with few annuity funds available for people to utilise when they get to the age they can pull money out of their KiwiSaver scheme savings.

A balanced fund is just such a scheme and can readily be utilised to meet cashing-up KiwiSaver’s required expenditure in retirement.

Also consider, that annuities (and I am sure there will be a plethora of them in New Zealand shortly as the insurance companies look to make a buck) consist of an underlying pool akin to balanced fund, one from which the insurance company pays out the regular annuity and pockets the remaining portfolio for itself as the profit.

Of course the annuity does spread the risk that an investor will outlive drawings from their own portfolio, by packaging their odds with another poor devil who dies early and misses out on both income and capital.

But this can be countered by really good financial advice, calculating and fostering sufficient client savings (portfolio) to outlast their lifetime of drawings.

Investors with a good level of savings will be more efficiently served to go for the self managed balance portfolio or fund approach.

A warning – don’t get glassy-eyed when the avaricious insurance companies come to town with their glossily packaged, ‘new’ annuity products.

You can be sure their actuaries will have worked out a handsome profit. Doing what is best for clients may be managing the portfolio for Total Returns, keeping residual capital for the client’s estate. Added value for your clients is a fee well-earned.

It’s been great to receive some really positive messages of support in my last few weeks at FMA.

Regulators don’t expect to be popular but most of the people I’ve met over the course of the last year have at least had respect for why we do what we do. We know advisers do care about their clients and this new professional era will benefit investors.

Since the start of the year we’ve used this blog to help advisers get ready for change. More recently we’ve told you about how we’re monitoring and enforcing the new rules.

Since FMA started you’ll have seen a marked increase in the number of media releases. Those who’ve attended conferences and roadshows will have seen me, Sean Hughes or one of the other team members there and presenting. We’ve updated and refined our website and issued more guidance (see most recently our updated disclosure pages).

And it’s not just about us giving out information. We listen too. We are genuinely taking on board your feedback – whether delivered in person, through letters, or through comments on websites like this (we had a smile at the shoe blog by the way).

A number of you have pulled us up recently and asked that we communicate important regulatory updates direct to you. Now that we have your details from the register we can do that.

Those who were AFAs on 1 July will have already received a mail pack from us with information and flyers. We’ll also now start using email updates to keep you abreast of the information you need to know. It’s important you keep the register up-to-date so we can do this.

Sue Brown, and her Primary Regulatory Operations (PRO) team will be the people you’ll hear from most regularly in future. The PRO team will be developing and leading FMA’s regulatory strategies and activities relating to the primary and retail financial markets, including financial advisers. And those advisers working for QFEs, or working as brokers will also get to know Elaine Campbell and the Compliance Monitoring team who look after the entity level Commercial and Infrastructure side.

Congratulations to all of you on what you’ve achieved. Except for those few we’re now ferreting out, most advisers appear to be playing the game. I’ll enjoy watching from the sidelines and wish you and your clients all the best.

Mel Hewitson

Some (young rascal) sent me this….I had a good chuckle. Read on!

“I’d like to buy a pair of black leather shoes, please”

“Sir, if it were only that simple. Here’s my card and here’s your Buyer’s Guide.”

“What’s this for”?

It tells you that I can only talk to you about shoes and allied products sold by this shop. I can’t talk to you about shoes sold by any other shoe shop, nor can I give any advice on, say, sausages, for example.

“Err”?

Probably the best way to proceed is to show you where we fit into the footwear industry. We buy in most of our products from the Far East at a fairly modest price and sell them on to the public at a considerably higher price; but of course, out of the mark-up we have to pay for transportation, import duties, rent and rates, display, staff, sales staff, cleaners and administration, etc, and our shareholders have to be paid a dividend out of the remaining profits. Not many people think about this when they buy their shoes, but we think it’s important. With this in mind, I’d like to ask you a few questions to make sure you get the shoes, or even boots, which are exactly right for you. It may be that when we have all the facts, I recommend that you do not buy my footwear at all. May I proceed?

“What do you want to know”?

“Well, how many arms and legs have you for a start”?

“What have arms got to do with shoes”?

“Well sir, if, for example, you only had one arm and I sold you a pair of shoes with laces, that could be construed as bad advice by LAUSTRO”.

“What is LAUSTRO”?

“The Laced and Unlaced Shoe Trade Regulatory Organisation.”

“What do they do”?

“Put the boot in. A friend of mine had to leave the industry.”

“What did he do wrong”?

“Sold a pair of carpet slippers”.

“What’s wrong with that”?

“Turned out the guy didn’t have carpet. So you see, I need to build a full picture for you. For example, do you need shoes for business or pleasure, or business and pleasure? How many shoes do you have already”?

“How many brogues, casuals, suedes, plimsoll’s, slippers, sandals, Wellingtons, etc? How many suits? what colour are they? Do you have athlete’s foot? Can you touch your toes? Any corns or bunions, or does your family have a history of dropped arches? What kind of socks do you wear?

How often do you cut your toenails? How much do you earn and what is your overall clothes budget? ? Well, thank you for that information. I’ll give it some serious thought and- get back to you”.

Two weeks later?

“Ah, good morning sir. I’ve given serious thought and what you need is a pair of black leather shoes”.

“Isn’t that what I asked for in the first place”?

“With respect sir, you have now had the benefit of my professional advice, based on all the relevant facts as given, and you now know with some certainty that what you need is a pair of black leather shoes. All the guesswork’s been taken out of it. Here’s your Reasons Why letter. I recommend that you buy these black leather shoes because they’ll keep your feet dry, match your suits, look smart and you can afford them”.

“Well, I’m glad that’s settled.”

“You want the shoes, then”?

“Yes, please.”

“Right, if you’d like to complete this application form, here’s your illustration, which I’d like you to sign. It shows a complete breakdown of costs and profits and includes my commission”.

“Your Product Particulars describe in great detail how the shoes are made and the Key Features are a summary of the product’s particulars, highlighting the risk factors.”

“Risk factors”?

“Yes. For example, if you Jive too long, the shoes may need repairing. On the other hand, if you die before you’ve had your wear out of them, I’m afraid there’ll be no refund, even if they don’t fit any other member of the family”

“I see”.

“So, just to recap. You’ve got my card; your Buyer’s Guide; Product Particulars; Key Features; Illustration; Reasons Why letter. You will get a letter from my Head Office telling you that I do, in fact, work for this company and also a Cooling Off notice. You can return the shoes within 14 days and have a full refund if you don’t like them for any reason.”

“How would you like to pay sir? “Cash”. Ah, well, would you mind nipping home for a copy of the gas bill or something to prove your identity, as you are not known to me. “

“One last thing sir, do any of your friends require shoes”?

Since 1 July I’ve noticed several advisers asking when are we going to take action against advisers who are breaking the new rules. That’s an entirely fair question and a function expected of FMA.

Now that the majority of initial licensing is complete I have put a team together to focus on the perimeter. I’ll explain what that means.

Inside the ‘stadium’ are the regulated- those who have gone through the effort and investment of getting themselves properly registered or licensed, whether individuals or firms – RFAs, AFAs, QFEs etc. They have tickets to the game.

Home watching the game on TV are those who have decided that being a financial adviser is not for them. So they have stopped (or not started) doing work that would otherwise require them to be registered or licensed. The right thing to do.

Then there are the perimeter players – some unaware of their obligations, others operating illegally, often knowingly. These include people without tickets who hover around the stadium looking for an opportunity to jump the turnstiles, unseen. These people:

- May be providing financial advice without being registered.
- May be RFAs still doing personalised investment advice, eg KiwiSaver, without being authorised.

Some financial advisers may not realise they are practising illegally, having ticked only ‘Broking services’ on the Financial Service Providers Register, thinking it meant mortgage, insurance or share broking. If they are providing financial advice then what they should have ticked is ‘Providing a financial adviser service (such as financial advisers, insurance advisers and mortgage brokers)’ .

‘Broker’ in this legislation has a particular definition to do with handling client money. Now would be a good time to double check your profile on the register and correct your registration details if necessary.

As we do this perimeter enforcement work we will publicise details of action taken so those with tickets to the game don’t feel cheated and those thinking of operating illegally will think twice.

My team will be even more effective if professionals help by showing us where to look if they spot illegal activity. We have a pile of complaints and tip-offs being assessed already and appreciate being given reliable information in good faith. In this way professional advisers can take the lead in improving confidence in your industry and outcomes for investors.

Whether it be devastation on a grand scale like Canterbury’s earthquakes, or localised events like the tornadoes that have hit Albany, Northland, South Auckland and the Kapiti Coast in recent weeks, the costs of cleaning up and replacement have been widely discussed.

The reluctance by international reinsurers to cover further risk in New Zealand and the need for central government to insure Christchurch City and Waimakariri District councils is understandable.

What has been less exposed is the parallel lessons to be learnt about the risks people face.

Life risks are very different from material risks, but statistically it seems that we place more emphasis on possessions than ourselves. Parents are quick to teach their teenagers about the merits of insuring their cars, but less agile to explain to their children that once they are responsible for more than themselves, they need to measure and mitigate those risks too.

A family needs protection just as much as the car and the household contents. A business owner, especially those employing staff, needs protection as well.

Many life risks companies have worked hard in support of the real family treasure and paid where they didn’t need to in the interests of doing the right thing in the face of an extraordinary series of events.

But what is needed is more risk management education. The Government’s financial summit on August 11, chaired by Sir John Anderson, is looking at responsible lending, debt management, credit advertising, financial literacy and dispute resolution.

We need to ensure that risk management when it comes to the lives of New Zealand’s most valuable resource – people – is included in the mix.

Amongst the comments we’ve seen in recent days, we’ve seen a challenge for us to give advisers more guidance on what we expect from them.

That process started some weeks back when a small group of the first AFAs were asked to send us their Adviser Business Statements.

To recap, the ABS is intended as an efficient way for you to record evidence that you’ve thought about your obligations and for FMA to understand the business you do.  It’s important to emphasise that the ABS does not represent our entire monitoring methodology.  It’s just one tool.

Our early monitoring work, including ABS reviews, has two objectives:

1.      Assess the range of advisers and advice practices in the industry, so that we can prioritise our future monitoring work and resources

2.      While regulation is new, many advisers will need additional help to understand exactly what the obligations mean. Making the expectations clear and ensuring advisers understand the next steps they need to take are important investments we are making in the early stages of this brand new regime.

We have just completed a review of the first batch of ABSs, and in the main it has achieved what we wanted.  At this stage of the regime, an ABS is a window into how an adviser interprets and performs their legal and professional responsibilities.  Our initial selection covered a wide range of business models, including AFAs who don’t spend all their time providing retail investment advice.

Generally advisers have responded constructively and in good faith to the feedback. If you were one of those advisers, thank you. Your attitude speaks to your engagement with the new regime and is likely to result in a smooth relationship with the regulator.

Overall the documents gave us good information, though some, perhaps through efforts to be succinct, had compliance gaps or did not do justice to what is actually happening in their business. How advisers deliver their advice/service is the key point, so we asked for more information on this in most cases.

Discussions with the first group of advisers about their ABS helped fill in these types of gaps and allowed us to complete the assessment.  We trust it has also given the advisers a better understanding of the sort of processes we’re looking for the document to describe.

To most of the first advisers selected we’ve said, ‘thanks and bye for now’, letting them get on with running their businesses.

We intend to provide wider feedback to the AFA industry once we’ve reviewed a few more ABSs.

Mel Hewitson

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.