There will be plenty of naysayers telling Hanover investors why they should tip the company into receivership (most of them funnily enough with first names starting with B).

I thought I’d give you seven reasons why the deal will go ahead.

1. No one likes admitting to failure. Investors have shown they are reluctant to put a company they backed under. It’s like they are admitting they made a mistake. Remember the majority of investors who put their money into Hanover and United did it off their own volition – not through advisers.
2. They voted in hope for the moratorium and they will do the same again with Allied Farmers.
3. It’s a way of saying goodbye to Hanover shareholder Mark Hotchin and Eric Watson. Nothing like a public humiliation to make one feel better.
4. Instead they replace them with the new Mr Nice Guy Rob Alloway.
5. At least it’s a way out. Currently investors are stuck in the moratorium. They can’t do anything and it seems Hanover is pretty hamstrung too.
6. Allied Farmers needs the deal as much, if not more then Hanover. Remember they are the ones who initiated it. They need the capital and the size. Without this deal its future in the finance business is less than rosy.
7. Investors with a medium to long term view may well see the deal stacks up. Hanover’s books don’t look particularly good in the light of the today’s economic environment. But markets go in cycles and no doubt somewhere, sometime the picture could well change.

Sure I may be wrong, but hey even the Independent Report suggests receivership isn’t all it is cracked up to be.

Boy, the initial reaction to the Hanover/Allied deal was hostile from some quarters. I have to say I have been surprised by some of the comments aired over the deal.

Yes it should be no surprise to see some negative reaction, particularly as in some quarters it was portrayed as a get out of jail free card for Eric Watson and Mark Hotchin – and some tried to make a story that they personally were going to benefit.

It is good to see a range of comments, but please, no one listen to Bruce Shepherd. He made it clear last year what his views were on Hanover and it seems he is emotionally involved and not particularly objective.

Some of the things he has said are blatantly incorrect and designed to mislead. I said in a Blog ages ago that maybe it is time there was a change of leadership at the Shareholders’ Association, and recent events have reinforced that view.

After reading Paul Holmes’ piece on Sunday my eyes weren’t just rolling round in my head they had popped out of their sockets. This guy is someone people look up to and listen to. Surely he could have got his facts right first. He proudly admits to being totally ignorant about investment finance so maybe he should have steered clear of the subject or done some proper research.

Coming back to the Allied/Hanover deal. In days subsequent to the announcement the attitude and commentary has changed. I note Brian Gaynor’s piece in the Saturday Herald as one example.

That is good, as investors need to make intelligent informed decisions, not emotional ones.

This is even more important as trying to make sense of whether it is a good deal or not is difficult because it is so complex and we are still to see the details and fine print of the deal.

I’ve been leaning on the positive side  of it and if the story today, that another competing bid may emerge, suggests that the deal has some merit and may be the catalyst for a better one.

When the moratorium proposal was being discussed it seemed to me sensible that the Hanover loan book was managed by the company rather than receivers. However, that is partially wrong. All the good people in this area have left Hanover and the book probably isn’t being managed as well as it could be.

Having a new bunch of managers at Allied running the book and trying to manage it to successful outcomes is a better idea.

I prefer it to receivers. The view I expressed to someone recently was that if receivers got their hands on the book last year and tried to realise it investors would be lucky to get 20c in the dollar. The market’s been at rock bottom, there are no buyers, no finance and many of the Hanover loans are second mortgages which in this market are next to worthless.

Markets go in cycles and if the book can be managed through the troughs then some much better outcomes are likely.

Whether the deal will go through is a moot point as there are so many stakeholders. My guess is that getting it through the Allied vote could be the hardest.

At this stage it seems there are some winners, particularly the likes of Hanover Capital investors. The Allied shareholders seem protected; Allied Nationwide investors get a stronger company and that leaves the biggest group: Hanover and United debenture holders. They have to decide whether becoming shareholders in Allied is better than having, frozen Hanover debentures being repaid on a long, slow, drip feed basis.

With all the controversy of the advisory industry I thought it would be worth recording some thoughts on what is going on at the moment.

There is a feeling that any control or input advisers had over their coming regulation has totally disappeared.

Last week’s sacking of two advisers from the Code Committee affirms this notion strongly for me. Especially as there are no plans to replace them on the committee.

Also former AIA New Zealand boss David Whyte made a lengthy comment on the article last week which had some salient points.

One he made was any thoughts of co-regulation of the advisory industry are long gone.

He also made some very interesting points about the Consumer survey of advisers and why it was flawed.

There is a feeling the survey had a pre-determined outcome; if so it achieved them.

IFA president Lyn McMorran said in an email to members yesterday it used “sensationalist” – that no one would really argue with.

However I have also heard the language in the draft sent out for review and the final published work was vastly different.

With regards to the sacking of Patrick Middleton and Liz Koh, I’d have to say that the Commissioner of Financial Advisers, Annabel Cotton, has over-reacted.

One argument put to me is that if these two were forced to fall on their swords, then anyone associated with any of the firms which “failed” the Consumer survey should not hold high office. This argument would capture people like McMorran.

Clearly that doesn’t make sense; just like the Code Committee sackings make little sense.

I doubt many people had linked the Code Committee members with the survey and surely it would have been possible to defend them if the situation ever developed that far? Both are well-regarded members of the advisory community and no doubt provided valuable input into drafting the regulations.

You really do have to wonder whose interests are being served by the Consumer survey of financial advisers released yesterday.

The release had all the hallmarks of a well-orchestrated media campaign. Some key media were given special treatment and advance copies of the survey and interviews on radio and television were jacked up well before the official release.

All common PR tactics to gain maximum exposure.

What is hard to understand is why do such a survey of advisers now when the industry is on the verge of a new regulatory regime designed to help increase confidence in the sector?

The survey does the total opposite. It’s like spending money to fix an old washing machine when you are in the process of buying a new one.

Consumer is clearly using this to drive more sales of its magazine. As a publisher you know topics which will generate reader interest and sales. The womens’ magazines do this cynically each week with the celebs they put on the covers. We, too, know the sorts of topics which will generate reader interest and make sure we maximise readership from them.

The Retirement Commission’s role is questionable too. Surely it should be helping improve the advice sector?

Looking at its role, it was one of the funders of the survey and its response has been to use the survey to promote a new service it is about to launch. Have a read of its release here.

It looks like they don’t want people to use advisers, rather they would rather New Zealanders become DIY investors using its website.

Then there is the Securities Commission, who was another funder of the survey. Surely it too should be trying to move the sector forward rather than clobbering it?

The IFA wasn’t a funder, in fact it appears to have not had much involvement other than nominating a couple of advisers for the survey panel. Indeed it hasn’t, to our knowledge, put out any statement. The president appears to be unavailable. The CEO, who you would expect to front, doesn’t. Instead it is left up to the chairman – who happens to be the husband of the Securities Commission boss Jane Diplock.

The most interesting thing we have learnt from the survey is that Consumer chief executive Sue Chetwin lives with a sharebroker. Wonder what sort of advice she gets?

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.

ANZ’s move to acquire the 51% of ING New Zealand it doesn’t already own is no surprise to the market, Goodreturns.co.nz publisher Philip Macalister says.

ING’s Dutch-based parent company has signalled that it wanted to sell assets, meanwhile ANZ, particularly in Australia, needed to pick up speed in the important wealth management market.

The move makes ANZ the biggest KiwiSaver provider in New Zealand with just under a quarter of the market.

A comprehensive survey published by Goodreturns.co.nz this week compared the funds under management for all KiwiSaver providers.

(Read the survey here.)

ING is the most successful overall provider with a total 212,732 members and $523 million (as at March 31) across the four schemes it manages – the ING default scheme, ANZ, National Bank and SIL.

Many questioned whether the ING brand had been damaged beyond repair following all the troubles the fund manager had with its CDO-backed Diversified Yield and Regular Income funds.

In its announcement ANZ says it has negotiated the right to use the ING brand for 12 months.

“The deal today most probably spells the end of the ING brand in New Zealand,” Macalister says.

One of the biggest challenges for ANZ will be to win over the independent financial adviser market.

Currently ING distributes most of its funds and life insurance via the independent adviser market. ANZ doesn’t deal with this market and will need to learn how to manage it to be successful with ING.

Sometimes I am amazed at the advisory industry in New Zealand.

Last week I chose to run a piece from Richard James at NZ Funds Management giving his take on the advisory industry, and some quite candid views.

My thoughts were that it was a good opinion piece from someone meaningful in the industry.

What amazes me is how some in the industry (I can’t use the term profession now) chose to use the piece as an opportunity to attack a range of targets including Money Managers, its founder Doug  Somers-Edgar and NZ Funds.

I have been asked about our policy on comments to Blogs. We do moderate them, and we have chosen to take a fairly liberal view that we shouldn’t “unapprove” comments that we don’t agree with.

The thinking is that we should allow discussion and the exchange of ideas.

Some comments don’t see the light of day for various reasons, such as defamation.

In this instance we haven’t approved (and have removed) some comments.

Why? I’m not prepared to see a positive contribution like this demeaned by advisers who have issues with MM/D S-E/NZ Funds.

It is not a platform for these sorts of comments or for aggrieved parties to spout forth with one side of the story.

It is less of a platform when these contributors don’t disclose all the facts.

Discuss the issues – don’t attack the writer.

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

ASB fessed up this week that one of its investment advisers has been involved in an elaborate fraud involving millions of dollars. There’s not a huge amount of information about what actually happened but the question I ask is this: Would adviser regulation have stopped this happening?

I think the answer is no.

Despite all the claims about how regulation will make the industry a better place and give investors a greater degree of confidence in the advice sector, it won’t stop this sort of thing happening.

If someone really wants to rip people off they will find a way to do it, no matter what sort of regulations are in place.

What the story does is show what a great advantage bank advisers have over most of the IFA market.

First up, the banks in New Zealand have been good at training and providing professional development for their advisers. In many cases the banks have arguably been the leaders here.

Secondly, investors have a high degree of confidence using a bank adviser, as the companies have the resources behind them to make things good (or at least better) when things go wrong.

While no figures are available with this case, ASB has indicated it had made good where possible. Considering it is a multi-million dollar rip-off, that is probably a not insignificant amount of coin.

This has also been shown at the ANZ over the selling of the ING CDO funds.

And the third thing is that if investors are dissatisfied with the bank advice, they have recourse to the Banking Ombudsman. The ombudsman is an independent body who can rule on complaints and make recommendations, where appropriate, that the bank put things right.

This is a huge advantage for bank advisers. I sometimes wonder if investors thought about this, they wouldn’t be that interested in going to an IFA.

While the Institute of Financial Advisers does have a complaints scheme, it is of no benefit to customers as it doesn’t make rulings whereby the investor receives any payout. Now it appears the institute is the only winner as it makes cost awards against advisers. In one of the more recent cases, and one you will hear more about, an adviser was cleared of some charges but still had costs awarded against her.

Many aspects of regulation are positive. But it’s not the panacea some are painting and it won’t stop fraudulent activities.

With all the news happening around the industry at the moment it sometimes seems a little hard to decide what to focus on.

Over the past week the finance company sector has again dominated the news for a variety of reasons.

One is the government’s not unexpected extension of the guarantee scheme. The other is its announcement on reviewing the rules around moratoria.

Dealing with the second one first it does seem like this is a waste of time. The large majority, if not all, the finance companies which are likely to seek support from their investors for a moratorium, rather than receivership, have wel and truly done so.

It’s unclear to me whether reviewing what has happened is good use of time and resources?

I agree that some of the companies which gained a moratorium arguably should have been put into receivership. However the investors had the choice and the overwhelming majority all voted for the stay of execution.

To me it is little surprise. Human nature indicates that people don’t want to put one of their investments into receivership as it is an admission they made a bad investment. Added to that they are less likely to vote for the big R when an offer of redemption, no matter how good or bad, is put in front of them.

I would add that judging the proposals in today’s environment is not necessarily a reflection of the decision made at the time.

Back to the guarantee scheme. My guess is that the banks will opt out of the guarantee as it won’t stack up on a cost benefit basis.

Banks have been able to reel in millions of term deposit dollars recently and I can’t recall one bank advertising the guarantee as the reason people should invest.

It’s a different story for finance companies. Many have promoted their GG status, and it has helped them enormously.

The big firms will no doubt use the scheme, however it will cost them more as the fee in the new scheme is based on the size of their total book, and not just the amount of money raised after the first GG came into force.

I wonder whether some of the smaller firms will opt in; organisations like credit unions and building societies. My guess is probably not as they haven’t had the same issues as finance companies.

It seems that in this second generation guarantee the rules have been tightened enough to force the much sought after finance company rationalisation to occur.

If this happens and we end up with a strong, well regulated finance company sector, then that is a victory.