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

Recently, we’ve been fielding a range of questions on disclosure so I’d like to address some of them here for you.
By way of background, the financial advisers regime establishes new rules around disclosure and client information – the Financial Advisers Act (the Act), the Disclosure Regulations and the Code of Professional Conduct. They all fit together, broadly as follows:

- the Act sets out the disclosure obligations, for all financial advisers and QFEs for personalised services to retail clients. It includes the requirement that disclosure should not be misleading, deceptive or confusing and the consequences of non-compliance.
- the Regulations set out the detail of the largely prescribed disclosure statements for AFAs, RFAs and QFEs.  RFA disclosure is more basic, reflecting the lower risk of Category 2 products.  When the Commission developed the QFE disclosure requirements, our starting point was AFA disclosure – aiming for equivalence. For example both have the primary and secondary disclosure structure. Then we had to take into account differences such as varying advice models and that the QFE provides the disclosure on behalf of their advisers, compared to the individual nature of AFAs’ and RFAs’ statements.

- the Code is about conduct. The relevant Code Standards go further than the box-ticking approach of the regulated disclosure templates. Rather they ask the adviser to really think about what the client needs to know in order to make an informed decision.

Although compliance with the Code is compulsory for AFAs, the ‘if not, why not’ section of the Act requires Category 1 QFE advisers to provide similar customer protection so the Code should be the textbook for those advisers too – a responsibility of their QFE to ensure. I encourage all advisers to aspire to the conduct sections of the Code. In fact, I know many already do because as professionals they ask not “what do I have to do to comply” but rather “what else can I do for the benefit of my clients?”

On timing, until the disclosure requirements of the Securities Market Act are repealed on 1 July, they remain in force and advisers who currently have disclosure obligations under that Act must maintain compliance with them. Then the Financial Adviser Act disclosure regulations kick in (1 October for Christchurch advisers taking advantage of the extension). If you become an AFA before 1 July then, as soon as you receive your licence, you also have to comply with all of the code standards, including those relating to the provision of information to clients.

Many ask why there are two disclosures for AFAs, primary and secondary, and why can’t they be given out at the same time?

It’s because when a client seeks financial advice, their first decision is which adviser to choose. RFA? QFE adviser? AFA? Then which RFA? Which AFA? etc. So the primary disclosure is designed to help them make that first decision, for example by setting out which financial adviser services an adviser is authorised to provide.

Once they have chosen their adviser, then the real work needs to be done to arrive at the right advice and product outcome for the client. Only then is an adviser in a position to give the required detail, including specific costs, of the recommended service to the client. That’s when the secondary disclosure statement comes into play. The period of time between the primary and secondary disclosures will be dependent on a number of factors such as extent of product research required, selection of product for the client etc.

We also get asked by AFAs why they can’t add additional information to their primary disclosure statement?

The primary disclosure statement in particular is meant to be succinct, relevant and comparable. Allowing other material to be added risks compromising this objective when there are other ways (eg business cards, brochures, websites, conversations) for advisers to get across their credentials and marketing messages, including qualifications which advisers ask us about most.

We’re trying to get the investing public familiar with the minimum entry standards required of AFAs. We all know it’s hard to get people to read fine print, let alone understand it. Therefore we all have an obligation to find ways of making it as easy for them as possible.

Shortly we’ll have some guidance up on our website covering disclosure. This will cover some of the themes above plus a few more. It is essential for all advisers, if they haven’t already, to familiarise themselves with the disclosure regulations and to do this well in advance of 1 July to ensure adequate time to get ready for the new requirements.  Here’s the direct link to the regulations or search under regulations on www.legislation.govt.nz.

In a principles-based regime such as this, as well as the information required to be disclosed under the regulations, professionals will make judgment calls in the context of their clients’ needs and arm their clients with sufficient information to help them make informed investment choices.

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

It’s fantastic to finally be getting to Christchurch. Christchurch advisers have been in everyone’s thoughts at every roadshow event.

Since 23 February the Commission has said we’d be sympathetic to Christchurch advisers who are struggling to meet the FAA compliance requirements so it’s good to be able to speak more tangibly about it now that the Government’s announcement of an extension has happened.  I look forward to meeting around 40 advisers on Tuesday and answering their questions face to face.

Readers may be interested in some stats.  As at late last week we had:

• Received 115 AFA applications from Christchurch advisers
• Of those, 31 have been licensed
• 84 are in progress
• Around 40 individual advisers have contacted us to describe the difficulty they are having completing their compliance journey (there is some overlap with the figures above).
• A few financial advisory firms have also been in touch, usually on behalf of their affected advisers or inaccessible client records.  We are getting an understanding of their issues and, in qualifying cases, will agree a pathway to compliance with them.

Here’s a summary of the extension provision:

• The Order under the Christchurch Earthquake Response and Recovery Act provides extended deadlines for registration and authorisation for financial advisers if they want to take advantage of them.
• It applies to advisers who have their sole or principal place of business within the districts of Christchurch City Council, Selwyn District Council or Waimakariri District Council.  If an adviser has been adversely affected by the earthquake and doesn’t seem to be covered by the Order they should contact us.  Each situation will be dealt with on a case by case basis.
• Canterbury based financial advisers have until 30 June to register and until 30 September to become an AFA.  This means they can continue to provide financial adviser services without becoming authorised until 30 September.
• They have until 30 September to comply with the disclosure regulations. Until then they must comply with the existing SMA disclosure requirements.  If they rely on the extension the disclosure extension also applies.  This is not optional.
• If they are already an AFA the original 1 July disclosure requirements date applies.
• Once authorised, Canterbury advisers must comply with their obligations under the Act, the Code and their terms and conditions of authorisation.  The extension does not affect the conduct obligations that are already in force and apply to all financial advisers.
• The order only applies to individuals, not companies, nor nominated representatives of QFEs.

What do affected Canterbury advisers need to do?  Splitting them into four categories:

1. If an adviser is already an AFA, they can ignore the order and are subject to FAA  disclosures from 1 July 2011  (the disclosure extension only applies if an adviser takes up the extension to be an AFA).
2. If they have already applied, they can contact us to confirm whether they’d like to be authorised by 30 June as originally planned, 30 September, or somewhere in between. We’ll do our best to fit in with their compliance readiness.  If we haven’t heard from them we’ll contact them just before we send out their AFA certificate to be sure they’re ready.
3. If an adviser doesn’t have their application in yet, but want to take advantage of the extension, we’d encourage them to:

• get in touch with us so we know who they are
• make plans to ensure they can meet the new deadlines
• speak to their training provider and ETITO to make sure courses and exams will be available during the extension period
• check referees are in a position to provide or update testimonials
• let their clients know when they plan to be registered and authorised

1. If an adviser plans to be a nominated representative they should speak to their QFE to see whether their nomination can be delayed to 1 October

If at any time a Christchurch adviser wants to speak to one of my team we have a dedicated person available.  His name is James Sime and advisers don’t have to go through our 0800 434567 number to speak to him.  His direct dial is (04) 474 2062. They can also email James on  james.sime@seccom.govt.nz and there is a factsheet on our website.

We encourage all advisers who can comply with the original dates to continue to work towards those deadlines.  This will help minimise any consumer confusion and will serve to ensure Christchurch is able to offer as many registered and authorised advisers as possible from 1 July.

We’d been waiting for a big KiwiSaver deal and now we have it. Fisher has landed the Huljich business.

This is probably no surprise as many had speculated Huljich was only in the game for the short term. Meanwhile Fisher has been acquisitive picking up other books including the First New Zealand KiwiSaver business.

So far there has been little explanation of the deal so it’s worth having a look at it.

I suspect one of the biggest drivers around Huljich’s decision to sell is adviser regulation. To sell or give advice on KiwiSaver one has to be an AFA.

Huljich, like Fidelity, managed to build significant KiwiSaver client bases by using insurance advisers and mortgage brokers to sign up members. These people are no longer able to provide that service.

We have produced an in-depth report and analysis on KiwiSaver managers based on last year’s figures. One of the findings is that Huljich and Fidelity were top performers when it came to increasing membership numbers.

(The report is available on a subscription basis. For details email philip@goodreturns.co.nz or call 07-3491920).

However, both firms also featured at the other end of the table when it came to average members balances.

Fisher, meanwhile, had the eighth highest average member balance and that position would have subsequently been reinforced by its FNZC buy. (FNZC was third highest, albeit a small number of members).

One of the challenges for Fisher will be to manage what has become a large, and very diverse membership base.

Coming back to the reason for the Huljich sale I would guess that adviser regulation means that it has, to all intents and purposes, lost its distribution force. Added to this Huljich had used Mike Pero Mortgages, NZF and Dorchester to sell its products. The first two ended the arrangement earlier this year and it is unclear what Dorchester are doing.

How Fisher will manage all these clients will be interesting to watch too. Its model has been very much around direct distribution and they do little with advisers.

One clue to this is that Fisher has set up a QFE. This maybe the start of a plan to build its own tied distribution force to sign up and manage clients.

Simplicity, as we become more and more connected – online all the time – has become one of the buzzwords of our age. But what those of us working in insurance often find, as we seek to develop products and services that resonate with New Zealanders, is that simplicity is nearly impossible to come by. The industry does not deliver it, and consumers struggle to find it without our help. This lack of simplicity is one of several reasons that Kiwis are one of the most disengaged populations in the OECD, when it comes to insurance.

The irony is that for most people, the fundamentals of life – and by extension what needs protecting – are very simple, as this diagram demonstrates:

The Circle of Life

It shows all the parties at risk in ‘The Circle of Life’. The business is underpinned by its key people, who are subject to general life risks – accident or illness that could leave them temporarily or permanently unable to contribute to the business.

That financial impact flows on to the owner/s of the business (often also a key person), who is responsible for the debt, both visible and invisible.

Then there are the families; the people supported by the business. What does the owner’s lifestyle cost? What about their staff’s lifestyles? Who and what is dependent on the business, and what happens if that revenue stream drops or stops?

With good advice and guidance, these questions are easily answered and the right cover supplied. The onus is on insurers to put the power back in the hands of consumers, by ensuring everyone is furnished with the knowledge they need to make good financial decisions and streamlining the requisite processes. Simple, really.

There are just days to go now till our 31 March deadlines. We know many of you have already got your applications in – as of Friday 25 March we had received nearly 1,000 applications and we’re currently receiving 50 – 100 per day.  Weekly updates of AFA numbers are on our website home page.  We’ve now granted status to some additional QFEs and more certificates will be going in the mail this week.

So, progress is looking pretty good.  On the roadshow we picked up a bit of confusion about what the dates mean. And in case you missed it, the Minister has announced a likely three month extension for Christchurch advisers. So, here’s a final reminder on the steps to take.

If you want to be an AFA you have to both register and apply for authorisation (a licence).

Registration

• 31 March is the legal deadline for registration for advisers
• But remember there is a criminal check that may take up to five days to process. To ensure you are on the register by the 1^st April you should get in as early as possible this week
• From 1 April it will be illegal to provide financial services unless you are on the register (or acting on behalf of a QFE)

Authorisation (AFAs)

• 31 March is the deadline to apply for authorisation if you want to ensure you’ll be an AFA by 1 July
• You do not have to have completed your competency assessments by 31 March but:
  • make sure you have checked and double-checked the assessments you need to complete (www.afacompetence.org.nz )
  • make sure you have booked for all your assessments
  • remember to allow time for possible re-sits – only around 75% of advisers pass Set B first time around
• You have to lodge your application yourself, ie your organisation can’t do this for you (the form asks you to confirm you’re the person named in the application, and to confirm you understand it’s a criminal offence to knowingly make false or misleading representations in your application).  Encourage your organisation to contact the Securities Commission if they have any difficulties with this.
• If you are part of a QFE you do not need to enter your QFE number if they don’t have it yet – you can enter this later

For Christchurch advisers

• The Minister has announced a three-month extension of both the registration and authorisation deadlines is being considered for financial advisers affected by the 22 February earthquake.
• The details of this decision will be announced in the next few days. Please contact the Commission and we will be able to alert you as soon as the Minister has made the announcement.

If you need more help:

Competence assessments

04-931-0007 or email helpdesk@etito.co.nz

Registration

0508 377 746 or email the online submission form at www.fspr.govt.nz

Authorisation

Read the AFA Authorisation Guide, 0800 434 567 or email afaapplications@seccom.govt.nz

Christchurch advisers affected by the earthquake

0800 434 567 or email afaapplications@seccom.govt.nz

My heart sank this week when I switched on the television news and read the business papers of the Herald to see the faces of three directors of Nathans Finance in court.

It’s not that I had money with this company or there were thoughts for the investors in this, or other, failed finance companies.

No, it was seeing the face of one of the life members of the Institute of Financial Advisers, Roger Moses, in court again on charges over an investment scheme.

Whenever this happens it feels like Mr Moses is bringing the industry into disrepute.

(For the record he and two other Nathans directors have pleaded not guilty and in the earlier case concerning a contributory mortgage scheme he was eventually cleared).

This court cases is happening at time when all these regulations are going on to try and tidy up the industry and help regain investor confidence.

I have written about this before as it is an issue which is a concern for advisers and the IFA.

However, when I was driving to the airport this morning listening to sports commentator Joseph Romanos talking to National Radio, I wondered if I should even raise this issue?

He raised the topic that everyone was allowed to criticise sports people on their performance, call for heads to roll when losses happen, but it was not OK for players to criticise match officials.

The view that emerged is that people should be able to express their views and that the “disrepute” line with players criticising officials was a bit over the top.

Maybe I shouldn’t raise the issue as not many people outside the advisory world will put the trial together with the IFA?

But then maybe the IFA should lead by example and remove people from its organisation which cast a shadow on all members?