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Advisers need to focus on rewards

Advisers need to play a key role in getting finance companies to pay appropriate returns to investors, according to KPMG.

Thursday, December 7th 2006, 5:41AM

by Philip Macalister

The problem is that many of the returns being offered by finance companies to investors are often poorly related to the risk of the investment. In some cases the interest rate isn’t high enough for the underlying risk of the investment and the contrary can be true too.

Indeed it sometimes seems that interest rates are being set by the market and competition between companies rather than on risk/return factors.

“The risks encompassed within the sector do not appear to be reflected in the debenture rates being offered,” KPMG says in its latest Financial Institutions Performance Survey.

KPMG says the question for the industry and regulators is how to change the investing public’s understanding of the risk and reward equation.

It suggests the two options are better public education or whether “reliance has to be placed on financial intermediaries to perform this role.”

KPMG partner Andrew Dinsdale believes that it is that latter, and that advisers play a key role in changing this situation.

However, he is concerned that advisers are more focussed on how much brokerage finance companies pay them rather than making sure the investment is paying an appropriate rate for the underlying risk.

“The concern remains that brokers and advisers have historically performed little, if, any, analysis of the finance company sector,” the report says.

Dinsdale says the perverse situation has developed where finance companies can manage to keep attracting money without increasing their rates.

“(Finance companies) haven’t had to put rates up to get money in,” he says.

He goes on to say that the real winners in the finance company sector are not the investors, but finance company shareholders.

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