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Financial advisers to blame for over-subscription to frozen ING funds

Financial advisers who took Morningstar recommendations out of context are to blame for the over-subscription to ING’s frozen funds, according to Strategi managing director David Greenslade.

Friday, July 24th 2009, 5:25AM 10 Comments

by Paul McBeth

Greenslade said "advisers took what they wanted" from a Morningstar report to try and boost investment in the Regular Income Fund (RIF).

The Morningstar report, prepared in April 2007, suggested around 25% of a defensive portfolio could be invested in RIF, but it did not include an allocation to ING's other CDO fund, the Diversified Yield Fund (DYF).

"The issue is, those advisers who wanted to sell the products, looked at certain aspects and took them in isolation," he said. "Morningstar are being unfairly bagged," as the company raised warnings about the funds in September 2007, six months before the funds were frozen, and advisers had access to the documents, he said.

"There were a number of guidelines around the use of the portfolios and one was that advisers could not be selective on what they chose to use and what they chose not to use within the portfolios." 

The Morningstar report discussed yesterday when Parliament's Commerce select committee met to question Banking Ombudsman Liz Brown over ANZ's role in selling the ING funds.

Brown said her office was reassessing what it considered an "acceptable" threshold of exposure to the funds. She said her office currently believes a 20% holding was fair.

Brown said it was clear that the funds were difficult to understand.

"They were certainly not well understood by investors, probably not particularly well understood by advisers."

Although this could make it difficult for investors, what is important for them to understand is the risk and terms of the product involved, she told the committee.

The committee chairman, Lianne Dalziel, was critical of ING's relationship in commissioning the report, but Greenslade said that is normal business practice, and that there was nothing out of the ordinary with companies like the fund manager entering commercial relationships with research agencies such as Morningstar.

The Ombudsman updated the committee on her office's progress in settling complaints against ANZ over the funds. Of the 129 completed investigations, 102, or around 80%, had been upheld.

She had received 521 complaints about ING, of which 195 had settled or were undergoing the bank's own process. 197 cases were still being investigated.

Investors in the funds have until the end of the month to lay a complaint with ANZ, and provided they do so, they can pursue action through the ombudsman's office if they are unhappy with the bank's decision, Brown told the committee.

She did not think an extension to the timeframe was necessary, as investors had already had more than a year to complain.

 

Paul is a staff writer for Good Returns based in Wellington.

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Comments from our readers

On 24 July 2009 at 10:49 am Colin said:
How can Morningstar's report be taken seriously by anyone when they don't even have any fund/investment analysts based in New Zealand.
On 24 July 2009 at 1:05 pm Andrew said:
Gareth Morgan in his book After the panic sums up research agencies such as Morningstar perfectly. Nobody takes them seriously any more.
On 24 July 2009 at 6:04 pm Unhappy said:
Greenslade said "advisers took what they wanted" from a Morningstar report to try and boost investment in the Regular Income Fund (RIF). Typical of Greenslade's elk to blame the Adviser.
On 24 July 2009 at 9:50 pm Michael Donovan said:
I agree with Gareth that 'advisers do not take research agencies seriously,' I add that 'investors do not take their advisers seriously.' And David Greenslade is correct in blaming the adviser if that is what you read it as? What investor would bother listening to an adviser who did not have an understanding of the very investment they have recommended? Advisers "stand up like real blokes should..!" If you want credibility back.
On 25 July 2009 at 11:14 am Eyes wide shut said:
Greenslade, Morningstar, Chesnuts and Hanmer Springs. Who wrote what and who influenced who? Sounds like smoke and mirrors and bullshit, commonly known as blaming others to cover your own ass.
On 27 July 2009 at 8:36 am Independent Advisor said:
Good research is available - just not in this country. Independence is also available - although it is hard to claim independent thought when your comments are protecting your master.
On 27 July 2009 at 8:44 am Independent Observer said:
I'm curious how an entity such as Morningstar would allow a client to distort the outcomes of an independent model portfolio, and promote these as being researched Morningstar outcomes. Research entities will fail to be recognized as trusted advisers to the financial services industry until they can demonstrate the robustness of their research process, and an independence from client / Manager influence.
On 27 July 2009 at 9:28 am Brian said:
"Greenslade said that is normal business practice, and that there was nothing out of the ordinary with companies like the fund manager entering commercial relationships with research agencies such as Morningstar" DOES THE NZ FINANCIAL SERVICES INDUSTRY REALLY WANT TO BE ASSOCIATED WITH THESE VALUES?
On 27 July 2009 at 10:24 am Researcher said:
Is it in fact true that other research companies (e.g. Fundsource) will produce special asset allocations for fund managers so they can increase the sales of their particular products?

If so, then this makes a mockery of genuine research.

How rife is this pracice within the funds management industry?

If this is more then an isolated ING/Morningstar incident, then we fully deserve the D Minus (and bottom of the pile)rating given to us by Morningstar.

How ironic it is though that Morningstar were complicit in this sham and yet it is them awarding NZ with a D Minus rating!

Is this a case of the 'pot calling the kettle black' I wonder?
On 28 July 2009 at 2:55 am Harry Potter said:
So Morningstar thought 25%, and the Banking Ombudsman thinks 20% of one's investment portfolio might be in a synthetic, derivative based CDO fund like ING's RIF or DYF. Greenslade thinks advisers are selective, and that Morningstar, a rating agency, is being unfairly bagged.

Personally I think a fifth to a quarter of one’s entire defensive portfolio in ONE synthetic product is insane. Have people lost all sense of what risk is? Return OF capital, not return ON capital, is surely the most basic part of a financial advice 101 course?

One may have targets and quotas to achieve, but risking losing a quarter of one's clients capital via one fund is surely intolerable - as many investors have now discovered.

Even simply research has for years told us what CDO products are like. For those who ignored Buffets widely published ‘financial weapons of mass destruction’ paper of 2002, other sources are always available - such as the Google search engine.

Type in “CDO Funds”; and choice phrases such as this spring from one’s browser if one is willing to spend but 10 minutes reading background material.

“Risk and return for a CDO investor depends directly on how the CDOs and their tranches are defined, and only indirectly on the underlying assets. In particular, the investment depends on the assumptions and methods used to define the risk and return of the tranches. CDOs, like all Asset Backed Securities, enable the originators of the underlying assets to pass credit risk to another institution or to individual investors. Thus investors must understand how the risk for CDOs is calculated.”

“The issuer of a CDO, typically an investment bank, earns a commission at time of issue and earns management fees during the life of the CDO. The ability to earn substantial fees from originating and securitizing loans, coupled with the absence of any residual liability, skews the incentives of originators in favor of loan volume rather than loan quality. This is a structural flaw in the debt-securitization market … [that has greatly contributed to the credit crunch]”.

“Participants in a CDO transaction include investors, the underwriter, the asset manager, the trustee and collateral administrator, accountants and attorneys”.

Wow, what a lot of people earning money from the poor investors who buy CDO’s. And the prior paragraph implies that US investment bank salesmen simply had to hit their international phone lines and say 'we need to sell volume', and financial professionals in NZ rushed to flog said CDO products to investors who clearly did not understand how the risk was calculated.

Numerous descriptions of CDO’s on the web run to several pages, describing how complicated these synthetic products are, and how toxic they can become, and how intangible their value is. A couple of articles even attribute CDO’s to Drexel Burnham Lambert, whose leading light in the 90’s, Michael Milken, many would (or do I mean should) know, was jailed by the Feds for junk bond crimes.

The really fundamental question this article raised to me is: “How do such risky and potentially toxic synthetic products become considered by our local research firms, product providers and banking professionals (e.g. the ombudsman) as appropriate for kiwi mom ‘n pop investors at 20% to 25% of their investment portfolios?”

Solving that is the real challenge if our financial services industry is to succeed in delivering much long term value to investors.
Commenting is closed

 

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