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Regulations benefit boutique managers

Tougher regulation is creating opportunities for boutique fund managers to win business with the big banks, according to Mint Asset Management chief executive Rebecca Thomas,

Thursday, November 24th 2011, 6:37AM 8 Comments

by Niko Kloeten

Mint, which has about $160 million under management, has recently had two if its funds added to RaboDirect's online offering.

And Thomas said tightened regulation had tipped the scales for many banks considering whether to sell their own in-house product exclusively or outsource to specialist fund managers.

“Banks are looking to avoid a repeat of the product selling scandals which revealed the practice of reputable banks selling their own in house products to their client, products which often did not stack up in terms of performance or product design against more independent, specialist fund managers.”

“One of the biggest issues at the time was that Mum and Dad investors did not understand that banks were regularly selling their own in house products, often under different brand names,” Thomas says.

“Today under the Financial Advisers Act, and as a QFE, banks are faced with a legal obligation to disclose information about its services, including if they are offering a tied or in-house product.”

Thomas said New Zealand is likely to follow the overseas trend where a “better-than-best” presumption is imposed within banks.

This means if a bank adviser decides to sell an in-house rather than recommend an outsourced product the adviser needs to be able to demonstrate, based on independent evidence, that the in-house product is among the best available in its peer group.

An additional advantage for banks is a reduced compliance burden which can be very overbearing in highly regulated markets.

“In a regulatory sense, the banks are responsible for advice on products but depending on how they structure the offering, the features and benefits of the product is the responsibility of the third party fund manager,” Thomas said.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 24 November 2011 at 12:07 pm Mentha said:
It's great to see competition, and especially the rise of NZ-based managers. Ms. Thomas's comments do however seem somewhat ambitious. Let's not overstate the facts: Rabo Direct is a DIY online funds supermarket - Mint is another product on the shelf, and it is certainly not the case that "Mint Asset Management now manages two funds for Rabo Direct".
On 24 November 2011 at 1:38 pm Craig Simpson (Dentice Simpson Consulting Ltd) said:
It is important to add that advisers may not be able to demonstrate that an in house product is better than the peer universe as some of the funds available to investors in NZ are not always covered under research databases from the likes of Morningstar, FundSource, Lonsec, Van Eyk etc.

Any one relying on these houses for their peer group investment universe may come up short and not be able to prove they offer a best of bred solution.

The research houses provide a good starting point for establishing what may be within the investment universe for a specific sector but the output is not necessarily the end solution and advisers should be aware of this fact.



On 24 November 2011 at 3:01 pm Joe Bloggs said:
I had to laugh as I was reading this:"contract to manage two funds for RaboDirect". Who's she trying to kid?
On 24 November 2011 at 9:32 pm Independent Observer said:
RaboDirect is a “supermarket” type platform, and does not extend mandates to external funds managers

As has been witnessed in other jurisdictions, banks will have a heavy bias towards passive in-house core exposures, with boutique tilts being used where they have limited comparative advantage.
This usually lasts until any external tilts become economically & competitively viable to manage in-house (easier said than done).
On 25 November 2011 at 7:20 am Philip said:
Yes RaboDirect is a supermarket offering a variety of funds to its customers.
It has around 40 funds on offer. The model is an online, no advice one where it mainly makes money from entry fees. To help investors make decisions it offers Morningstar research.
On 25 November 2011 at 8:06 am Rabo Fan said:
The way you (IO) have used "supermarket" seems also to describe the model run by most private banks and investment adviser businesses - being they have a list of approved products. My understanding is that Rabo have a process for selecting approved products, which then are made available to investors. I think they use a group Morningstar for fund research, plus have an investment committee.

Once funds are up on Rabo's platform it doesn't mean they are there forever, and I think you will find that they are moderately active in killing stuff off occasionally (I seem to remember AMP's property fund was up there at some stage, plus a few other funds that seem to have now gone).

The only difference that I can see between Rabo and other adviser or private bank type platforms is that Rabo lets the investors decide how to configure their portfolios - as opposed to an adviser getting involved. To this end getting a gig with Rabo is no different than getting up onto any big groups platform. With just north of something like $180 million on Rabo's funds platform, I can see why Ms Thomas is interested in this.

As a thought, maybe the FMA will accept that "reasonable" third party research is just to follow what's on Rabos platform.

On 25 November 2011 at 6:24 pm Independent Observer said:
Whilst I suspect that most institutions who resell managed funds have a review process, it is worth noting the difference between a bespoke model (private banks, financial advisers, etc) and a dispensary model – such as what is offered by Rabodirect.

Although both satisfy an appetite, the ‘supermarket’ styled approach referred to, is one step closer to a disintermediated, pick-your-own solution – with an absence of any significantly relevant research. The main drivers for this universe will be past performance and brand recognition (inclusive of celebrity managers).
On 28 November 2011 at 5:25 pm Accent said:
I did enjoy your insight that on a supermarket fund platform (with no research) the main driver will be past performance. The very helpful star ratings (Fundsource/Morningstar), so heavily relied upon by many advisers, are based purely on past performance. They are meaningless - in fact I would say dangerous - as research would indicate past over-achievers will be future under-achievers. I don't think the supermarket approach disadvantages investors on this front!
Note however, that "qualitative" research ratings (not "quantitative" star ratings)are of value. It is the inquiry of process and investment rationale that advisers should (but largely don't) focus on.
Commenting is closed

 

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