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Bridgecorp and advisers

Sunday, July 29th 2007, 11:34AM 4 Comments

by Philip Macalister

While talking to advisers at the IFA Conference last week it started to dawn on me one of the reasons why Bridgecorp fell over. The picture that began forming after the first day is that it was the advisers themselves which triggered the collapse. Why? Well it appears that in the months prior to the collapse, many advisers started to stop putting money into the firm. This funds flow drought, combined with borrowers not paying the company, led to the inevitable liquidity crunch. No money in, no money out to make interest payments. (This in itself raises questions about how the company was being run). While this picture was one which formed quite quickly, it was brought home to me when a gentleman, who shall remain nameless but used finance companies extensively, said, "we brought the company down" (or words to the effect). On enquiry this was the royal we (advisers, not his company). So in the end, it seems, advisers where the catalyst for the collapse. That brings me to a point which needs clarification. A news item in one of the weekend papers quoted the IFA ceo David Hutton as saying not much of the money in the company came from advisers. This is patent rubbish. Sources inside Bridgecorp say 60-70% of the money raised came through advisers. Some of the biggest supporters are high profile and senior members of the association. One report (unconfirmed) is that a large firm had up to $50 million in the company; many others had amounts of around the $5 million mark.
« Continuous disclosure requiredBridgecorp report amazing reading »

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Comments from our readers

On 30 July 2007 at 10:56 am Mike King said:
Your criticism of structuring the rolling maturities of finance company debentures is a little specious – it makes sound sense to split a holding between a variety of debt issuers and maturities: over say 6, 12 & 18 months.
It’s not to maximize brokerage but to minimize the exposure while still securing a reasonable average income return for the investor. As each holding matures, the vehicle is reassessed, and if any concerns have arisen, the maturing holding can be shifted elsewhere, thus reducing exposure to a company that may be experiencing difficulties.
The Bridgecorp demise as certainly, at least in part, victim to this strategy – not only was no new money being offered, but the staggered maturities were not being re-invested. It was a slow bleed, at first, but then…

On 30 July 2007 at 8:18 pm Thom Bentley said:
Sorry, but if you can't find a finance company that you're confident will still be around just 24 months later, why are you putting your client money there in the first place?

Plus, the idea in the rolling maturity approach is that in the initial 2 years, each maturing debenture is reinvested for 2 years or more. Your argument that the rolling maturity approach is put in place in order to manage a client's exposure to risk then looks somewhat specious, doesn't it?

I would also ask why (apart fromt he commission), when there are numerous good quality tradeable fixed income securities available on the NZDX (e.g. Infratil) paying around 9%, so many planners use debentures instead. Surely investing in a tradeable bond is a better way to manage a client's risk, as if you have any concerns you can sell the bond. As Bridgecorp and Provincial investors discovered, once you're in a debenture, you're well and truly stuck.

On the point about advisers supporting Bridgecorp, of course they did! Everyone in the industry knows that several planners had huge exposure to Bridgecorp at one time ($50m+). Many of these same advisers also had very large exposure to Provincial. A coincidence? Maybe, but it's interesting that both firms were well known for generous 'special' commission deals and little extras like trips to the Rugby World Cup, private plane flights to Wanaka for vineyard visits etc...
On 31 March 2008 at 11:21 am Mike King said:
None ther than Chris Lee himself, the self-proclaimed pseudo-guru of fixed interest investments, says, on his website:

"A-rated companies can be used for longer terms. Currently most B-graded companies are best used for 12-18 months."

Is Mr Lee therefore also guilty of this cardinal sin - "Sorry, but if you can’t find a finance company that you’re confident will still be around just 24 months later, why are you putting your client money there in the first place?"

On 8 April 2008 at 1:07 am Barrington Smythe said:
That's a very silly question, Mike. Chris Lee actually does his own in-depth research and only ascribes A and B ratings to those companies he is very confident will be around in 12-18-24 months. That's the whole point of doing proper research!!

I understand (as you would too if you read his weekly reports) that he also invests a large proportion of client portfolios in listed (and therefore tradeable) bonds from the likes of Rabobank, ANZ, BNZ, Infratil etc etc.

Look, I have no particular personal reason to be a fan of Chris Lee's, but at least he clearly does his research and is willing to publish it, for free and for anyone to use (or criticise). What exactly would you be able to show if I were to ask you for your research file on all the finance companies you recommended?

So far, Chris has only been wrong on Provincial out of the 17 companies that have failed. It has to be said though that virtually every financial adviser was wrong on Provincial.

My question regarding tradeable bonds still stands: why on earth wouldn't a financial adviser recommend Infratil 2015 bonds (for example) which can be sold at any time and are now paying a yield of 11%+, rather than a finance company debenture? Commission is surely the only answer.

By the way, I don't recall Chris ever proclaiming himself to be the guru of fixed interest investments, let alone the pseudo-guru, so I think you'll probably have to withdraw that particular allegation.

I suspect that the only advisers who dislike what he says so much are the ones who have been dishonest, incompetent, greedy, self-serving and lacking any hint of expertise to back up their recommendations. I hope that doesn't mean you?
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