KISS principle still rules

Friday, February 15th 2008, 10:40AM 9 Comments

by Philip Macalister

You may think Blue Chip and the financial advisory industry have little in common. Think again. One of the things that struck me is the similarities to what has been happening in the finance company sector. Obviously people were investing in these things to save for their retirement and they thought they were safe (as houses). Another thing is that Blue Chip and the likes (I'm not sure what you call them - managed property investments maybe?) are quite a big sector. Reports are that Blue Chip alone had 3-4000 investors. There seem to be plenty of these schemes, big and small, so the total number of investors is substantial. Then I pondered how do you pick a good one? Here, my guidelines for choosing finance companies come into play. You need to be able to understand how the investment works, the backgrounds of the people involved and the structures. It seems when you get either complicated investment structures, or complex corporate structures, there is a higher probability of trouble. Also these complicated structures often provide a great way for the provider of the investment to clip the ticket multiple times. That is fine, as long as the investor knows. Often they don't know and by the end of the line, the ticket has been clipped so often there is little left for investors. This seems to be the case with Blue Chip as it has been with other types of investments, including some from big financial planning firms. All this leads me to a growing belief that the simpler the investment product, the safer it is.
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Comments from our readers

On 15 February 2008 at 1:11 pm Alison Renfrew said:
Several years ago we talked with people inviting us to work with them to recommend Blue Chip Property to our clients. My initial reaction was that the focus was on marketing small (very small) apartments in Auckland. I have never liked small apartments and speculate that they will be tomorrows ghettos. I asked for more detail on how the scheme operated because it seemed complex to me and the person said to me "You don't need to understand. Clients don't ask. Trust me it works". This sort of response didn't fit comfortably with us and we had no more to do with that firm. I heard later that feed back from that person to his colleague was "The Renfrews are more trouble than they are worth". Seems to me that they were approaching advisors who chose not to think and who didn't wish to understand. Today we assist clients, many of them, into property investments that we and our clients understand. Buy the land (in the right growth area), build a house, rent it. Very simple.
On 15 February 2008 at 1:42 pm Tom Watson said:
When we analysed the cashflow projections provided to clients considering a purchase we identified:
1. Extra money had to be borrowed to provide working capital to fund rental shortfalls each year.
2. Profit came from linear capital growth @ 6% pa - not likely in an overpriced market.
3. Blue Chip buy back after 4 (or 8) years at estimated value depended on their solvency.
4. A very large maintainence/ refurbishment fee was to be deducted from the sale proceeds.
The public were being told that these were good investments by SALESMEN not qualified to determine what is or isn't a good investment with no consideration of any risks i.e. interest rate increase, rent decrease, etc.
On 15 February 2008 at 2:00 pm Nigel Tate said:
Just another reason for the government to act with greater haste in enacting regulations that curb the spread of these types of "Investments?" along with the salesmen or saleswomen that push them onto ill-informed members of the public. It seams to me that companies that promote these highly leveraged and complex schemes seem to be able to survive due to the less well informed members of our own industry agreeing to promote them, if the numbers of ill-informed advisers reduced so to would the spread of these promotions.

It's an old one but seems to be more and more appropriate - Don't promote what you don't understand. Education is the key, both public and advisers.
On 18 February 2008 at 8:02 am Adolf Fiinkensein said:
About four years ago I heard on the grapevine that the registered valuations for borrowing purposes were arrange by BlueChip and clients could not appoint their own valuers. That was enough for me to smell a rat.
On 18 February 2008 at 8:12 am Mike King said:
Bluechip's "valuations" were always suspect, especially as they were based on expectd value on completion - which means they were based on a fanciful trust in future growth.
The release of deposits to the Vendor (an associated company called Blue Skies, owned by Bangerter & Bryers, which would sell a huge mark-up to the developers' prices) was another source of major concern.
The cashflow projections also relied on an extremely dodgy tax structure, that was always doomed to failure.
Bribanc & associated management & body corporate entities have left investors with hundreds of thousands of debt on unpaid accounts, though these charges had been deducted against the rental offered.
Crooks? Can any other conclusion be arrived at?
On 18 February 2008 at 8:40 pm Barrington Smythe said:
Did anyone else find it interesting that Blue Chip's computers with client and company records were stolen from their Parnell office over Christmas, while no other offices in the same building were broken into?

The facts according to the SST seem to be that the thieves broke in on the ground floor, ignored the two offices on the floors below Blue Chip's office, stole only the computers and a small amount of petty cash, ingnored all other staff valuables, and the building manager wasn't even informed of the break in.

Fascinating, wouldn't you say?
On 18 February 2008 at 9:54 pm The lone Ranger said:
The article states that the thieves are believed to have gained entry through a rear door on the ground floor.
It doesn't say whether or not they had a key to let themselves in.
Even in rural towns,buildings of any significance have an alarm system tied into to a security service.
Obviously the tenants of this building didn't mind being burgled.
One would have thought that such a business would have had a back up record of all computer transactions stored somewhere nice and safe like a strongroom.
Perhaps Blue Chip was not sufficiently switched on to know this.
I suppose the burglars stole the petty cash so they could have a snack on the way home.
There is no doubt that a constant threat to the liquidator is valuable assets disappearing before they can all be secured.
Anyone ever heard of the liquidation sale of a building/joinery company where the local subcontractors are talking about all the good gear that doesn't seem to have made it to the auction.
Or the liquidation sale of the large rural contracting business,where by the time the liquidator has decided to make the trip from the city,certin machinery seems to have done a runner and the company's plant schedule is a bit vague on what should exist.
I was this morning talking to a person who has BlueChip Joint Venture as a tenant,and who is a little behind with rental and outgoing receipts.
I was informed that the tenant was now looking for cheaper premises.
I referred the landlord to the liquidation notice in today's paper,and advised contact with the liquidator.
That reminds me of that great series by Ian Wishart about the winebox affair,when a number of interesting items seemed to be unable to be located in evidence,having mysteriously disappeared.
The liquidators will have to go back to source documents to reconstruct matters.That will just mean more chargeable hours for them.
What amazes me with Bluechip is the use of the oldest trick in the book--The guaranteed rent--Why would anyone fall for that trick ?
As for valuers,a valuation is only someone's opinion,whether it be for a house,a car or a diamond ring.
I have seen three different valuations on assets,and you would not think they were valuing the same item.
Anyone who buys an asset where there is uncertainty in regard to valuation,must use a valuer that they can trust.
They must also ask the valuer to put in writing as to whether there is any potential conflict of interest,just in case some else has chucked half a cattle beast in his freezer.
On 19 February 2008 at 1:01 pm Majella said:
Bryers didn't just shaft the innocent Blue Chip investors - he has also systematically gutted his Franchisees of their businesses & livelihoods.

I believe he has gone about this consciously and deliberately, and is probably right now, celebrating the "success" of his venture, which has certainly enriched him and his offsider, Bangerter - sole shareholder in Blue Skies Holdings Ltd (now in liquidation! go figure!)

BSH Ltd was the real money-trap in their elaborate system and these two thieves have pillaged and plundered as fast as they could get away with it.

It was always going to end this way...the only constraint on them was just how long the property boom would go on, and then how long they could get away with their sleazy activities being exposed to sunlight? (Anyone else ever tried to get HOLD of anyone one BC , prior to the receivership, who would actually tell the TRUTH about anything?)
On 12 March 2008 at 4:53 pm Michael Donovan said:
Hello Phil,

I wrote to you some weeks ago regarding some of the fringe reasons why I believe that financial planners are guilty of (a) not taking inot account the effect of the "true" rate of inflation when "building client investment portfolios," and (b) why people are now being publicly exposed to "hunting higher returns" than they might normally be expected to do, hence we are seeing the results from these "high flyers" like Blue chip, and even some of the finance coy's, and the other things we are seeing which have offered the "big carrots..!"
The point I make is that there is a reason for this growth in people getting into things which offer very high returns, and the reason is that these people seem to actually know more about the 'real" rate of inflation than do a large number of 'professional" financial planners..!?

Was there a reply (or print) of my original email a few weeks ago?
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