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It's not advisers who need regulating

Saturday, February 23rd 2008, 9:51AM 6 Comments

by Philip Macalister

If ever there was a group of “advisers” who needed regulating then it’s the ones who sell all this Blue Chip stuff, or what we call packaged property investments. NZ Property Investor Magazine has been examining the collapse of Blue Chip. What is amazing is that “investors” bought nearly half a billion dollars worth of property through Blue Chip in a year. If you think about all the other crowds who are selling this stuff then the sector has been getting more money than managed funds have in recent years. Although people are being sold this stuff as an investment and “for their retirement” it falls outside of the securities laws. This is absolutely ridiculous. New disclosure laws which come in on February 29 won’t have any impact as the people selling this stuff aren’t investment advisers. According to the Securities Commission an “investment adviser is a person who gives investment advice about securities.” All this packaged property stuff isn’t a “security”. My discussions with the Securities Commission indicate they don’t have any jurisdiction over this, rather it falls to the Commerce Commission under the ambit of Fair Trading Laws. I can’t see this being particularly useful. The next bit of adviser regulation is the bill currently before Parliament which “licenses” advisers and makes them all join an Approved Professional Body, who then regulates them. Again it appears that these rules won’t capture people selling – I wouldn’t call it advising – on packaged property. Commerce Minister Lianne Dalziel says she has an open-mind to changes to the bill. Here's a chance to see how open it is. It’s not the investment advisers who use managed funds, finance companies and the like that need reigning in. It’s the group who “sell” property.
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Comments from our readers

On 23 February 2008 at 12:46 pm Barrington Smythe said:

Yes, the property guys need to have their nuts put in the same vice as the rest of the investment advice industry, and the sooner the better.

However, let's please not let Vestar, Broadbase, Bennetts, Money Managers, Ellerie Cornwall etc etc off the hook. All these guys have made very large amounts of cash out of recommending crap investments, and all will no doubt have most of their personal assets in trusts or in the wife's name in case the lawyers make a call.

All this reminds me of the old story about the old client being shown around Wall Street, who is shown the harbour where all the brokers moor their yachts. Concerned and confused, he quite reasonably asks where all the clients' yachts are moored. See Rod Petricevic for details.

I have attended property seminars where the punters were told categorically that property was the best investment possible, far better and safer than shares or fixed interest, because it always goes up and they aren't making any more land. (Although NZ is roughly the same size as the UK and has 4m people vs 60m in the UK, so maybe there is a wee bit more room to expand??)

To understand where all this started, you only need to read the comments of one James Lockie of Cairns Lockie, quoted in this blog in Sept 2005:

"Finance companies have become popular because other investments haven’t delivered in recent years.

They offer guaranteed returns. If an investor deposits funds with a finance company for two years at 9.85%, that is the return they will receive.

Fund managers ...are in able, or lack desire, to offer some form of guaranteed return."

Lockie also raises the issue of “transparency of fees”.

He argues that there are “absolutely no fees paid by those who invest in finance company debentures”.

(NOTE- apart from the spread between the rate paid to debenture holders and the rate received from borrowers, which might be 6%-10% higher....)

Lockie also puts forward consistency of returns as a plus, saying “finance company returns have performed well, despite many changes in the economy.” (What changes?)

Look, whether it's property, debentures or funds of CDOs, the standard of advice offered to mums and dads by some 'financial advisers' has been woeful, inadequate, ill-informed, shameful, pathetic, greedy, self-serving, biased and generally rubbish. Let's not try and make Blue Chip out to be any worse than the rest of the dross out there.

On 24 February 2008 at 4:50 pm admin said:
Barrington, I'm only partly with you on this one. I think there is a major product manufacturing issue, and the advisers are the easy targets in the middle.
Now I'm not saying advisers are all pure and haven't made any mistakes. What I am saying is at least with the sorts of investments they use (whether it is finance companies, managed funds etc) there is some transparency, money goes into trust accounts (hopefully), trustees oversee investments (!!), and even under the old rules there was some disclosure.
With this packaged property stuff there is little or none of that. The Securities Commission has no jurisdiction in this area.
There is next to no comeback on people who flog it, there is zero transparency, and there is no investment statement or prospectus.
On 25 February 2008 at 11:47 am Majella said:
While mostly I'm in agreement with Barrington, the comment that:

"...apart from the spread between the rate paid to debenture holders and the rate received from borrowers, which might be 6%-10% higher…"

The profit margin generated by an institution CANNOT be considered a "fee" to an investor. You could just as equally argue that bank term deposit rates of at 7.5%, while the bank's credit card rate is 22.5%, is a "cost" or hidden fee to the term depositor.

It's also well known that Bridgecorp, at least, offered a wholesale rate of at least 1% more (maybe higher for some) than the published rate, from which the broker could nominate a brokerage, if any. It appeared to me from advertising (by brokers) that some were taking LESS than the standard 1% p.a. Perhaps they were not ALL bastards?
On 25 February 2008 at 3:08 pm Peanut H said:
BS is at it again putting his boot into those nearest the range of his size 16 steel caps. What about putting the boot into the Directors, Senior & Junior Managers of the companies who manufactured and promoted these so called crap investments. Also while we are at it why not cleanup the whole industry up by getting rid of the Sharebrokers, Accountants, Solicitors & Advisers who recommended DFC, Equiticorp, Skellerup Finance, Alexander Acceptances, Flat Rock, Feltex, Provincial, Bridgecorp, Five Star, Nathans Finance, VTL, C+M, Bluechip, National Finance, Western Bay, First Step and any other listed share which has turned into a penny dreadful. It would be a bit silly wouldn't it? there would be no one left to provide advice.
On 25 February 2008 at 6:55 pm Barrington Smythe said:
Re Majella's comment, if Bridgecorp was a decent company it would have had no need to pay wholesale rates to attract business. And if same advisers rebated some of this to clients in the from of higher rates, it still didn't make Bridgecrp a good investment.

And yes, in my view the banks do have hidden fees just as finance co's do. That's why banks make billions of dollars in profits every year, and why they bombard us with invitatons to take out credit cards.

You could see from Bridgecorp's Prospectus that Petricevic was paying himself more than the CEOs of most large listed companies. That is a fee to debenture investors since it's money going out of the business which should have been left in to build up the equity, which would protect debenture holders.

Re Mr. H's comment, there will always be unscrupulous 'businessmen' out there trying to make the most money possible out of investors. It's the advisor's job to make sure he/she only recommends investments that they have thoroughly researched, or where research has been thoroughly carried out by a reputable source (and no, PIR or Chaston doesn't count).

As I've said elsewhere, nobody gets it right all the time even with good research, but what can be done easly is to build properly diversified portfolios to minimise the impact of any failures (Investment 101). If an adviser has carried out detailed research on every investment and constructed a properly diversified portfolio, then that is not likey to result in significant losses for clients through corporate failures.

Also, it's a bit different recommending equity investments (where the risks are well known and the upside is potentialy unlimited), and fixed interest investments where there's no upside and potentially 100% downside.

When you had people like Mr. Lockie (see above) and lots of financial advisers saying that 'debentures are guaranteed' and there are 'absolutely no fees', and then following that up by putting 20%, 50% or 100% of a client's money into one finance company, with no real research, and where that company just happens to pay the highest commission, then I call that crap advice. What would you call it?
On 27 February 2008 at 4:28 pm Majella said:
" BS says "When you had people like Mr. Lockie (see above) and lots of financial advisers saying that ‘debentures are guaranteed’ and there are ‘absolutely no fees’, and then following that up by putting 20%, 50% or 100% of a client’s money into one finance company, with no real research, and where that company just happens to pay the highest commission, then I call that crap advice. What would you call it?"

I'd call that crap too - not even advice.
Commenting is closed



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