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In support of advisers

Friday, September 11th 2009, 10:38AM 4 Comments

by Philip Macalister

Financial advisers have been widely vilified in recent times and have become a divining rod for derision. If you believe the media, all financial advisers are Madoffs. Recent case in point, the just published report by the Capital Market Development Taskforce reads like a diatribe on the financial advice industry. Almost a third of the report is devoted to the deficiencies of financial advisers when in reality advisers control only a fraction of the assets invested through our capital markets.  Somewhat perversely, the entities the authors of that report represent collectively wield far greater influence over New Zealand‘s capital markets than the entire financial advice industry. But they seem to have chosen to deflect rather than reflect. It seems to us that financial advisers are punching well above their weight. Granted, the financial outcomes for investors the world over have been poor in recent times. But, while convenient for some, it is wholly inappropriate to lay the full responsibility for those outcomes at the feet of what is a critical but still relatively embryonic industry in our country. We profess to know a little bit about, and a lot of, financial advisers. NZ Funds, is the only investment management group in New Zealand that makes its living exclusively from working alongside financial advisers. We have followed that course for more than 20 years now, from the genesis of our industry to its currently troubled point. We work with advisers of all denominations. From one man bands to large national chains; from the truly independent (I will come back to that hoary old chestnut) to those that rely on us for a wide array of investment and business services; from those qualified primarily through experience to those who hold doctorates in finance. They are generally good, honest people of strong integrity and ethics. They do not need to be told to put their clients’ interests first. They are acutely aware morally, if not necessarily technically, of their fiduciary duties. Their recommendations are not, in our observation, tainted by remuneration factors. But we do frequently observe their genuine concern for their clients’ financial outcomes and well being. The distribution curve of financial adviser capability is no different than that of any other profession – some outstanding, many average and a small minority whose less than exemplary behaviours draws all of the others into disrepute. Ask any lawyer, priest or male primary school teacher about the stigmas of association. People’s wealth is second in importance only to their health and their families. It is a source of enormous anxiety and uncertainty for them. This is especially so as the average client of a financial adviser in New Zealand generally has a significant shortfall between the life they desire to live in retirement and their current and prospective financial resources. They have an unfunded superannuation liability. It therefore follows that as a profession, financial advice should be held in similar regard to the other profession that deals with the issues of our life enjoyment, namely, medicine. But it is not. Far from it. The maligning of financial advisers has three primary legs to it:
  1. they pursue their financial interests ahead of their clients
  2. they are underqualified to perform their role
  3. they lack independence.
With respect to the first issue, if it were true one would expect to see abhorrent remuneration and great wealth being accumulated amongst advisers, much like that which has occurred in the investment banking and sharebroking industries globally. This has not occurred. Most advisers make a living, not a killing. With respect to the second there is strong and unequivocal basis to this criticism. Most advisers we talk to would dearly love to see a stronger professional qualification criteria develop.  But, like any industry in its relative infancy, the availability and level of professional qualification takes time to develop. It requires concerted investment from industry participants and government. With respect to the last, there is much confusion and obfuscation around the issue of independence. There is no evidence that we are aware of that supports the contention that a wide range of choice (commonly referred to as independence) improves a client’s financial outcomes. To the contrary, there are very strong arguments and evidence that fully integrated advice and investment management services can deliver a superior outcome. Advisers’ remuneration or commercial arrangements are not matters of independence, they are matters of disclosure. It goes without saying that they should be disclosed. But to say that an adviser delivers a lesser service because they utilise a narrower range of investment providers implies that is possible to fully understand all available products and securities – which is nonsensical. Independence should be defined as the ability for an adviser to recommend what they believe to be in their clients’ best interests. Nothing more, nothing less. Much of the noise in the media directed against financial advisers comes from those who hold a vested commercial interest in maligning the advisory industry (read their competitors). They are often advisers in drag. They, more than those they malign, are exploiting the investing public’s inability to discern the veracity of the distinctions they are making – many of which are spurious at best.  They are patronising those they purport to protect. An example from the Capital Markets Development Taskforce report bears this out. The report argues that funds are flawed investment vehicles because “individual members’ asset holdings may be distorted when other members buy or sell units in the fund”. Given that this same flaw could arguably apply to all traded securities (the circularity of which is perplexing given the Taskforce’s stated aims), one can only assume that the statement represents the interests of one or more of the contributing parties, not those of investors generally. The real destruction of wealth that has occurred in New Zealand has been driven much less by the direction of advisers and much more by the lack of it. Most of the investment directed to failed finance companies for example, was and still is, made without the benefit of advice. There is strong empirical evidence globally that it is human behaviour, not bad advice, which is the primary enemy of individual investors. The poor financial outcomes achieved by investors over the last decade have been exacerbated by the laying bare of the imperfections of modern portfolio theory. While modern portfolio theory is beautifully elegant it is flawed in its application for individuals. The returns from risk assets are not as predictable as the theory implies over the investing timeframe of most individuals; the outlier events occur more often and to greater extremes than the theory accommodates; and diversification does not provide the protection necessary to sufficiently smooth the ride. Despite all assurances, investors can not cope with the true volatility of the assets in which they are invested and their self defeating behaviours prevail. These are failures on the part of academics and investors, not advisers. One factor on which most will agree is that New Zealand and New Zealanders would benefit enormously from a widely accessible, professional, efficient, profitable, and client centred financial advice industry. We believe that investing in the advice industry is a better means to that end than deriding it. Richard James is the chief executive of NZ Funds Management
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Comments from our readers

On 13 September 2009 at 6:46 pm Independent Observer said:
Anyone who comes out in defense of the financial advisory industry should be applauded. Not everyone who is involved in the industry is a villain - albeit that many have been attracted to the industry over the past few years for jaundice motives.

But let's not get distracted - our industry is on its knees at the present, with Regulators and (potentially self-serving) industry-hangers-on now deciding our fate. I openly congratulate anyone who is prepared to stand up for the advisory industry at this juncture, and strongly encourage more voices to step-up and support the good parts of the industry.

Whilst I don't want to detract from Richard's commentary, it would be useful for more advisers & advisory-related members to go public with their stories, rather than relying upon a [well-meaning] representative of the asset-gathering / manufacturing part of the industry.
On 14 September 2009 at 9:19 am Michael Donovan said:
A well written story Richard, and as a 'grandfather' I knew you personally when i was deeply involved in our profession over many past years.
As I have written previously, "LARGE" is most likely where a big part of the 'problem' originates.
With a LARGE investment planning business there comes an associated problem of corporate control.
This means that the LARGE numbers of advisers within a franchise (mostly "good honest people of strong integrity and ethics")are not actually ultimately acting as themselves, and are in fact 'controlled' by the heads of their relevant franchise group.
To help prove this point, we only need to consider the BIG TWO or THREE in NZ and we can quickly recognise them as open, dismal failures...and there has been much expose press on one of them in recent weeks which looks set to be building momentum rather than otherwise?
You suggested that the minority have tended to tarnish the overall profession, however, could it also be suggested that the 'minority' may be analysed as being mostly the "THREE?"

While it is naturally acceptable for any professional to make a good living (so as to be there in down times for their clients), I do clearly doubt the overall sincerity of a large number of advisers who i have associated with over the years.

So, my response is based mainly around your three main points.....

(1) The "wealth" created and enjoyed by advisers should have a more in-depth analysis, and should be assessed as to "what they are actually doing, to get paid for..!"
eg: To charge 1%pa off their investors money to supposedly "monitor" investment portfolios" which have clearly ended up losing large amounts of capital for the investors, and over protracted times, is surely not a qualification for an adviser's acceptable 'wealth'?

We all agree that no-one can pick the absolute bottom nor top af any market, however, i challenge that even the less-educated can at least pick "trends."
eg: the housing market TREND was too high a couple of years back, and is more acceptably low risk as a TREND in comparison. Be clear that while this means that the probability of huge capital losses have diminished, i am not suggesting that values are set to boom tomorrow.
It is merely to help demonstrate simple TREND-picking.

So, more on 'wealth' in regard to advisers...
Like all franchises who charge an annual 'monitoring' fee (like the one i belonged to at Money Managers till way back in 2001), I challenge that if you compared two portfolios, one 'monitored' and the other not, the difference in returns to relevant clients would be precisely 1%pa.
Therefore, would the best advice to those clients be to cancel their annual 'monitoring' fees, and enjoy a jump in returns per year (or at least a drop in losses) by precisely 1%pa with absolutely no additional risk???

(2) As a non-acedemic myself, i would naturally have to accept QBE (qualified by experience) alongside the MBA's.
However, while our profession in NZ is relatively 'young', should we not simply piggy-back on the more mature advisery professionals overseas who have lots more experience in 'weathering the downs' than many in NZ, and after all, most of the investments within portfolios have overseas content as a major part?
Of course, we can enjoy the 'perk' of being able to customise such overseas experience and add our own Kiwi ingenuity.
eg: Masterfunds were picked up on many years ago by Money Managers, and were at first rubbished by NZ competitors. However, while they were first developed overseas, they were very much modified and upgraded (with good help from your company too), and we now see most of the knockers enjoying their own versions of masterfunds.
There however, we need to again raise the question of 'TRUE monitoring'?

At least we can now say that virtually ALL NZ advisers have "experienced" a major downturn..!

(3) Lastly, (MPT). I do tend to agree that good old "diversification" can be construed wrongly as being the answer to lowering risk.

eg: diversifying across a portfolio of investment houses has resulted in nothing but poor results, and Blue Chip is one high-profile example.
Likewise, in recent years, someone who ommitted to pick "sharemarket trends".....same result.
The DOW is only back precisely to what it was way back in 9/11, so without any 'added-value' trading, a typical index investment would have produced static results at best..!

To summarise, I suggest that one of the major problems for investors has clearly been exposed during most of the last decade, and that has been in the form of a severe lack of 'reality' to the claimed "monitoring' (and subsequent adjustments) of portfolios.
Investors appear to have been coerced into entering into 'monitoring' contracts, however, the relative advisers have not actually honoured what they 'claimed' to be doing..!
And who is to blame? I suggest that the blame is not totally with the actual relevant advisers, it appears to be more with their bosses who have clearly built a nice annual cashflow from 'monitoring' fees, regardless of the markets.
The bosses have told their advisers that the annual 'monitoring' fees are justified, because the bosses claim that the 'monitoring' is done at head office.
Of course, it is well-known that a business value is helped by capitalising annual revenues?

As I have alluded to, all advisers are individuals.
However, they tend to be caught between the proverbial 'rock & a hard place' because if they abide by the franchise rules and rely on 'head office monitoring' they have to subsequently field the angry calls from investors who have been left in protracted falling markets (trends), and at the same time, they can realise that they if they applied their own logic (trend-picking) to adjust portfolios, they would be 'bucking their relevant franchise-bosses rules, and get into trouble or, even lose their franchise???

So, is all the 'wealth' created and enjoyed by advisers morally and ethically acceptable, and the questions need to include, "are you actually doing what you charge for?"

Support is always appreciated by advisers anywhere, and the support from your company was always well appreciated by myself back in the days when i had a 'link.'

I am pleased to notice that one of my gripes from the past appears to being gradually dealt with, and it is very relative to one of todays hot topics.....Kiwisaver.
In my school days, we were encouraged into the savings "habit" every Wednesday, when we saved our "bob" into our school-encouraged savings account.
May i suggest (if you are not already) that your company supports the savings attitudes of NZ'ers, and the best place to begin good habits is early in life.
If we all began our investments when we were at primary school (like they are taught to do overseas) then the bumps along the way would tend to have less negative effect.
Look forward to your additional help in that area.
Michael Donovan
On 18 September 2009 at 4:24 pm Rob Blackmore said:
I feel I need to reply to the comments from Messer’s Donovan, Visser and Sage regarding Richard James excellent article.

The honourable advisers have chosen to remain in the advisory organisation founded by Doug Somers-Edgar unlike those who have left.

The remaining advisers have chosen the honourable path of staying loyal to their clients and working alongside them to achieve the best outcome possible in what has been and will continue to be trying conditions – it appears some people are oblivious to the global financial events of the last 18 months.

The ongoing assistance, availability and advice being offered to the investors is often undertaken with far less remuneration paid than Mr Donovan suggests. I believe the majority of these honourable advisers will continue to have the courage, commitment, character and empathy needed to see the task of helping their clients through to the conclusion of these issues – they will not abandon their clients through lack of courage, commitment, character and self responsibility.

The sense of commitment to our clients is one of the reasons our organisation will survive – no matter how many untruths are written by others. Another reason it will survive and thrive along with our clients is the strategic partnership with NZ Funds and its people such as Richard James, it’s other Directors, Principals and their staff. They are people of integrity, character, honesty, ethics and are 150% committed to achieving the best outcomes for investors.

In my opinion these attributes are far more important than Honours and PhDs.
On 21 September 2009 at 10:56 am Michael Donovan said:
Yes Rob,attributes such as integrity, honesty, ethics and the like are all amongst those which can be much more down-to-earth and important than the relevant academic qualifications. And while the editor has chosen to delete a couple of comment replies which may be seen to have been more of a personal attack on the old MM, even though they did appear to contain some relevance to Richard's "genisis" topics, they did read somewhat as containing at least some associated content relating to the referred-to "attributes."

However, there are elements of all the comments posted which I feel should be noted, and noted in as much as can be done in a fly-on-the-wall perspective, because I assume,(and make the point) that it is not only those within the 'industry' (advisers and fund managers)who read these columns, but also the clients (investors) of both.
We all have our individual opinions, and it is great that we are allowed to expess them, and only a relatively small number of us seem to bother to make the time to add ours to such columns.
So, I am pleased that my response was left in because I did endeavour to respond to Richard's comments, and referred to each in my comments.

However, there is still a human element applicable to the comments made in these columns, and as always, the relevant editor is able to have the last say.
The last contributor (Rob)made comments applicable to advisers who have "chosen to stay" with their clients, and that is naturally honourable in these recent hard times.

However there is also another human element applicable here, and that in my opinion applies to the actual reasons behind any adviser "staying and sticking up for his/her particular company."
Sometimes, in any "industry" people cannot see the wood for the trees, and are somewhat at a disadvantage to others who can see things from a different perspective.
It can be quite sad that this disadvantage applies (to any "industry")and I can assure you that it is a psychological fact that unless you can truly see things from BOTH perspectives (both as a 'member of your industry, or your particular group in that industry)you simply remain at best only 50% qualified to comment..!

The point is that the likes of those who are part of a large group have most times naturally been dictated to by their bosses, and as i have seen, the bosses have generally told their group members that certain 'jobs' within the group are being done by their head offices.
One of those 'jobs' has been monitoring of investor-clients portfolios, and i still challenge that such mobitoring does NOT actually take place.

The downside of this is obviously that all of the investors suffer because it is their money in question.?

If an advisor is charging 1%pa to 'monitor' investment of say a total $40 million, then the advisor is getting $400,000 pa.
If the 'monitoring' is NOT actually being done, then where are the list of "attributes" applicable?

When the portfolios drop in value, the client suffers a (often quite large) capital loss, and at a time of life where such losses cannot be easily retrieved...!
Directly beside that, the adviser only loses a relatively small portion of annual revenue, eg; down say to 'only' $350,000pa.

That amount, i suggest is quite sufficient revenue on which to run an office in any of the larger groups nationwide.
However, the point i repeat is that are the advisers actually providing a TRUE monitoring service which they advertise and contract to offer.

What does not fall into acceptance in my opinion is that the advisers of especially the larger groups offer a response to their investors which is supposed to provide an acceptable answer....."it wasn't me who lost your money---it was the markets..!"
This is where my very point of TRUE MONITORING comes into the fray.
If you say you are going to do something (and charge handsomely for it) then surely you must be expected to do it..!

I have seen absolutely NO evidence that TRUE MONITORING is applied by advisers, and particularly those who are part of the larger groups or franchises, and it concerns me...on behalf of their investor clients.

What is the sense in just "being there"?
To me it is what is being provided when there by anyone in any industry, particularly when handsome fees are being applied to those who are the most important part of any industry....the client/s, and it surely must be ultimately up to those who remain on the coalface (even if bosses come and go)to make sure they honour what they charge for, so as to maintain that list of "attributes," and this applies to any "industry"...?
The difficulty remains in the fact that it is virtually impossible to denounce oneself...when you are still part of a large group who may be guilty of such actions and inactions?
The choice must be only two-part.
Charge and don't deliver
charge and deliver (what you are charging for)?
Commenting is closed



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