How much research must advisers do on equities?

Advisers have a heavy workload keeping up to speed with the IPOs on New Zealand’s equity markets.

Monday, October 7th 2013, 4:16PM

by Susan Edmunds

Chapman Tripp partner Roger Wallis said he could not remember another period quite like the one the market is currently experiencing. “With the strength of the products being made available and the interest in it.”

NZX said the Kiwi sharemarket was experiencing its strongest year in the past decade. By August, issuers had raised $2.4 billion of equity. NZX’s equity market capitalisation has risen from $46.6 billion in 2008 to $77.9 billion in 2013, or from 27% of GDP to more than 37%. Wallis said it looked set to continue.
He said there was still some uncertainty around how much work an authorised financial adviser had to do to get familiar with a product such as an IPO, before helping clients invest in it.

The interplay of international securities laws meant that many organisations could not make their own research available. This was particularly obvious around the Mighty River Power float, he said. Companies who were part of the selling syndicate were not able to offer their research to anyone during a long blackout period.

Since then, there had been moves to address the problem, Wallis said. There is NZX-sponsored advice available on the impending Meridian float.

Wallis said that would probably help AFAs discharge their obligation to be familiar with all the material. “That was a bit of a challenge with Mighty River Power because of the paucity of research due to international rules.”

He said other recent IPOs, such as Z, have had comprehensive prospectuses. “It’s hard to think of anything that was not in those documents.”

The Financial Markets Conduct Act will see a shift to shorter prospectuses to help investor understanding. But AFAs will still need to familiarise themselves with the supplementary information about offers, which will be available online.

Smaller deals on the secondary market were also being lapped up almost as fast as they could be produced, he said. “Advisers have had to get up to speed very quickly.”

Wallis said there was a risk that advisers would find they had so much paperwork to wade through, that it was not worth advising on equities products. Some would find their businesses could not continue as they were under new regulatory requirements. “Adviser models are under examination.”

Some would need to move to a fee-for-service model to justify the time it took them to thoroughly research each product.

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