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Concern at stress-testing regime

The new DIMS regime could make life tough for Authorised Financial Advisers if they are required to stress test individual client portfolios.

Tuesday, December 10th 2013, 6:16AM 1 Comment

by Niko Kloeten

The Financial Markets Authority’s consultation document on DIMS licensing requires stress testing of investment strategies, which should “cover a range of factors that can create extraordinary losses or make the control of risk within the investment strategy difficult”.

It is not yet clear whether that will apply to AFAs offering only personalised DIMS services, who will not have to be licensed.

FMA spokesman Tony Reid says DIMS licence requirements are still in the consultation phase and there are further regulations on the way for AFAs who want to continue providing personalised DIMS.

“Where possible, FMA plans to align AFA DIMS authorisation [for personalised DIMS only]and the DIMS licence [for class and personalised DIMS].

“The requirements will depend on the type of DIMS being provided. For example, what is appropriate in a large-scale class DIMS business will not necessarily be appropriate for an AFA.

“FMA would always expect appropriate testing of an investment strategy whether by an AFA providing a limited DIMS for a single client or a large entity providing a service that is similar to a managed investment scheme. The appropriate level of testing will depend upon the circumstances.”

Institute of Financial Advisers president Nigel Tate says stress-testing individual client portfolios would be “virtually impossible” under the current regime.

“For individual AFAs providing a personalised DIMS service, each portfolio is bespoke. I have 185 investment clients and no two clients have got the same composition of portfolio.  They’ve all got the same components but with different proportions, values and durations.  Stress testing would make it impractical for advisers to provide the service.”

Minter Ellison Rudd Watts partner Jeremy Muir says clarity is needed.

“Requiring DIMS licensees to stress test a model portfolio for a class DIMS is clearly a different proposition in terms of scale and workload, than requiring an AFA to stress test each individual portfolio constructed under a personalised DIMS framework. 

“By framing the requirement in the licensing consultation as part of demonstrating how a licensee will exercise ‘due skill and care’, however, there is an implication that AFAs should do the same – as they have the same ‘due skill and care’ obligation under the Financial Advisers Act. 

“It will be helpful, therefore, if FMA and/or MBIE clarify what they intend to be the scope of an AFA’s obligations in this regard.  This could happen as part of the development of further regulations for AFAs, or by FMA issuing its own guidance.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 11 December 2013 at 7:41 am MPT Heretic said:
Stress testing portfolios...really? For what exactly? Volatility, risk of not achieving objectives, risk of not taking enough risk, risk of an investor bailing out at the wrong time, risk of the kids needing capital for their 1st home, risk of living to long, risk of inconsistent cashflows? Perhaps those within the FMA with real world portfolio construction experience could explain just how they can model those variables.

The bigger issues however is that once again the regulators confuse product delivery with advice. Stress testing may be relevant for a generic balanced fund where individual investors can be ignored but it is not relevant for personalised advice.

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