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Govt approves new DIMS rules

Advisers have won some concessions in the new rules governing discretionary investment management.

Tuesday, June 17th 2014, 6:40AM 24 Comments

Cabinet has approved new rules for the regulation of DIMS which includes, as expected, a decision to push back the start date of the changes.

While decisions have been made at the government level the finer details of how they will operate won’t be known until the Financial Markets Authority releases its guidance note.

Good Returns understands a draft has been circulated amongst the industry. Some who have seen it have been worried about its contents.
AFAs will be able to operate simple DIMS, however it is unclear exactly what a simple DIMS is.

“To qualify as personalised DIMS, the investment strategy for the DIMS must be personalised to the particular client, based on their situation and goals. This definition is relatively narrow, and AFAs will need to be licensed to offer anything other than this,” the cabinet paper says.

AFAs offering simple DIMS will still need to gain some sort of approval from the FMA.

This incudes an additional eligibility requirement, allowing the FMA to assess whether the AFA is capable of effectively performing the service and whether there is any reason to believe that they will not comply with their legal obligations, Foss says.

He says in his cabinet paper that “tThis requirement will be applied in a flexible manner, reflecting the extent of the service that the AFA proposes to provide, and the extent to which the AFA is using services that reduce risks to investors, such as online platforms and reputable research providers.”

Other key regulatory changes include:

  • Alignment of the requirements for DIMS under the Financial Advisers Act 2008 with those that will apply to other DIMS providers under the Financial Markets Conduct Act 2013.
  • An exemption for financial advisers who only manage their clients’ investments in limited situations, such as when they are on holiday.
  • The base fee for a DIMS licence will decrease by 40% from $3565 to $2139.
  • A transition period for existing DIMS providers, allowing them until 1 June 2015 to apply for a licence and until 1 December 2015 to update their client documentation. New providers will need to comply from 1 December 2014.

Good Returns will update this story later today.

DOWNLOAD Cabinet Paper here

DOWNLOAD Regulatory Impact Statement here

« [Weekly Wrap] What does DIMS really stand for?IFA working on pro-bono offering »

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Comments from our readers

On 17 June 2014 at 7:57 am Murray Weatherston said:
AFAs will be able to operate simple DIMS without having to be licenced, however it is unclear exactly what a simple DIMS is

Phil, this statement is wrong. With a simple DIMS in terms of Cabinet paper, (assuming its not personalised) AFA or his business will still need a licence but the application may not need to be as full as for a complex DIMS.)
On 17 June 2014 at 8:58 am Ally said:
What the FMA calls "DIMS" are simply old-fashioned Powers of Attorney, freely entered into by the parties.

These arrangements have been around for centuries........But, extraordinarily, the FMA has decided to outlaw them (or at least dictate the terms) as far as AFAs are concerned.

But what about the hundreds, probably thousands, of POAs in existence that don't involve an AFA ?

Plenty of "ordinary kiwis" hold a POA granted by their elderly parents to handle their financial affairs. If POAs in the hands of AFAs are such a problem, what about the thousands that are completely outside the FMA's tentacles ?
On 17 June 2014 at 9:15 am Brent Sheather said:
It looks like Mr Foss, an ex CSFB executive from memory, has been mis-quoted here. He says in the Cabinet paper "this requirement will be applied in a sensible manner reflecting the extent to which the AFA is using services that reduce risk to investors such as online platforms and reputable research providers". Surely he meant reduce returns to investors? How on earth does an online platform reduce risks? It is far safer for the individual to own the assets in their own names. While I am here I wonder who he was thinking of when he said “reputable research providers”. I can think of maybe one but most of the others are good to the extent that their recommendations tell you what not to do.
On 17 June 2014 at 9:49 am Alan Clarke said:
Brett you missed the point about platforms

They are worried about Ross ponzi schemes.

You simply cannot build a Ponzi in a platform.

i.e. you cannot transfer one clients money to another, your staff can't steal it, and you can't either

They are super secure

As to efficiencies of owning investments direct vs a platform, that is a debate we could have for a week and no one would win.

I have my money on platform and would not have it any other way, neat, tidy safe custody, data backed up, simple at tax time, and records galore available going back years and years

And no Aegis don't give me a discount either

As to a simplified DIMS, it can only be a step in the right direction

On 17 June 2014 at 10:44 am traveller said:
Please will someone define "in a flexible manner"
On 17 June 2014 at 12:04 pm Brent Sheather said:
Hi Alan, Not sure I did miss that point. You may not be able to build a Ponzi in a platform but you sure can’t do it if the assets are in the client’s name.

Similarly you can’t transfer one client’s money to another, your staff can’t steal it and you can’t either. In my view the difference comes down to fees and my clients have the options of custodial or direct and most opt for direct.

The system we use produces performance, records galore, blah blah but we had to buy the system which cost about $50,000.

Note it cost us $50,000, not our clients. Aegis gives advisers a system but the customers pay … forever.
On 17 June 2014 at 12:06 pm Dai Eveleigh said:
I've read the Cabinet paper and the guides previously produced by the FMA and really can't see what all the fuss is about. I use research from a research company to form the basis of my recommendations. I put those recommendations to clients to accept or decline and then complete the transaction if approved. Therefore not a DIMS.

I think if advisers ask themselves, "Who is making the buy/sell decision" then most advisers will discover that they are not providing a DIMS service.
On 17 June 2014 at 3:45 pm Alan Clarke said:

cost of platform varies but is about one quarter to one third of 1%, and is tax deductible

for a system run professionally, audited to bank standards, managed externally to our business, no trust account needed, no cheques flying about, one less thing we have to do so we can spend more time on what matters, something we don't have to supervise or worry about, less staff to employ, clients funds super secure, instant nearly paperless rebalancing, ever closer to being paperless overall, , super efficient and more and more and more

21st century technology - Morris Minor vs Lexus Hybrid

See, I told you we could debate it for a week and no one would win

I am happy to pay it and have no client objections of any significance either

I used to do it your way, but made the change 6 years ago to access DFA funds. The added bonus was how good a platform is and I have since become a big Aegis fan

We get awesome service from them too no I'm not an Aegis salesman either
On 17 June 2014 at 5:04 pm CJM said:
"... can't see what all the fuss is about ... Therefore not a DIMS."

Well if you are not offering a DIMS, then I can see why you don't see the fuss!

As I see it, advisors had two surprises with earlier DIMS guidance.

First, the definition of DIMS covers a lot of advice that many advisors did not think was a DIMS (say regular rebalancing, reinvesting dividends, making a decision only while a client is on holiday and has given their approval).

Second, for those advisors offering DIMS, the definition of personalised DIMS was so narrow it seems not to exist. And Class DIMS licences seem aimed at big fund management firms rather than AFAs.

Now we wait for the next round of FMA guidance to see if any of that has changed significantly.

But if you are operating your business taking no decisions on behalf of a client in any circumstances, then DIMS regulation will not be of any importance.
On 17 June 2014 at 6:01 pm brent sheather said:
Hi Alan, I see where your coming from and one quarter to one third of one percent doesn't sound much but for my clients 650m its 2 million a year out of their pockets.

Thats a lot of money ...their money.
On 18 June 2014 at 9:06 am Alan Clarke said:
Brent I kept the best for last

with $650 m you will get a platform for 12-15 bp

Under $1m pa

And if you explain the benefits, probably most of your clients will readily agree - even be impressed with how progressive you are

no certificates

instant transactions

your daily mail reduced to 20 letters from 100

less staff

Huge task to transfer, but once done, it's just way better

So once you are enjoying your Lexus Hybrid, you can remember me with a nice case of central Otago red wine
On 18 June 2014 at 10:06 am Dai Eveleigh said:
To CJM, ".... making a decision only while a client is on holiday and has given their approval"
This point was addressed in the Cabinet paper (see points 48 - 51 Contingency DIMS) and in the Recommendations of the Cabinet paper (point 9).
Also regular rebalancing has previously been addressed by the FMA, i.e if the client agrees to rebalancing within pre approved ranges, then that is not DIMS (see page 5 of the FMA FAQ 20/03/2014).
On 18 June 2014 at 10:42 am btw said:
Alan/Brent, can either of you help out with a longstanding query I have..?

Have either of you sighted the actual custodial agreement ICSL/AEGIS have (or any other wrap providers for that matter), and the underlying broking agreements they hold with the market participants?

I ask because I’ve always been concerned about prime broking arrangements (such as we saw with Lehman’s), where “custodial” agreements actually permitted the custodian to deal in the underlying assets (such as providing 3rd party leverage or short selling facilities).

It’s always hidden of course in the small print so difficult to say without checking the actual agreement. The only custodial agreement I have sighted does in fact permit this secondary dealing, but that was some time ago, and hopefully industry practice has changed since Lehman’s (but I can’t find any evidence to that effect).

Any thoughts/assistance? Anybody? Any AEGIS employees perhaps?
On 18 June 2014 at 11:49 am Brent Sheather said:
Hi By the way,

Sorry I have no knowledge of Aegis or CSL custodial agreements but agree prime broking agreements could be an issue. Aegis certainly makes buying and selling for clients easier but whether that is a good thing or a bad thing I’m not so sure. Once you take the impact of the bid/offer spread, brokerage and other transaction costs into account these can add up to another 0.5% to 1.0% in annual costs to investors.

Brent Sheather
On 18 June 2014 at 12:19 pm Graeme said:
Brent is 0.5% to 1.0% the typical level of transaction fees that your clients incur? What are people using platforms are incurring?
On 18 June 2014 at 2:42 pm Brent Sheather said:
Hi Graeme
The 0.5 – 1% transaction fee I referred to has been calculated by John Bogle, the UK Department of Trade & Industry, Vanguard and various other reputable sources. It is total transaction costs expressed as a percentage of the fund. It includes brokerage, obviously, market impact, bid/offer spread etc etc. In the UK and on the NYSE bid/offer spread and market impact were far bigger factors than brokerage. The analysis also uses, from memory, assumed turnover levels of something like 40%. Our clients turnover averages less than 10% and some of that is short dated bonds maturing. To answer your question as to what costs people using platforms are incurring you would need to look at the underlying turnover, costs etc of the funds used then the turnover of the clients portfolio. Good luck getting that info.
On 20 June 2014 at 1:42 pm Realist said:
From the trade settlement records of a PAM client, we see bond brokerage costs being charged at 1.5%. This is three times the level being paid by investors using major wrap platforms.
On 20 June 2014 at 2:46 pm brent sheather said:
To Realist...ok that's possible. In the interests of a a sensible comparison our all up av annual fees incl fund managers fees and monitoring are less than 0.5%.

Assume turnover of 6% of the portfolio at 1.5%..our highest fee..= an annual charge of 9bps..50 plus 9 = 59bps.now

Let's see your numbers Mr Realist....incidentally a name would be a brave move too.
On 20 June 2014 at 5:37 pm Graeme said:
Realist. Who is PAM that you are talking about? I am lost, as I don't know this group.

Surely no one pays 1.5% to transact in bonds.
On 21 June 2014 at 8:24 am Alan Clarke said:
PAM and its people are easily found on on google

Aegis brokerage on shares is 0.35%

We agree on low turnover, DFA pay this a lot of attention with amazingly low transaction costs

I am fascinated to see how many people in the industry clearly don't know how a platform works

Bit like the Guinness advert "I don't like it because I never tried it"

If everyone got onto platforms, the volume and competition would probably bring costs down to 12- 15 BP pa.

The advantages are innumerable

The FMA can see how it adds a lot of protection to our clients funds too
On 21 June 2014 at 9:37 am Realist said:
As you asked PAM that I referred to is Private Asset Management. Brent Sheather is a director.
On 23 June 2014 at 8:57 am Colin said:

You have dropped your portfolio turnover from 10% to 6%. Both figures seem low. How do you get such a low portfolio figure?
On 23 June 2014 at 9:19 am Graeme said:
Thanks for the answer Realist. I did a search and found their website. On this it say that "PAM is a fee based adviser which means we charge a flat transaction fee – usually 1% to 1.5% of the sum invested to implement a portfolio recommendation. We pay the stockbrokers whom we use to execute transactions from this fee. If we also use UK/US brokers their fee, around 0.25%, is additional. Most of our clients have sums to invest in excess of $500,000 and the implementation fee at this level is 0.8% and over that is negotiable."

This is consistent with what you have said Brent in your answer to Realist.
On 23 June 2014 at 10:54 am Brent Sheather said:
Hi Colin

We determine turnover when we recommend clients make a change to the portfolio. If you own direct bonds and mainly exchange traded funds and actively managed funds you don’t need to make too many changes to the portfolio, unless you have made a mistake or you have bought something which has done particularly well. In Australia we typically own just two funds so not much need to buy and sell there for example.

Another point that advisers need to consider is whether to have different implementation fees and monitoring fees for bonds versus equities. We thought about this long and hard and decided to have the same implementation fee for bonds and equities so that advisers and clients wouldn’t be biased one way or the other by fees.

I think if you looked at the average asset allocation of “advised retail” you would see high risk portfolios. Maybe I will sponsor a PhD investigation on this topic. I am sure everybody would be interested to see other people’s numbers. Our low cost strategy resonates with Mum and Dad - $650 million under management with no advertising, no seminars, no nothing.

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