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Portfolios, not products the key: James

There are calls for more oversight of advisers' portfolio construction.

Wednesday, August 26th 2015, 6:00AM 3 Comments

by Susan Edmunds

Richard James, chief executive of NZ Funds, said New Zealand's regulatory focus needed to shift away from scrutiny of the suitability of individual products to look at portfolios in their entirety.

“Generally speaking, most regulation is focused at a product level but most of us don’t hold one product, we might hold 10. What actually matters to people is that the assets they own in their portfolio are sensible for what they are up to, their age and risk profile. It might be quite logical to have a conservative investor with one component of their portfolio quite aggressive. What’s important is the overall portfolio.”

He said there should be more oversight of the portfolios of investors who were saving for retirement or relying on savings for retirement income.

“To me, the most readily apparent example of inappropriate portfolio construction among New Zealand retirement investors is the large numbers who have invested the vast majority of their financial assets in the domestic market. The risk of a significant negative market event in the small, concentrated domestic market at some point during the 20-50 year investing horizon of these investors is unacceptably high, and simple to mitigate.”

James said the approach would not be very different from what was expected of a manager and could be regulated by the FMA in a similar way.

Fund managers are expected to have an outline of their asset allocation for a balanced or a growth portfolio and internal controls to ensure they stayed within those guidelines.

“The FMA is looking at offer documents and then at actual portfolio allocation and saying 'are these things consistent?' This is only applying the same thinking at a financial advisory level.”

He said it was something most advisers would likely be willing to accept. “It’s how most advisers think anyway. The FMA idea is built around investors going and buying a single product. But the vast majority are advised in some way.”

Tags: financial advisers Richard James

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Comments from our readers

On 26 August 2015 at 7:31 am Pragmatic said:
More common sense from Richard... although in reality there remain many industry participants who continue to believe in misguided notions such as Modern Portfolio Theory and Efficient Markets...
On 26 August 2015 at 9:47 am NormanStacey said:
Mr James is of course correct - but surely Advisors and authorities have already been doing this. Proper practice was defined at least 20 years ago, (Andrew S Butler, 1995),
"decisions as to which investment vehicles ought to be included in a portfolio cannot be made in isolation; they must be made in light of the nature of the other elements of the portfolio."
On 26 August 2015 at 2:14 pm traveller said:
Good work Mr James. If FMA people don't understand this they should go back to school or dig ditches.

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