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Index submission criticised

Questions are being raised about how key industry figures balance potential conflicts of interest, after the chairman of the Code Committee made a controversial submission on the way fund managers are required to describe their fees.

Wednesday, March 9th 2016, 6:00AM 8 Comments

by Susan Edmunds

The Financial Markets Authority has released an information sheet explaining how it expects fund managers to disclose performance-based fees to investors.

It wants it made clear that the absence of a high-water mark can mean investors pay twice for the same performance and for performance fees to be tied to an “appropriate” index.

David Ireland and Catriona Grover of Kensington Swan, made a submission saying it was incorrect for FMA to describe such benchmarks as “inappropriate”.

“This is a commercial matter, and should not form part of FMA’s regulatory guidance. Provided the hurdle rate is clearly identified, and where it differs from the appropriate market performance measure that distinction is clearly and effectively disclosed, that should be the end of the matter. Hurdle rates that must be surpassed before a performance fee is charged may differ from the relevant market index measure for a number of commercial or marketing-related reasons, many of which may be reasonable.”

Other submitters, such as Milford Asset Management, also took issue with the FMA's guidance.

But adviser Brent Sheather said it was a conflict of interest for Ireland to take the stance.

He said Ireland told advisers, as chair of the Code Committee, that they must always put their clients first.

“To tell financial advisers they have got to put the clients’ interests first and at the same time promote a definition that is not good for clients, that’s a real conflict,” he said.

“If performance fees with appropriate benchmarks aren't viewed as attractive by the likes of the NZ Super Fund then performance fees with inappropriate benchmarks almost certainly should not be inflicted on retail investors.

“Therefore financial advisers who are required to put client's interest first should not be recommending funds with unfair performance fees. In his job at the Code Committee he is batting for retail investors but in his submission to the FMA on performance fees he appears to be reciting the same arguments as used by fund managers.”

Another industry commentator said it was an example of the balance that participants had to strike when they had regulatory roles but also worked in the industry and needed to represent their clients.

Ireland rejected any suggestion of a conflict.

“He is entitled to his views, and will no doubt continue to share them with the world. I remain unconvinced he has actually read the full submission we made to place the sentence he continues to misquote in its proper context, or understood the point being made. It is unfortunate he has placed his own spin on a submission piece to mount a personal attack, but at least he is consistent.”

Tags: David Ireland FMA

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Comments from our readers

On 9 March 2016 at 10:23 am R1 said:
It is a tough call to say Brent Sheather is making a personal attack just because an individual makes comments that appear in conflict with their multiple roles. The way I see it he is pointing out a personal conflict of interest type issue and good on him for doing so; most in the industry are not prepared to do this and so we look complicit in not putting clients interests first. The fact is that many people in senior positions frequently wear two or more hats. To clarify Mr Ireland position a question that should be asked for the record, is: does the firm Mr Ireland works for have any corporate clients that charge unfair performance fees?
On 9 March 2016 at 1:29 pm winstonkey said:
"controversial submission" is a very polite term.

Anyone with teenage children will understand the concept - "just because something is legal doesn't make it the right thing to do."

Inappropriate benchmarks should be loudly described as such, just to make it clear and obvious to investors that a particular fund manager is putting their own interests in front of the investor. Legal parsing, pinhead dancing and minimum effort disclosure don't make inappropriate benchmarks any less inappropriate.

Good on the FMA for publishing their recent discussion paper on this very issue. This type of legal maneuvering and arbitrage against clients is a bad look for the industry, and yet another outlier versus best practice in more mature markets overseas.
On 11 March 2016 at 3:50 pm Graeme Tee said:
The silence is deafening from Mr Ireland on the question of whether his firm acts for a fund manager that charges unfair performance fees. Perhaps I can shed some light – it appears that Kensington Swan act for Aspiring Asset Management as per a Trust Deed dated 17 September 2015.

I am not saying Mr Ireland acts for Aspiring or that Aspiring charge unfair performance fees. All I’m saying is the Trust Deed is written on Kensington Swan letterhead.

After all it could have been their Auckland office acting for Aspiring.
On 11 March 2016 at 5:50 pm Pragmatic said:
In the spirit of full disclosure, Graeme Tee works for Brent Sheather
On 14 March 2016 at 9:55 am Brent Sheather said:
In the spirit of even fuller disclosure Graeme Tee has not worked for Brent Sheather since about 1999 and even then some would say he didn’t work for me then either. Since 1999 Mr Tee has worked with Mr Sheather, as a co-venturer.

Incidentally it is a little ironic that someone should talk about “the spirit of full disclosure” but not disclose his/her name.

Brent Sheather
On 14 March 2016 at 12:54 pm Graeme Tee said:
Hi Pragmatic

I’m not sure what sort of conflict of interest you might be thinking of to require disclosure of who I work with. I’ve been working in the industry for nearly 30 years now, a quick google search will show my history.

But seeing as it is something you think is important, should you disclose who you work for (or with)?
On 14 March 2016 at 9:29 pm gaman AFA said:
Good luck with that Graeme.

Much like the iconic drink from the 70's, with Pragmatic you get the disclosure you disclose when you're not really disclosing a disclosure.
On 15 March 2016 at 10:47 am Brent Sheather said:
It is ironic that Mr Ireland hasn’t responded to R1’s question as to whether Kensington Swan acts for fund managers that charge performance fees. I’m sure the Code which Mr Ireland authored advocates full disclosure but it appears the same rules don’t apply to lawyers or Code Committee members. In my opinion this lack of disclosure needs to be cleaned up. It is a funny old world.

Brent Sheather

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