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Diversified battle continues

The sale of Diversified Investment Strategies Ltd (DISL) occurred for lower than the market rate and with greater risk for the vendors, according to an industry expert.

Friday, July 15th 2016, 7:00AM

by Miriam Bell

Financial advice firm DISL closed down after its funds were sold to Fisher Funds Management and one of its directors, Vicky Watson, took up a job with Fisher Funds.

Watson and the firm’s other director, Norman Stacey, disagree on the circumstances surrounding the sale and the resulting litigation means they are battling it out at the High Court in Auckland this week.

Stacey alleges he was pressured into selling DISL significantly under market value and under terms not acceptable to him and that information relating to Watson’s job offer was not disclosed to him.

He has been under examination for most of the week, but yesterday two industry experts took the stand to provide evidence on sales values of financial advice businesses and the remuneration of financial advisers.

The first witness was Strategi Ltd managing director David Greenslade.

In his evidence, he said there is no standard benchmark for sales of financial advice businesses in New Zealand and it can be complicated to work out values.

In the case of Diversified’s funds, there were two different businesses – DISL and Diversified Wealth Management Limited (DWML).

Normally, two such businesses could be split up and sold, but DISL and DWML were closely linked with, for example, the same shareholders and overheads.

In Greenslade’s view, the price the two businesses were sold for was lower than the industry average and came with additional risk to the vendors that was unusual given the discounted price.

The risk was that existing clients might not want the changeover and would instead transfer to another fund which would, ultimately, translate to a lower payment overall.

However, Greenslade said DISL’s directors agreed to the sale because they didn’t take adequate advice and ended up following only one solution.

There were several other options – besides selling both DWML and DISL to Fisher Funds – that they could have pursued, he said.

“The vendors opted for the sale to Fisher Funds to early. They didn’t get sufficient advice and they didn’t allow themselves long enough to explore other, better options.”

Fisher Funds are experienced in the acquisition of FUM and were likely to have undertaken comprehensive due diligence on DWML and DISL and their revenue streams, Greenslade said.

In negotiations a purchaser rarely puts their best offer up front yet, in this case, there doesn’t seem to have been any serious counter-offer to the initial offer, he continued.

This meant the negotiations were not well handled by Stacey and Watson – which was probably due to their strained relationship and a lack of trust.

Greenslade said the lack of trust was likely to have been the reason Watson did not disclose information relating to her job offer from Fisher Funds to Stacey.

Stacey alleges that this employment information, which included Watson’s salary rate and a “buy back clause” on her clients, meant Watson was unwilling to explore other options beyond the sale of Fisher Funds.

In Greenslade’s view, the salary offer to Watson was on the high side, in terms of market standards, and considerably above what she received at DISL.

He also thought the “buy back clause” was unusual in this type of transaction.

For this reason, it was not hard to see why Stacey might question whether Watson was acting in the best interests of DISL, he said.

The second witness was insurance industry veteran Ralph Stewart who provided evidence on the market value of financial advice businesses and market salaries for financial advisers.

For the defence, Watson’s lawyer Jesse Wilson examined Greenslade and Stewart on how sales values and remuneration levels were arrived at and measured.

When it came to Watson’s salary offer, Wilson said it was likely to acknowledge the experience and benefits that Watson would bring to Fisher Funds.

The defence will be presenting its case over the next couple of days, with the hearing expected to end on Monday.

Tags: Disclosure disputes funds management Strategi

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  • Harking back to the old days
    “Tactical move by CIGNA and looks like they have a lot of bench strength now in sales, underwriting and product / pricing...”
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    “Never happen. The Greens are such an aspirational bunch. Must all the weed. They 'want' all sorts of unlikely things...”
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