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Ultra-conservative advice approach may harm junior boards

Advisers’ concerns about their regulatory requirement to put their clients in “appropriate” investments may be constraining growth in junior boards, a report on the equity market suggests.

Friday, February 17th 2017, 6:00AM 3 Comments

by Susan Edmunds

Chapman Tripp this week released a report on the New Zealand equity capital markets, which said the drop in the number of NZX main board issuers seen in 2016 was likely to continue this year.

Partner Rachel Dunne said there were only three new IPOs last year and a lot of companies bypassed the NZX in favour of private sales or an overseas exchange.

She said that was likely to continue and become the “new normal”.

According to Dunne, both the NZAX and NZT markets had trouble developing a strong pipeline of new issuers.

That might lead the NZX to decide the New Zealand market was too small to sustain junior boards, especially with the early success of crowdfunding, which allows companies to raise money without a listing.

Dunne said the increased scrutiny from regulators on financial advisers was a double-edged sword. 

She said the expectation on advisers that they would accurately describe investment risk to clients and match their investments to their risk profile correctly led some  to take an overly cautious, conservative approach and bypass investments such as the NXT.

“If investment advisers think their rules mean they should only look at companies that are rock solid then the will put every investor in the NZX 10, Auckland Airport and the gentailers. It results in stagnating value boards. There needs to be a balance.”

A continued decline in the NZX would lead advisers to look overseas for investment opportunities, she said. “It’s so important for the New Zealand economy to have a strong capital market so KiwiSaver funds and the like can invest in New Zealand listed companies. It’s a bit of a vicious cycle.”

She said New Zealand invest seemed more risk averse than some, which led some specialised or growth companies to go straight to the ASX. “Our Australian neighbours are more willing to take a risk on early stage and tech companies that are not so well understood.”

Dunne said advisers still had a growing role to help people new to the market understand their investments.

Tags: equities investment

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Comments from our readers

On 17 February 2017 at 7:30 am Pragmatic said:
Most advisors are acutely aware of the fine line between minimizing investment risk and playing it too safe. Unfortunately, the same can’t be said for direct investors (just look at the percentage of Kiwisaver monies that are currently residing in conservative options).

The decades of complacency and relying upon historic market conditions to continue are behind us (think CalPERS 10-year outlook of 6.2% from passive investing to help support their underfunded scheme!!!), with cautious routes in building investment portfolios requiring a rethink.
The elephant in the room is not the direct lump sum investor, it’s the ignorant KiwiSaver accumulator. Making certain adjustments to the mix of investment options (…and yes – being sensitive to fees) could mean the difference between a savings shortfall or a secure retirement.
On 17 February 2017 at 8:20 am AFA Muggins said:
"Dunne said the increases scrutiny from regulators on financial advisers was a double-edged sword............led some to take an overly cautious, conservative approach and bypass investments such as the NXT."

Really? The light switch has gone on?Maybe Ms Dunne would like to come and work under the current regulatory regime in investment advice to get a taste of the coal face. Maybe she would like to talk to the FMA as well.
On 17 February 2017 at 9:56 am Brent Sheather said:
In my opinion these comments are at best naive and at worst describe how the big end of town consistently seeks to exploit retail investors. Anyone who knows how the industry works knows that investment bankers need no encouragement to ignore portfolio theory and recommend high risk, undiversified portfolios to their retail clients so as to fulfil their obligations to their more important clients, the promoters of the IPO. The FMA stresses that AFAs must put client’s interest first but in the case of an IPO the organisation has two clients and inevitably one is put “further first” than the other.

Ms Dunne got one thing right and that is that “advisors still had a growing role to help people new to the market understand their investments”. That obviously means, for retail investors who can’t afford mistakes, highly diversified portfolios with low fees. It certainly does not mean speculating on the latest Feltex, Serko or Wynyard disaster. Is Ms Dunne not aware that IPOs underperform in the longer term relative to the broad index? There is a huge body of research supporting this fact. That is not surprising given the information asymmetry which exists and the fees. Any sensible advice to market weight, i.e. ignore, most small cap disasters is not “ultra conservative”. It’s just standard portfolio theory as embraced by professional investors around the world. Incidentally a reasonable person would also consider such advice as “putting the client’s interests first”.

The dynamics of vertically integrated organisations are such that investment banking dominates retail banking and that is why the world needs a return to Glass Steagall.

If Ms Dunne seriously wants to improve the fortunes of the NZX then it needs to be “safe to get back into the water”. The best place to start is modern portfolio theory and sensible, unconflicted, advice. The world has moved on from the 1980s.

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