Ross exposes hole in financial adviser law
The SFO investigation into Ross Asset Management has highlighted an apparent gap in legislation that allows financial advisers to manage their clients’ money with relatively little oversight.
Tuesday, November 20th 2012, 7:03AM 
26 Comments
Ross Asset Management (in receivership), owned by Authorised Financial Adviser David Ross, has been described in the media as a boutique investment firm.
However, it appears to have been operating as an authorised financial adviser and a discretionary investment management service (referred to as a DIMS), according to receiver PWC’s initial report.
Minter Ellison Rudd Watts partner Lloyd Kavanagh said when it comes to looking after client money the regulatory requirements for fund managers are “more robust”, than for financial advisers operating a DIMS.
“A fund manager is what I think of as a manager of unit trusts or a KiwiSaver scheme and in both those cases the law requires there to be an independent licensed trustee responsible for the holding of assets and for supervising the conduct of the manager. It’s quite a robust structure, it’s fair to say.”
And while the Financial Advisers Act contains a lot of requirements around advisers gaining authorisation, the legislation contains only a “relatively brief” section on “broker conduct” dealing with how financial advisers (including those providing a DIMS) handle client funds, he said.
“The FMA has the power to give directions but this is a very lightly regulated activity; there’s no requirement to have a separate custodian or for the custodian to be licensed. And there is no requirement for client funds audit.”
And Kavanagh said the issue isn’t addressed in the Financial Markets Conduct Bill currently making its way through Parliament.
“There are a whole raft of new licensing requirements including for fund managers and changes to the regime for DIMS, but there are still no licensing requirements for holders of the assets i.e. custodians and nominees.”
Pathfinder’s John Berry, convenor of the Boutique Fund Manager’s Forum, said although Ross apparently operated as a DIMS he was concerned the general public wouldn’t grasp the distinction and boutiques would be “tarred with the same brush”.
“I don’t know whether it was the media or the FMA who said it first [calling Ross a boutique] but it’s really unfortunate for boutique fund managers that that’s the terminology being used.”
Berry has compiled a due diligence checklist financial advisers can run on behalf of clients, which includes asking whether the boutique has a “public face” in charge.
“Ross Asset Management (RAM) did not appear to have a website. After 3 years of marketing in Wellington we did not know RAM existed,” he said.
He also recommended searching managers on the Companies Office and checking their most recent financial statements, annual return and prospectus are filed.
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Comments from our readers
On 20 November 2012 at 8:15 am Brian said:
When considering investment into a boutique, advisers also need to be aware of the financial viability of some of these entities, and the composition of their funds (ie: a significant mandate can expose the boutique to a variety of risks). On 20 November 2012 at 9:00 am Anon said:
Quite right John - RAM was not a boutique fund manager.
Among the many, many red flags around the firm were: no website, no public profile at all (Linked In, Facebook etc - and isn't it telling that 3 weeks later no media even has a photo of the guy?), no audited accounts, the accountant RAM used was based in the same office, the sole director of the 'nominee' company used by RAM was David Ross.
TO me there are several issues raised here:
1. Investor education. More needs to be done to educate investors about the right questions to ask before investing with any organisation. All of us in the industry need to step up and work towards this.
2. What due diligence does the FMA do when awarding the AFA designation, other than see whether someone can pass a few exams?
3. Anyone offering DIMS needs to be subject to the same oversight (independent custody and pricing, regular audits) as fund managers.
4. Custodians/nominees need to be regulated. It's crazy that the one organisation that actually holds client assets is the only one not subject to regulation!
On 20 November 2012 at 9:16 am Ally said:
AFAs who operate a DIM service would have had to obtain Standard Set C as part of their authorisation process. That involved submitting client files to ETITO for assessment. Of course, some were let in thru the back door e.g. stock brokers. Presumably David Ross got in via an exemption as well. On 20 November 2012 at 9:30 am Anon said:
Ally,
Clearly, obtaining Standard Set C is not exactly going to stop a David Ross. Anybody can present a few client files (which can easily be invented of course) to ETITO which tick all the boxes in terms of process.
Maybe Ross was grandfathered in but let's face it, there are plenty of AFAs out there who were happily stuffing their client portfolios with Bridgecorp, Capital & Merchant, MFS, ING DYF etc etc. a few years ago and yet still got the AFA designation and continue to operate.
The next regulatory step should be that at a minimum, anyone offering DIMS has to have independent custody of assets and independent audits by a reputable organisation.
On 20 November 2012 at 9:47 am John, Pathfinder said:
If you are interested in seeing our short checklist for financial advisers who are considering investing client money with a fund manager (particularly a boutique) then please follow this link -
http://www.pfam.co.nz/documents/Boutiquemanagerchecklist.pdf
Most is common sense stuff but process is key for AFAs engaging a fund manager - i.e. you want to be able to point to having done sufficient due diligence....
On 20 November 2012 at 11:23 am Anon said:
...and what's more, some AFAs were recommending Ross Asset Management to their clients!! On 20 November 2012 at 12:27 pm Craig Simpson (Dentice Simpson Consulting Ltd) said:
Standard Set C was not a requirement for those who were already CFP's - they only had to do Set B which you can pass with very little study at all.
In the old days if my memory serves me correctly you could be "grand-fathered" into being a CFP.
On 20 November 2012 at 12:29 pm Mac said:
De ja vu. Warren Green, an investment adviser from Nelson had also created a ponzi scheme (and was jailed)that blew $1.5m of clients' funds. You would have thought that the FMA's surveillance team would have targeted their audits at the investment advisers who directly invested client funds. On 20 November 2012 at 12:44 pm Ally said:
I doubt any AFAs had recommended RAM since regulation came in. Most advisers had never heard of him - although anyone well connected in Wellington knew of him. And while, strictly speaking, he was offering a DIM service, in reality he was fund manager. On 20 November 2012 at 1:09 pm Anon said:
Hi Ally, actually there were some AFAs recommending Ross to their clients post-regulation. And for those who did so pre-regulation, shouldn't they have revisited this recommendation?
And no, Ross was NOT a fund manager. A fund manager would have one portfolio into which clients invest, not individually managed accounts for every client with different holdings in each one.
At the risk of repeating what John Berry and Lloyd Kavanagh say above, in law a fund manager has to have an independent licensed trustee responsible for the holding of assets and for supervising the conduct of the manager.
On 20 November 2012 at 1:39 pm Anon said:
Ally - RAM is not a fund manager (boutique or otherwise).
RAM is an Authorised Financial Adviser offering a Discretionary Investment Management Service.
RAM's business model is much the same as most adviser groups, with the exception that they used his own in-house wrap platform (with their own custody/nominee arrangements!). RAM (Ross) might have pretended he was a fund manager to his clients, but in reality he was an adviser.
As Lloyd K says in the article “A fund manager is what I think of as a manager of unit trusts or a KiwiSaver scheme and in both those cases the law requires there to be an independent licensed trustee responsible for the holding of assets and for supervising the conduct of the manager. It’s quite a robust structure, it’s fair to say.”
On 20 November 2012 at 2:21 pm Majella said:
@ Anon - indeed. It will be most interesting to hear the selection criteria applied to RAM's inclusion (and what commission it was [or was promising?] to pay). This is a much more egregious error than even the worst Bridgecorp recommendations (such as one I heard about , a $2m farm sale proceeds 1n a 2 year Debenture) On 20 November 2012 at 6:17 pm Ally said:
Anon's attempt to tar all AFAs offering DIM with David Ross's brush is disingenuous. Very few AFA/DIMs are "stock pickers" - certainly not in offshore mining stocks. Rather they carry out asset allocation, fund selection and maybe a bit of NZ fixed interest. And the only significant "feeder" for RAM was apparently based in Queenstown (what a coincidence: that's where his brother is a Real Estate agent). Disclaimer: it may be just that: a coincidence ....... On 20 November 2012 at 7:16 pm Forthright said:
The majority of AFAs would use a platform such as Spicers, Aegis, One Answer (sorry if I left yours of the list) to administer their discretionary investment managed clients mandates. Therefore not a chance of the RAM accident happening in that space.
However I am sure we all know of AFAs and for that matter non-AFAs who manage discretionary mandates in a similar fashion to RAM. The trouble the FMA have is they just don’t know the scope of the discretionary mandates which exist out in NZ Adviser world.
The FMA know exactly how I operate as I passed standard set C and the assessor (bless his soul) just happened to be a retired Adviser who had 10 years more experience than me and I have been around the industry for 20 years. I was impressed with the Assessor’s industry knowledge and in-depth investigation into whether I would pass muster as an AFA. If I had a RAM type business I seriously doubt the Assessor would have given me my AFA rifle.
If an Adviser managed to bypass the standard set C scrutiny then I can understand how a RAM scenario can occur. I just hope no more of the AFA and non-AFAs non-standard discretionary mandates implode like RAM.
On 21 November 2012 at 11:01 am BTW said:
@ Anon 1.39pm
You need to get a better understanding on what you're reading. According to your interpretation a fund manager that's not legal, is by definition not a fund manager. In other words, there's no such thing as an illegal fund manager!
As regards your assertion that the operation wasn’t a managed fund, I think its too early to determine that. However, given that the client assets were pooled into one broking account(s) it would be hard to argue that they were held individually – so a “fund” is the most likely finding – particularly as it seems the individual reporting was largely fictitious (so it would be impossible to attribute those remaining assets as being held to any one individual investor).
Neither are you right to dismiss what the investors thought they were investing in, particularly as one of the entities was called “Ross Unit Trusts Management Ltd”. If it quacks etc – and the courts will take that into account.
Ultimately of course it’s not important whether he ran it as individual holdings or as a pooled fund – it seems the business was largely fictitious and so he could have run it either way.
On 21 November 2012 at 1:59 pm Lone Ranger said:
I would like to know how the Ross situation occurred on Sherriff Hughes watch. The baddy rode into town tied his horse up outside the Sherriff’s office and robbed the bank and rode out of town without the Sherriff realising were the steaming pile of strawberry manure under his hitching rail came from.
RAM looked like a Ponzi, walked like a Ponzi and quaked like a Ponzi. Why were the FMA asleep at the reins?
There were so many clues, consistent 30%+ per annum returns, only the tooth fairy is that good a fund manager. Perhaps the FMA has now found the ancient IBM 1980’s server hidden in the RAM companies Terrace office. That last statement is pure conjecture, but like Madoff’s IBM server the RAM server must have also produced thousands of pages of Ninja statements. Nothing cast from the statements but a shadow like a Ninja.
As time goes by and the fog starts to lift around RAM affairs, I would imagine a number of RAM investors will be talking to their legal Advisers about why the FMA Sherriff wasn’t in the saddle making sure NZ biggest Ponzi was not occurring just down the street from the FMA Wellington office.
On 21 November 2012 at 2:20 pm Anon said:
I don't want keep this going but it doesn't matter what Ross called himself or what his clients thought he was. He was not a fund manager, but an AFA offering a DIMS. The closest analogy is share brokers who do the same thing - essentially investing in direct shares/bonds with a nominee holding the assets. While they might have 'model portfolios' many clients will hold different stocks/bonds.
What Ross called his companies is not relevant. There are quite a few AFAs out there offering DIMS under names ending 'Wealth Management', 'Portfolio Management' etc. but they're not fund managers.
Ross had 12 or so different companies and Ross Unit Trusts Management has been shown to hold only $58K assets for clients. Most of the assets were 'invested' by Bevis Marks Corporation which doesn't sound like a fund manager to me.
However Ross portrayed the business, all proper fund managers have a prospectus, investment statement, independent custodian and trustee etc etc.
On 21 November 2012 at 7:36 pm Anon @ 1.39 said:
Hi BTW.
I suggest that if you don't think that RAM was an Authorised Financial Adviser offering a Discretionary Investment Service, then you contact PWC and tell them they have got it wrong.
On 22 November 2012 at 12:58 pm Brian said:
Whilst the definitions appear to indicate that Ross was not a Fund Manager, he did in fact manage funds (on a discretionary basis) on behalf of investors. Anon can continue to bang on around the semantics of whether this is the correct label to use, but the reality is that consumers believed that Ross Unit Trusts Management et al was a boutique fund manager with [dubious] abilities.
We can argue this point within the industry, or we can put pressure on the industry bodies (including the Regulator) to ensure that the correct description does not infect an already cautious industry sentiment. A Peace-meal description to investors from boutique managers provides limited comfort for those who are awaiting some signals from the industry. At the same time, perhaps the Regulator instill some confidence around where they were in their investigations of Ross.
On 22 November 2012 at 1:16 pm brent sheather said:
I still cant believe this happened if he passed the ethics exam. On 22 November 2012 at 1:46 pm BTW said:
Hi Anon @ 1.39,
I would, except they’re not wrong. It’s your reading and interpretation of their report that is wrong (with respect).
First, you’re confusing RAM with David Ross personally. The report makes it clear that David is the AFA, not RAM. I don’t think in fact that it’s legally possible for RAM as a corporate entity to be an AFA (although that might have changed).
Second, accepting that RAM was offering DIMS services (which they clearly were – you don’t have to be an AFA to offer DIMS), that doesn’t mean that it or other members of the Ross Group weren’t also acting as fund managers. The two are not exclusive.
Lastly, in terms of your citing of the PWC report, and the question of whether RAM were a fund manager, you need to read pg 5 of the report where PWC state,…. “In our opinion the Investment Fund managed by the Ross Group is……. Furthermore the value of the Investment Fund’s assets which have been identified ….". Further on pg 8, where they describe RAM as…. “Key trading entity – fund and investment manager, nominee company and possibly custodial trustee.”
While I don’t think their preliminary observations are determinative of the matter (and they do not claim them to be so) I think it safe to conclude from these comments that they consider at least part of the business as fund management.
On 22 November 2012 at 3:42 pm Anon said:
Re BTW @1.46pm - let's take another quote straight from page 11 of the PwC report then:
We understand that David Ross was an Authorised Financial
Advisor and through the Ross Group offered Discretionary
Investment Management Services (“DIMS”) as defined by the
Financial Advisors Act 2008.
On 22 November 2012 at 4:10 pm BTW said:
To: Anon @ 3.42
That's not "another" quote. That's the section I was referring to in my second paragraph to establish that PWC stated that DR was the AFA - not RAM.
On 22 November 2012 at 4:33 pm Mark Jory said:
We need to remember that the AFA designation only proves that you have the knowledge, skill and training to meet the minimum standards required.
It is no guarantee that you will in fact operate your business to those standards!
A cook is a crook regardless of their income, professional qualifications.
In the last decade we've some some of the worst frauds committed by beneficiaries, lawyers, accountants, office administrators and financial Advisers.
As one person said in the documentary the other night about Stephen Versalko of ASB. Most people think of him as a Financial Adviser who ripped off his clients, but he was really an employee who ripped off his employer.
On 22 November 2012 at 5:46 pm Stan Charles said:
Sweet I have added DIMS to my list of things RFA, AFA,QFE,CLU,CFP,IFA.
And still folks lose their savings with little recourse.
And this is why the banks will win, because at least they give the money back to their clients.
On 23 November 2012 at 7:48 pm Anon @1.39 said:
There are multiple Anons at work here. The key thing we have in common is we are right on most points!
I disagree Ally. The majority of advisers are playing at being stock pickers (at least the majority by FUM). If you want evidence, flick open any listed company's annual report. You find that big shareholders include Custody Service Limited (Craigs IP), Private Nominees (ANZ Private Banking), FNZ Nominees (FNZ Wrap), and Investment Custodial Services Limited (Aegis). Don't be fooled in thinking that advisers aren't recommending direct securities to their clients, and acting as stock pickers.
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