[Weekly Wrap] Where's the money gone?

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The big news this week was the massive shortfall of funds uncovered at Ross Asset Management, in what receivers suspect could be a giant "ponzi" scheme.

Friday, November 16th 2012, 9:14AM 3 Comments

by Niko Kloeten

Receivers John Fisk and David Bridgman of PWC have found only $10 million of funds, despite client accounts showing just under $450 million invested on behalf of 900 clients.  If this did turn out to be a ponzi scheme (and receivers haven't made their minds up yet) it would be the largest in New Zealand history and would dwarf the amounts involved in recent fraud convictions of Jacqui Bradley ($15 million) and Evan Paul Cherry ($5 million).  Ross is still in hospital, reportedly with head injuries.

The sad saga is a real set back for the advisory and funds management world as it embraces regulation and strives to increase its public perception. One of the things we have been told so many times is that the government regulated the sector to increase investor confidence.

The Ross saga raises many questions including why this "scheme" wasn't picked up earlier by regulators.  For instance, Ross managed to become an authorised financial adviser (AFA), apparently without any alarm bells going off at the FMA.  All the nitpicking about advisers' paperwork looks pretty insignificant compared to what looks like a $400 million-plus fraud. 

But is it fair or realistic to expect regulators to stop every situation like this?  Perhaps more effort needs to be put into investor literacy?  If anyone claims to be able to achieve returns of 30% per year this should be an instant warning sign that something is fishy.

On a totally different note AMP has found itself in the middle of a squabble between two advisers over a commission book.   This story attracted a number of comments critical of advisers who align themselves to one provider, and of the conduct of the providers themselves.  This issue is unlikely to go away given the QFE system brought in under the regulatory regime for advisers encourages this sort of arrangement. 

And advisers have been warned to be careful what they write on client file notes, otherwise their comments could come back to haunt them in more ways than one.  Some advisers may think this is stating the obvious, but there are numerous examples in other industries of people getting themselves in trouble by writing comments about a person without thinking about whether that person would end up seeing them.

Advisers should also brush up on responsible investment, if they want to be able to provide an adequate level of service to clients who have an interest in investing ethically.  New Zealand advisers, like their Aussie counterparts have been somewhat skeptical of RI, which many people see as being the realm of hippies and tree-huggers.  Indeed, these terms were used a number of times at yesterday's conference to emphasise that RI is not just for greenies.

The minimum qualification for Authorised Financial Advisers is set to stay where it is, a decision that has been welcomed by the PAA's Jenny Campbell, who said it was more important to improve certain aspects of the current qualification.  It seems sensible to leave it as level 5 for now, particularly given all the other issues AFAs are currently grappling with including the new anti-money laundering requirements.

Advisers have also been asked for help with the government's review of the default KiwiSaver schemes.  Advisers have a lot to offer as unlike those in the government they have first-hand knowledge of investor behaviour.  One option being considered is life-cycle funds, which according to one expert are the next-best thing to financial advice for default investors.  And finally, in other KiwiSaver news, growth funds are performing strongly thanks to buoyant equity markets.

In our People news we have new appointments at Goldridge's investment management firm and Grant Thornton. All the latest appointments are in our People section.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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