[Weekly Wrap] Loophole needs closing

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The story I found most interesting this week was about how a hole in New Zealand financial law dramatically reduces the level of oversight on businesses like Ross Asset Management.

Friday, November 23rd 2012, 9:22AM 2 Comments

by Niko Kloeten

The acronym DIMS (discretionary investment management service) has come under scrutiny because this is the way RAM operated (with David Ross an AFA).  Those offering a DIMS service have much weaker regulatory requirements than fund managers, who have to issue a prospectus, appoint an independent trustee etc.  It is staggering that someone who supposedly had $450 million under management doesn't have to have any external supervision while boutique fund managers with $25 million in funds have to jump through all the hoops.  This is a classic example of of regulators leaving a loophole big enough to drive a bus through. 

But despite PwC describing the business as a DIMS it keeps being called a fund manager by various media and this has forced legitimate managers to defend themselves.  Devon Funds Management is named in the story but it isn't the only one that has sent notes to advisers re-assuring clients and explaining the differences between their business and Ross.  Harbour Asset Management has put out something similar while Pathfinder has created a checklist for assessing boutique funds.  It must be infuriating for fund managers who comply with all their regulatory requirements to have their reputations damaged by someone who didn't even operate the same business model.

It will be interesting to see what comes of the SFO investigation into Ross, which was announced this week.  Meanwhile, Ross is out of hospital and promising to co-operate fully with inquiries.  The investigation has clearly taken an emotional toll on Ross, although investors looking at getting 2.3c in the dollar back might not feel much sympathy.  One thing I've noticed about this case is there doesn't seem to be the sort of blind faith seen from supporters of Allan Hubbard when South Canterbury Finance and other investments fell over.  Perhaps Ross needed to drive a yellow VW?

In other stories this week, Grosvenor's chief executive Allan Yeo has labelled banks the "number one enemy" of financial advisers.  A comment I found interesting was his view advisers should see each other as allies against the banks rather than competitors.  Bank bashing is a favourite pastime of some in the advice industry but others see banks as playing an important role, even if some of their sales methods are somewhat suspect.  For instance, Norman Stacey says the banks are the biggest source of new advisers, and a number of these advisers will one day strike it out on their own. 

As if advisers don't have enough to worry about, they now have to be careful what keywords they use.  The company mentioned in the story is Pinnacle Life but I'd be interested to hear from any advisers who have had similar legal letters from other product providers. 

And advisers looking at alternative investments will have a harder time proving their suitability for clients.  Suitability is one area the FMA is really focusing on and one in which AFAs appear to be struggling.  Some might choose to ignore alternatives altogether, particularly if they have conservative clients.

Amongst the new appointments this week have have Kiwibank announcing who will take over Gareth Morgan's investment role at GMI and plenty of jobs advertised. Full details in the People section.

In insurance this week we looked at when a life policy really expires and found an insurance website that closed after generating more leads than the adviser could handle.

And finally, in mortgage news, home loan lending has boosted bank stability while BNZ's chief executive has criticised the way bank profits are reported by the media.

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

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