[Weekly Wrap] More questions about Ross

This week saw more questions emerge about David Ross and the regulations that were supposed to protect consumers from dodgy financial services.

Friday, December 7th 2012, 10:01AM

by Niko Kloeten

We revealed this week that Ross never had to sit Standard Set C, regarded as the most demanding unit standard (and perhaps most relevant to his failings), because he's a chartered accountant.

It's hard to say if things would have been any different had he been required to sit this standard, but it doesn't do the credibility of the regulatory regime any good. It will be interesting to see what approach the Code Committee takes once the "sunset" period for those given exemptions from certain unit standards expires.

Will all these AFAs have to go back and do these standards in their entirety? One also wonders if the FMA will focus its monitoring on those with some of the attributes of Ross (operating a DIMS, no third-party custodian, exempted from Standard Set C etc).

And as if the financial adviser industry needed more damage to its reputation, it has emerged the FMA is investigating a number of other AFAs who invested their clients with Ross. As Brian Henry said, these advisers will likely be in a worse position than those who recommended finance companies, which at least had prospectuses, investment statements and third-party trustees.

On paper at least, the amount of money potentially lost in Ross Asset Management is up there with some of the biggest finance companies, even if much of the money never existed. If investors are left out of pocket they will no doubt go after their advisers and some cases could end up in court if they are unable to be resolved beforehand.

Also this week, the FSC announced it will probe the "viability" of the adviser distribution channel, to try and answer the question of how to get the services financial advisers provide to a much larger segment of the population.

This is an important issue not just due to New Zealand's chronic under-insurance but also due to the increasing importance of KiwiSaver and the fact that being in the wrong type of fund could make a huge difference to an investor's retirement outcome.

One problem that needs to be acknowledged is New Zealanders' low incomes. Regulations raise costs and prevent some of the sorts of innovations that could help New Zealanders get access to some sort of advice in a cost-effective manner. If advisers have to take four hours ticking all the boxes every time they give someone advice, then quite simply many people won't be able to afford that service. Banning commissions, as some countries have done, would also greatly reduce access to insurance advice.

A good example of how innovative advice solutions are now tied up in red tape is a KiwiSaver fund selection website that went back online recently after being taken down to be re-written in order to comply with the Financial Advisers Act. Naturally the word "recommend" is a big no-no and even suggesting that young people should probably invest in growth funds could fall foul of the regulations.

This brings up an interesting issue: by endeavouring to improve the quality of advice given to the minority of people who use investment advisers, have regulators actually made things worse for the majority who will still invest in things like KiwiSaver but without any help? I wonder how many people will go to such a site, look at the historical returns since KiwiSaver began and think conservative funds offer better returns than growth funds?

At the other end of the retirement savings spectrum there's the question of how to help retirees manage their decumulation process and there are problems with traditional products in this regard. Getting decumulation right is arguably more important and more difficult than actually saving for retirement because the margin for error is smaller: people can recover from savings mistakes if they work for 40-45 years but if something goes wrong during retirement it's much more difficult to recover. It's also difficult to predict how long we're going to live for so we need to err on the side of caution, particularly given the lack of an annuities market in New Zealand.

In insurance this week, Russell Hutchinson asks what "supermarket specials" insurance advisers offer their clients.

And finally, in mortgage news, the Reserve Bank has kept the OCR at 2.5% while indicating there's unlikely to be a further cut, particular if Auckland house prices keep rising. However, the bank would prefer to use other tools such as loan-to-value restrictions to curb any housing boom rather than hiking interest rates.

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

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Fund managers call for level playing field »

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