Concern DIMS rules may force advisers out

Murray, Aegis is sophisticated. The limits of say 5% or 10% could easily be set up on Aegis so no "rule ducking" could occur

In terms of a return to the dark ages, I calculate that for all clients to sign off all transactions - 500 to 1,000 letters pa - would add 50 days pa to my work load

Can't say that excites me

Clearly the FMA's intent is to have every DIMS provider classified, effectively, as a fund manager. AFAs offering DIMS should do so only for wholesale clients (owning financial products worth $1 million + under the new regulations). The FMA will have fewer powers to hassle them.......As for wraps/platform, they will want to cover themselves by having clients sign off on every transaction. Clients will not be happy with the extra paper work

Ally if you think that only offering DIMS to wholesale clients gives FMA fewer powers to "Hassle" AFAs then you're way off the mark.

The new FMC Act extends the wholesale definition to $5 million of Net assets per entity and the requirements for an AFA (or anybody for that matter) to correctly classify clients as "wholesale" is not as straight forward as you may imagine. The whole DIMS issue I believe will be the major issue facing AFAs this year.

clearly many advisers - and perhaps the FMA too - do not understand Aegis

You just cannot run a Ponzi scheme in Aegis

You cannot pay out clients money to anyone but the (carefully verified by Aegis) clients bank account

Aegis will usually be satisfied if the client signs the authority to allow the adviser to rebalance e.g. to a maximum of 10% of the portfolio value

Aegis are not fund managers either

Ally is right about one thing though - the clients will not be happy about screeds of paperwork to sign

They will grizzle and say "isn't this what I am paying you - the adviser - to do" ?

Not too mention the delays when clients are away as they often are - meanwhile markets might have risen - hence the letter for them to sign - to rebalance to take profits - but have fallen again by the time the client responds - opportunity lost

Gavin, it seems you are involved with a "Compliance" business. I suggest, therefore, that you get up to speed with the Financial Markets Conduct Act.

A wholesale investor will be a person or entity who has *either* $5 million in net assets or $1 million in financial products. These changes will be incorporated into the Financial Advisors Act. Note that "persons" will eligible to become wholesale investors.

At the moment it is only "entities" i.e. trusts and companies. So there will be a lot more wholesale investors. And AFAs will not need to be licenced to provide DIMS to wholesale clients. In fact there will be no changes at all. The FMA will only be able to check that the AFA is acting competently etc etc

Sorry guys but the FMA gets the thumbs up from me. Ally, I think the FMA should classify many DIMS providers as fund managers. They certainly think they're fund managers promoting their value-add as "superior stock and managed fund selection". In reality value is lost in many cases.

A direct equity and fixed interest portfolio I recently came across with a client was a train wreck. The advisers ego was put well before the clients needs.

Therefore, it's not the FMA preventing a future Ponzi scheme but an expectation that those advisers who think they're the next Warren Buffett have professional systems in place to protect their clients.

Alan. You have confused me. The article says that the following is not DIMS: "Rebalancing scenarios where the adviser can only rebalance a portfolio back to the original allocation and the client has already agreed to all decisions about which products to buy and sell."

You have said that: "markets might have risen - hence the letter for them to sign - to rebalance to take profits - but have fallen again by the time the client responds - opportunity lost".

If the article is right, then the rebalancing to take profit that you are talking about wouldn't be DIMS would it? This would be because any profit would lead to the need for rebalancing in the first place.

Interested to know how this works, as I am no expert.

Ally - thanks for the insight. So if you only offer DIMs to "wholesale" then great but I'm not sure there would be many advisers who would have a business where they only advise "wholesale" and in fact in my experience very few do. I know of one "adviser" who has tried this approach with FMA and I am sure they did not find their interaction "hassle Free" by any means. In fact that adviser was not granted AFA status and is more than likely still under review by FMA in respect of compliance with the FAA Act. The point I was trying to highlight was that DIMS will be the prominent issue for Advisers in 2014. So here's another prediction for 2014/ 2015. If you currently have a DIMS authorization and you don't apply for a "class" licence then your name will be on a FMA list for priority monitoring activity.

Supplied -

It appears you are right, but I often take profits into cash to support the clients monthly draw (clients who need income)

In other words, rebalancing but often into cash and not "rebalance back to original portfolio"

hence my request for an exemption to alter portfolios up to 10%

I need some flexibility but to reassure the FMA restrict what I can do to 10% of the portfolio

and of course using Aegis which adds huge security - the clients money is extremely well protected

John Milner

you hit the nub - I have found after 25 years in the industry - and through bitter experience too - that not all fund managers (i.e. their corporate bosses) are trustworthy or competent

some pretty big ones too

After many years of frustration and disappointment with them, I moved across to asset class DFA funds which are sophisticated, low cost, widely diversified and do not forecast or stock pick

and DFA pass my integrity test too

The fund management industry can be found severely wanting at times - just look back to 2009

That's not to say there are not some good guys, people like the two Pathfinder boys are great

But are the big fund managers (i.e. their corporate bosses) good corporate citizens ?

And how many would pass Code standard 1 ??

My hope is that the FMA does not place too much faith in them

Since some of them have let mum-and-dad investors down in the past, and no doubt will again in future

I agree Alan. The rapacious behaviour of many fund managers (paying themselves "performance" fees for outperforming the Bank Bill rate) means they are not putting client's interests first. So presumably AFAs who obtain a DIMS licence - so the FMA treats them as fund managers - won't have to either. Or will there be a higher standard for DIMS operators than fund managers ?

I agree with John Milner: if it walks like a duck etc etc.

Whilst this is not necessarily the forum to promote / scorn fund managers, Alan Clarke's delcared research process confirms the need for the FMA to maintain a firm hand on the industry.

I agree Ally

rapacious indeed and not just performance fees either

the question then is who to aspire to ?

It's not fund managers

Who or what then ?

who can we admire and aspire to be ?

and its not all about return either - surviving bad times is also very important

for me its people like Eugene Fama, Nobel prize winner - he enjoys research and excellence - profit does not seem to drive him

perhsps the FMA can enlighten us more

Don't quite know where "Supplied" came from, as I must have been typing poorly.

Alan. The following might provide a solution:

If on a Monday your client withdrew cash from their portfolio, and on the next business day their portfolio was rebalanced back to their original mix, then this wouldn't be DIMS.

This would seem quite a simple and sensible approach. It would be hard for the FMA to begin to argue that it was not sensible to rebalance a client's portfolio following a withdrawal, or contribution.

The reason to highlight this is that it clarifies that the discretion you are asking for is to allow you to actively manage your clients' portfolios. One idea would be to talk to the people at DFA about these concepts, as you would have to think that they have lots of good experience in this type of stuff. If you are right that DFA don't stock pick or forecast, then I would be betting that they won't use some type of discretionary approach to rebalancing portfolios. In fact they should be fast to highlight the flaws in this type of approach.

Pragmatic

Its probably a fair bet you don't know, as many don't, who DFA or Eugene Fama is

and perhaps you could drop your nom-de-plume so we can see which side of the fence you sit on

Eugene Fama Nobel prize winner 2013 & winner of the 1st Onassis prize for services to global finance 2009

No one in the NZ finance industry has won any such award

Ken French also a top academic in the US

DFA was founded by these guys and based their research, and they continue to research research research

US$250 billion under management, and a vast library of research

and their funds allow advisers to easily meet fiduciary standards

back in 2000 I went looking looking looking for a better way to build investment portfolios

and eventually found DFA

then I researched them for 3 years before making the big change

I buy asset allocations from a unrelated independent research house

I have had no regrets or concerns ever since

Is that enough research for you ?

offer to Pragmatic - free book

I wrote a book in 2011 and have just written my 2nd book which is at the printers as we speak

both contain plain English financial and related info for middle NZ

I am happy to send you a copy of my first book gratis

contact me via my website with your address

Whilst Alan Clarke is no doubt a renowned author on financial matters - I will politely decline the offer to receive a gratis copy of the latest ramble.

Instead I would question how market-efficient zealots actually justify their fees from clients. I'm unsure why a client would pay an advisor to simply poke their hard-earned savings into a limited-active product, and continue to claim an ongoing fee.

Pragmatic. The "limited-active" quote is interesting and clever.

Based on this quote my bet is that as you see the brilliance in DFA's marketing story, being that they promote that active management is not the answer, so can you please get your clients to invest in our "limited-active" (your words) quant strategy that we get well remunerated for.

I think you are on to it.

Alan. If anyone manages $250 billion at roughly 0.3% per annum, then (by my math) they would make around $750 million per annum (it is after 10 pm, so this could out by miles).

I am unsure of who has shares in this DFA religion thing, but if it is your heros like Eugene, then even if you cut this in two, or even by ten, it would not be a bad year at the races!

The ultimate believer in asset class investing would go for the lowest cost passive or indexed solutions available, not ones that cost say 0.3% per annum.

Didn't someone once say something like: "Within the cult of Wall Street, making money justifies any behavior, no matter how venal."

Could promoting asset class investing at roughly 0.3% be venal? My pick is that you have been "sold" to.

Ok, I don't really know what venal even means, but it sounds flash.

Well I spent 15 years struggling with active managers and it drove me spare - promises, underperformance, lack of integrity in some cases, et al

Research everywere shows about 80% of active managers underperform the index

Chapter 5 & 6 in my 1st book tell my story and why I changed over

DFA are way more than an passive manager - in fact highly sophisticated and well worth their 0.3%

But Pragmaitc and Simon - you clearly don't understand the model and you don't know what you don't know

Advisers owe it to their clients to study all available investment models

Hi Simon

I kinda agree with your sentiment: you're either a believer in passive or active... with other "limited-active" approaches providing a passive approach at an active cost.

My experience with European UHNW / family offices / Private Banks highlights that many in the NZ industry simply don't know what they don't know - and are sitting ducks for 'investment cults'. Global investors increasingly demand preservation of capital, and have no interest in relative returns.

These concepts are not new to the Northern Hemisphere - although are largely overlooked downunder through vested interest and ignorance.

Thanks for the laugh this morning Simon. I did enjoy your post. However, I too have a few of points;

1. Although I don't invest directly with DFA, I am very familiar with them. There is a big difference with DFA and index funds. You obviously don't have a full understanding of this.

2. In reality, a large proportion of Active managers struggle to meet their appropriate benchmark/index while charging very high fees.

3. I struggle to understand how some advisers concentrate their promoting of low manager fees ONLY for their point of difference while their fees are at the high end of the adviser fee range. Surely if it's good enough for the manager it's good enough for the adviser?

4. Good on you Alan for stating your name and don't have the need to hide and throw stones

5. Yes, I am an Asset Class investor. My clients come before my ego.

Pragmatic, I'm not sure where you have been in Europe but my experience with advisers throughout Europe, which is on a daily basis in my business, is that the industry is a complete train wreck. Outdated product, poor transperency and commission levels to die for. The UK's RDR is helping but to compare NZ with Europe, you have got to be kidding.

So clearly Pragmatic & Simon don't actually know anything about DFA do or are, but are happy to dog them as a cult. I guess they'll never win a Nobel prize

And they don't have the courage to use their real names either

Imagine if they ran an airline - they would order an Airbus without looking at what Boeing are offering

I feel sorry for their clients

They say if you argue with fools you'll always lose

I guess I just lost

Never mind I have am lovely motor glider in my hangar and I'm off to get R & R and find a thermal or two

"Bye

Put it this way

US$250 billion FUM - Nobel prize winners

I went on a fixed interest course in 1990 for 2 weeks

the lecturer was an excellent fellow, and went to train many advisers

then worked for various big fund managers as well

about 2000 he became an adviser himself

he uses asset & DFA class funds

top guy, 30+ years in the business, and a main of real integrity

DFA a cult ?

I hardly think so

Hey Guys the debate is about DIMS not active vs passive or the particular merits or demerits of any one fund manager. After all this debate has been raging for many years and will continue for more to come.The future of Advice by smaller sized practitioners could well be affected by the new Regulatory landscape concerning DIMS. How do you think this new DIMS regime will affect you?

John Milner

Thanks John, you are so right - egotists have no place in this industry

As an old pilot of 11,000 hrs, I long since learnt that those who think they know-it-all will soon come to grief

There are know-it-all pilots, and old pilots

But there are no OLD know-it-all pilots

What's that got to do with financial services ?

change the word "pilot" to "adviser"

Thanks John

I agree with your points.

I had started typing a note this morning to say that in my post I had missed to highlight that I like the concept of asset class investing, and much of what good managers like DFA promote.

I am just trying to highlight the irony in the notion that is being presented. Alan, you said that you have spent 15 years struggling with active managers and it drove you spare.

Your solution came when you found DFA. Interestingly, as you observed, DFA are way more than a passive manager.

So given they are not a passive manager, then do we arrive at the conclusion that DFA are an active manager? I think we do, and we then observe that they are one of a whole range of different types of managers that exist

From this I think the point you are making Alan is that good active managers are actually worthwhile, especially if you can get access to them at the right fee.

And in a nutshell you have presented a challenge for investors, being that good active managers are worthwhile, it just takes a lot of time and effort to find them. 15 years in looking in your case. As you have learnt though through finding and working with DFA, this is indeed a worthwhile pursuit.

There is a whole universe of groups and investment experts like DFA out there. They come in many forms and guises. Some are index managers, some are quant managers, some are value managers etc. There are no right and wrong answers in this industry. If there was it would be a boring place to work......and note Pragmatic, I see merit in passive and active approaches. I like good managers, and don't like average or bad ones. That's what I am about.

Also there has been lots made in the posts above about Noble Prize winners. Of course everyone remembers that some Noble Prize winner were involved in Long Term Capital Management, which lost more than $4 billion. Accordingly, in the search for great fund managers, don't just focus the search on Noble Prize winners, as this universe or group has a pretty patchy record. Some have been great, while some have swung and missed big time.

Alan. Fill that glider up with gas, as I am sure that if you widen your search you will continue to find more groups like DFA out there. I can understand if you can't be bothered with this, and choose to just stick with DFA. After all, doing global searches by yourself in a glider is always going to be tough (it must be far more fun just flying for the pleasure of it).

Your observation about various people not being likely to win a Noble Prize is100% right. I think what one gets in the investment industry is called "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel." Still, if you were to say that there is a snowballs chance of me winning one of them, you would also be 100% right.

You are also right that DFA are a good active manager (just like all the other good managers out there, regardless of whether they are active or passive or somewhere in between). I like good managers. This is what I am about. I know that good managers are hard to find, but finding them is definitely worthwhile. I also know that there are many ways to manage money successfully, ranging from passive to active and everywhere in between. Further, pinning a "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" to someone does not automatically mean that they will be a good manager.

DFA are good.

Hopefully this helps clarify a few things.

Enjoy the flying.