[GRTV] Former NZ Funds Management chief executive Richard James

Tuesday, July 31st 2018, 11:00AM

So my next guest is Richard James. Richard has been the chief executive of NZ Funds Management for the past ten years, but has decided to step down. Welcome Richard, thanks for coming along. Tell me, ten years, why have you decided to step down from the role?

Well I've actually been with NZ Funds for 25 years, and I've spent the last nine years, 2009 I took over and obviously it was an interesting time to take over a business like ours at that point in time. We've really gone through a process of repurposing the business, reorienting the business, and building it out in a different direction. And I felt that the time was ... And I think we've achieved a lot over that period of time, and I felt that the time was right, with the company's moving into a new phase, I thought the time was right for the introduction of new talent. And now's as good a time as any for that.

So ten years ago we're at the height of the GFC, what was the business like then?

Well NZ Funds grew up as an investment management business, and obviously our business was built around developing investment management products and services for financial advisors. When I took over it would be fair to say that some of the decisions we'd made in the preceding decade hadn't worked out as we would have like or our clients would have liked, so we were faced with the need to really look hard at why that was and what we were gonna do going forward.

We decided at that point in time, as I said, to repurpose the business, and we've converted the business from an investment management business into a wealth management business. We've built our own advisory arm and we improve our best thinking, and we share everything we do in that advisory arm with our independent advisory clients. So today we are a genuinely integrated wealth management firm as opposed to a manufacturer of investment products. It's quite a different business.

So before you were very much product-based, and now it's around wealth management. How hard has that transition been to make?

I think the first thing people would say is, “Well aren't you competing with your independent advisory clients?” The reason we set the business up was twofold reasons really. The first, as I say, was to try and learn from the things that we hadn't done so well and to try and put our own best thinking into practice. And the second was that all of the independent advisors, or most of them, have a longterm succession challenge, and if you talk to independent advisors they'll talk about how long they're going to be in the business for. We look at our conferences and there's a lot of gray hair in that industry.

The second challenge we were trying to overcome was, “How are we going to provide that succession option?” And I think to date we've provided succession solutions effectively for about 15 firms, and we do three or four a year. We see that probably going on in perpetuity. I think making major changes to any business is hard, but I think once we overcame that perception that we were going to be in competition with our clients, then it became a lot easier.

So your proposition is, when you manage money it's really around a value-based approach, yeah?

Yeah, so we would, in terms of trying to summarize our approach to the investment management side of things, we are global with a value orientation and with downside mitigation. And we're global because ... So we have a global perspective because most of our clients have their home and their income and their business and all their other assets. In New Zealand it just doesn't make sense for them to have their entire investment portfolio here.

We have a value orientation because over time buying cheaper stocks has proven to produce higher risk-adjusted returns than buying expensive stocks, stocks in particular. And we have downside mitigation strategies because our experience has been that, when markets really have significant draw downs, individual investors, individuals and families who have spending liabilities next year and the year after and the year after, can't actually deal with the volatility of the market. So they are willing to pay some of their longterm return away in order to try and dampen volatility in their portfolio. So that's what we're trying to do.

So when people look at the performance of NZ Funds products, sometimes they'll see that they're not doing as well as others. And that's part of the reason why, is it, or ...

Well our approach is active as well, we have a relatively unconstrained approach to how we put together portfolios for clients. But I think, for example, if you think about our kiwi service scheme relative to other kiwi service schemes, I think there's 240 different products in KiwiSaver within those 30 schemes. And so people focus on the performance of the individual products. In our scheme, for example, everybody has, for each age and stage, or everybody's now lifecycle process, which is about 90% of our members, they each have an amalgam of our income strategy and our inflation strategy and our growth strategy, depending on where they're up to in life. And we are rebalancing them every year.

So the performance of the fund is less important to us than the performance of the individual investor. And if you look in terms of our kiwi service scheme over the duration of KiwiSaver, I think we're in the top quarter every year but one in terms of wealth creation for the investors within our scheme in total. Which is what we are primarily concerned about.

And some people think that you're expensive. Is that reality or perception?

Well we are expensive. Our industry is too expensive, I've talked about it public, I have no qualms with that. Within our business we have a longterm program to reduce the cost of investing for investors, and that looks across every aspect of what we do, both on the advice side, the investment management side, and the administration side.

So how does the industry deal with this issue about being expensive? What has to happen?

You have to grow and you have to progressively bring down costs. Well that's certainly the approach that we take. We all have a desire to deliver a better value proposition, so for us, as I say, that's about progressively bringing down the cost of investing, but also at the same time investing and trying to deliver additional value to our investors, which is part of the proposition. Through better service, smarter advice, better online reporting, all those sorts of things.

I was reading something about that the other day, and it was saying basically that, with the cost pressure which the industry is under, we've gotta grow. So does that mean we're gonna see fewer and fewer small firms existing?

That appears to be the case, yep. But you know, in lots of different industries I think there has been, and there still are, forecasts of the demise of the boutique or the smaller or the intermediate-sized player. And it hasn't really panned out. I mean if you look at the legal profession or the accounting profession or medical profession, yes there are aggregated groups or consolidated groups and there are bigger players emerging in each of those industries. But I think across all of them there are still the existence of quite successful smaller or medium-sized players.

So I absolutely think that scale is an obsession for people in our industry, but we are certainly not focused on trying to be the biggest investment management firm, we're focused on trying to be as good as we possibly can be.

The other big trend of course is the rise of passive investing. You guys are active managers, where do you see that fitting into the picture in the future?

Firstly we have an unconstrained approach, we don't consider ourselves to be active or passive. In some parts of a client's portfolio we implement it passively, other parts we implement it quantitatively, and other parts we implement it actively. So we look at each part of a client's portfolio on its merits, and decide how to implement.

I think in the industry there's too much focus on what is “best” and I don't think there is an individual approach which is best. I could argue vehemently for an entirely passive approach, I could argue vehemently for a quantitative approach, or I could argue vehemently for an active approach. I could argue vehemently for a longterm strategy using property. So I don't believe any one of them is right or wrong.

I think what is important is that conversation moves from how a portfolio is implemented, from a wealth management context, to what is the client's strategy? What are their lifetime cash flows in terms of spending and saving and their big capital asset decisions and when they retire and all those sorts of things. That is the biggest decision for the client to make, that is where I think a lot of the advice conversation should be.

The next piece is how do you implement their portfolio around those goals? Do you do it in one big pool, or do you build multiple portfolios for each of those different goals? And what is the strategic asset allocation, basically the growth/income split, in each of those goal portfolios? And then you get down to the level, and then how should we implement each of those asset allocations? Should we do it passively, actively? And I think it changes for each component of a portfolio.

So I think it's really dangerous in our industry to focus on absolute truths, that this is the only way to do it. Because none of us can be certain of anything, it's all probabilistic.

So it's actually about having your philosophy and sticking to it, and actually knowing what it is.

Yeah, and being willing to accept that sometimes the best thinking won't work and you have to change the way in which you do things. Because ... If we set up a strategy for a client, what we project will happen over the long term won't happen, it will be wrong, and what the client projects what will happen over their lifetime will be wrong as well.

So it's not something that you can just set up and then think it's gonna exist forever. It's a dynamic process, and that's why it's really, really important, going back to the Royal Commission stuff, where advisors promise to do something. We're gonna look at your circumstances relative to what's happening in the market, it's really really important that that actually happens.

Yeah, and you touched on the Royal Commission in Australia, this whole issue of conduct in financial markets is a massive issue globally. Where do you think we sit in New Zealand on how we perform in that area?

The issues that are arising, that have been identified in the UK and the US and more lately in Australia, exist here. I don't think it's right to say that they don't exist here. And it may be to a lesser extent her because our industry is younger, just by definition, if something is younger it's going to have less legacy issues.

But the basic issue of if an advisor or an investment manager or anybody promises to do something for somebody and then they, in particular if they're charging them for that promise, then they should do it. And that's the message we send to advisors, we work within our own advisors. If what it says in your client agreement you're gonna do X, Y, and Z, you absolutely have to do it. We try and hold ourself to the same standard, and I think ...

There are lots of examples in New Zealand of situations where that is not happening today, and we all have a responsibility to remediate it as quickly as we possibly can.

Do you think we should go to the stage of having some sort of inquiry here?

There's sort of an inquiry. As you know, the FMA and the RBNZ have asked all the big banks and insurers to respond formally around the issues arising from the Royal Commission. Certainly in our case we're doing it anyway because we ... If they're asking them, they're going to ask us, and so we're looking-

You're waiting for the knock on the door.

Absolutely, and I expect lots of other market participants are, so whether there's a need to go to a formal process ... But I think the same questions have to be asked of people who are custodians of other people's money.

And just coming to the advisory market, you've worked really closely with the independent advisors. What do you see are the big issues for those guys in the next couple years?

I mean regulations obviously, always an issue, and I think it's sort of a constant, of them having to ... Obviously they've got a big change coming in terms of the legislation that dictates their industry in terms of moving under the FMCA. I don't know about the next two years, but the biggest change I think in the industry certainly during my life in the industry and for what I can foresee, is KiwiSaver.

And I think you got two and a half million people in New Zealand with a financial asset for the first time in their lives, most of them. It is just reaching, average account sizes are getting to 30,000 or whatever it is now. It is just reaching the point where it is of real significance to those individuals, and they are going to start asking questions of themselves and then in time of advisors, “Am I doing the right thing? Am I saving enough, am I in the right strategy, what are the decisions I need to make around this pool of money?”

There's lots of research globally about what are those points when people start to think about. There's some that says when it gets to the level where they can buy the sort of car they want, or 100,000, or whatever it is, but we are reaching those levels. And I think that there's going to be, over, maybe not the next two years, but over the next five or ten years, there must be a massive rise in demand for financial advice built around people having to make those decisions in relation to their KiwiSaver.

Well thank you for your time Richard, it's great to have you in here.

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