News

Ross exposes hole in financial adviser law

Tuesday 20th of November 2012

Ross Asset Management (in receivership), owned by Authorised Financial Adviser David Ross, has been described in the media as a boutique investment firm.

However, it appears to have been operating as an authorised financial adviser and a discretionary investment management service (referred to as a DIMS), according to receiver PWC’s initial report.

Minter Ellison Rudd Watts partner Lloyd Kavanagh said when it comes to looking after client money the regulatory requirements for fund managers are “more robust”, than for financial advisers operating a DIMS.

“A fund manager is what I think of as a manager of unit trusts or a KiwiSaver scheme and in both those cases the law requires there to be an independent licensed trustee responsible for the holding of assets and for supervising the conduct of the manager.  It’s quite a robust structure, it’s fair to say.”

And while the Financial Advisers Act contains a lot of requirements around advisers gaining authorisation, the legislation contains only a “relatively brief” section on “broker conduct” dealing with how financial advisers (including those providing a DIMS) handle client funds, he said.

“The FMA has the power to give directions but this is a very lightly regulated activity; there’s no requirement to have a separate custodian or for the custodian to be licensed. And there is no requirement for client funds audit.”

And Kavanagh said the issue isn’t addressed in the Financial Markets Conduct Bill currently making its way through Parliament.

“There are a whole raft of new licensing requirements including for fund managers and changes to the regime for DIMS, but there are still no licensing requirements for holders of the assets i.e. custodians and nominees.”

Pathfinder’s John Berry, convenor of the Boutique Fund Manager’s Forum, said although Ross apparently operated as a DIMS he was concerned the general public wouldn’t grasp the distinction and boutiques would be “tarred with the same brush”.

“I don’t know whether it was the media or the FMA who said it first [calling Ross a boutique] but it’s really unfortunate for boutique fund managers that that’s the terminology being used.”

Berry has compiled a due diligence checklist financial advisers can run on behalf of clients, which includes asking whether the boutique has a “public face” in charge.

“Ross Asset Management (RAM) did not appear to have a website. After 3 years of marketing in Wellington we did not know RAM existed,” he said.

He also recommended searching managers on the Companies Office and checking their most recent financial statements, annual return and prospectus are filed.

Comments (13)
Clayton Coplestone
When considering investment into a boutique, advisers also need to be aware of the financial viability of some of these entities, and the composition of their funds (ie: a significant mandate can expose the boutique to a variety of risks).
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12 years ago

Alison Gilbert
AFAs who operate a DIM service would have had to obtain Standard Set C as part of their authorisation process. That involved submitting client files to ETITO for assessment. Of course, some were let in thru the back door e.g. stock brokers. Presumably David Ross got in via an exemption as well.
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12 years ago

John Berry
If you are interested in seeing our short checklist for financial advisers who are considering investing client money with a fund manager (particularly a boutique) then please follow this link - http://www.pfam.co.nz/documents/Boutiquemanagerchecklist.pdf Most is common sense stuff but process is key for AFAs engaging a fund manager - i.e. you want to be able to point to having done sufficient due diligence....
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12 years ago

Craig Simpson
Standard Set C was not a requirement for those who were already CFP's - they only had to do Set B which you can pass with very little study at all. In the old days if my memory serves me correctly you could be "grand-fathered" into being a CFP.
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12 years ago

Daryl McAlinden
De ja vu. Warren Green, an investment adviser from Nelson had also created a ponzi scheme (and was jailed)that blew $1.5m of clients' funds. You would have thought that the FMA's surveillance team would have targeted their audits at the investment advisers who directly invested client funds.
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12 years ago

Alison Gilbert
I doubt any AFAs had recommended RAM since regulation came in. Most advisers had never heard of him - although anyone well connected in Wellington knew of him. And while, strictly speaking, he was offering a DIM service, in reality he was fund manager.
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12 years ago

Anthony Edmonds
Ally - RAM is not a fund manager (boutique or otherwise). RAM is an Authorised Financial Adviser offering a Discretionary Investment Management Service. RAM's business model is much the same as most adviser groups, with the exception that they used his own in-house wrap platform (with their own custody/nominee arrangements!). RAM (Ross) might have pretended he was a fund manager to his clients, but in reality he was an adviser. As Lloyd K says in the article “A fund manager is what I think of as a manager of unit trusts or a KiwiSaver scheme and in both those cases the law requires there to be an independent licensed trustee responsible for the holding of assets and for supervising the conduct of the manager. It’s quite a robust structure, it’s fair to say.”
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12 years ago

Mike King
@ Anon - indeed. It will be most interesting to hear the selection criteria applied to RAM's inclusion (and what commission it was [or was promising?] to pay). This is a much more egregious error than even the worst Bridgecorp recommendations (such as one I heard about , a $2m farm sale proceeds 1n a 2 year Debenture)
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12 years ago

Alison Gilbert
Anon's attempt to tar all AFAs offering DIM with David Ross's brush is disingenuous. Very few AFA/DIMs are "stock pickers" - certainly not in offshore mining stocks. Rather they carry out asset allocation, fund selection and maybe a bit of NZ fixed interest. And the only significant "feeder" for RAM was apparently based in Queenstown (what a coincidence: that's where his brother is a Real Estate agent). Disclaimer: it may be just that: a coincidence .......
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12 years ago

Anthony Edmonds
Hi BTW. I suggest that if you don't think that RAM was an Authorised Financial Adviser offering a Discretionary Investment Service, then you contact PWC and tell them they have got it wrong.
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12 years ago

Clayton Coplestone
Whilst the definitions appear to indicate that Ross was not a Fund Manager, he did in fact manage funds (on a discretionary basis) on behalf of investors. Anon can continue to bang on around the semantics of whether this is the correct label to use, but the reality is that consumers believed that Ross Unit Trusts Management et al was a boutique fund manager with [dubious] abilities. We can argue this point within the industry, or we can put pressure on the industry bodies (including the Regulator) to ensure that the correct description does not infect an already cautious industry sentiment. A Peace-meal description to investors from boutique managers provides limited comfort for those who are awaiting some signals from the industry. At the same time, perhaps the Regulator instill some confidence around where they were in their investigations of Ross.
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12 years ago

Brent Sheather
I still cant believe this happened if he passed the ethics exam.
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12 years ago

Anthony Edmonds
There are multiple Anons at work here. The key thing we have in common is we are right on most points! I disagree Ally. The majority of advisers are playing at being stock pickers (at least the majority by FUM). If you want evidence, flick open any listed company's annual report. You find that big shareholders include Custody Service Limited (Craigs IP), Private Nominees (ANZ Private Banking), FNZ Nominees (FNZ Wrap), and Investment Custodial Services Limited (Aegis). Don't be fooled in thinking that advisers aren't recommending direct securities to their clients, and acting as stock pickers.
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12 years ago

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