Ross exposes hole in financial adviser law
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.