Regulation
Worry at DIMS 'overkill'
Thursday 6th of March 2014
DIMS are defined as any investment service where the adviser does not refer to the client for every decision.
From December this year, anyone who wants to continue to offer class DIMS services will have to be licenced, including those who offer model portfolios with minor changes available.
Only those who offer a very personalised service will not.
The move is believed to be a response to the collapse of Ross Asset Management.
But adviser Jordi Garcia said the new rules seemed to go too far.
His own business, NZ Financial Planning, was one that could potentially have to be licensed under the new rules – but that would not make sense for it or its clients.
Garcia said the business used a master trust type structure, without much discretionary management. But there was limited discretion for the firm to rebalance agreed mandates depending on market movements.
“If we continue to allow this, it sits under the DIMS category, which for us is nuts. And the impact for the clients is huge because of the amount of paperwork they would get.”
The business would have to have all its clients sign off on the fact that had it had discretion and provide a new prospectus and investment statement as well as require regular client reviews.
It would also face compulsory periodic reporting on asset holdings and values, investment returns, fees, and transactions carried out, consistent with proposed reporting requirements for other forms of managed investment arrangements.
He said NZ Financial Planning was arguing with the FMA that what it provided was not a true DIMS at all. “This is not a David Ross scenario.”
Ben Brinkerhoff, of NZ Wealth, agreed it seemed an overreaction that would not benefit clients.
He said while the idea that anyone who made decisions on the behalf of a client needed to be tightly regulated sounded like a good one, in practice it could mean lots of advisers started asking clients to sign off on every decision. “What are you solving? Investments are like soap, the more you handle them, the smaller they get.”
He said the moves would create a lot of pain for the industry.
Comments (21)
Alison Gilbert
True to form of any bureaucracy, the FMA is seeking to close the stable door long after the horse has bolted (with David Ross in the saddle). In doing so they are catching in the DIMS web many activities that involve little or no discretion. Furthermore, the definition of a DIMS includes this clause "In determining whether a AFA has discretionary authority, it does not matter if the client has the right to be consulted on, or to countermand, the advisor's decisions". The FMA has yet to say just where the "discretion" comes in in such cases... Certainly in my copy of the Oxford dictionary, this situation would not fit the definition of the word "discretion".
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10 years ago
Murray Weatherston
Ally
I don't understand why you (and many other advisers) are having difficulty understanding the clause you refer to. I wonder whether the case is more that they don't agree with the law.
In an attempt to concentrate the debate, let me offer an explanation. For the record, I don't do DIMS but have spent a lot of effort coming to grips with the issue as a SIFA representative in consultations.
I think the law as written is quite straightforward - if an adviser has any right under the investment authority to make a decision on behalf of his or her client at any time, then it's DIMS.
It's only when the adviser has to refer every thing to the client, and wait for the client's decision to accept or reject, that there is no discretion - and therefore no DIMS. The Adviser is making recommendations, not making decisions.
The key simply is "who makes the decision?"
In the case where the client has the right to be consulted on the adviser's decision, the timeline is
1. the adviser makes the decision - this triggers DIMS
2. the adviser then consults the client
In the case where client retains the ability to countermand the advisers decision, the timeline is:
1. adviser makes decision to do/or not do something - that's again where DIMS is triggered
2. client might (but also might not) countermand.
Very happy to stand corrected.
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10 years ago
Alison Gilbert
Murray, because you don't do DIMS you are unaware of the various permutations. For example, many advisors request DIMS authority from the client simply so that they can carry out transactions (previously discussed and agreed with the client) on a platform (otherwise the client has to fax an approval form to the platform, something many don't want to do; especially for simple cash transactions). Yet according to the regulations, this is DIMS.
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10 years ago
alan clarke
95% of the risk exists where advisers do not use platforms, but have trust accounts
Those advisers have true discretion
I use Aegis only
I use industry recognised risk profilers and asset allocations
I have a signed agreement with clients to rebalance and make minor changes to their portfolios
Furthermore if markets move upwards quickly I can take profits within 12 hours
and if I am concerned about something, alter it within 12 hours
No waiting for days or weeks to find the clients to explain and sign off
An adviser who has the authority to act and if necessary act quickly probably lessens the overall risk
Where is the risk in my operation to the client ?
And unlike a fund manager, I know my clients and who they are and what they want
The FMA have gone off half cocked because they failed with Ross, and now we pay
It would make sense for them to regulate those advisers with discretion
who don't use a platform
But then when did sense ever come into it !!
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10 years ago
Robert Oddy
Courtesy of SiFA, and in support of Murray's comments, here is the applicable legislation from the Financial Markets Conduct Act 2013 (and further below that, the Financial Adviser Act 2008, Section 12) both of which both clearly define who provides a DIMS service.
Part 6
Licensing and other regulation of market services
Subpart 1—Key provisions
392 Meaning of discretionary investment management service and related terms
(1) In this Act, a person (A) provides a discretionary investment management service if—
(a) A—
(i) decides which financial products to acquire or dispose of on behalf of an investor (B); and
(ii) in doing so is acting under an authority granted to A to manage some or all of B's holdings of financial products; or
(b) A provides financial advice in the ordinary course of, and incidentally to, providing a discretionary investment management service under paragraph (a) (for example, as to the appropriate scope of an investment authority).
(2) In determining whether A has an authority under subsection (1)(a)(ii), it does not matter if B has the right to be consulted on, or to countermand, A's decisions.
(3) In this Act,—
DIMS licensee means a person that acts as a provider of a discretionary investment management service under a licence under this Part
investment authority means, in relation to a discretionary investment management service, the authority granted by an investor to manage some or all of an investor's holdings of financial products under the service
provider of a discretionary investment management service means a person who is in the business of providing a discretionary investment management service.
Financial Advisers Act 2008
Section 12 When person provides discretionary investment management service
(1) A person (A) provides a discretionary investment management service if A—
(a) decides which financial products to acquire or dispose of on behalf of a client (B); and
(b) in doing so is acting under an authority granted to A (or A's employer or principal) to manage some or all of B's holdings of financial products.
(2) In determining whether A has that authority, it does not matter if B has the right to be consulted on, or to countermand, A's decisions.
Section 12: substituted, on 1 July 2010, by section 10 of the Financial Advisers Amendment Act 2010 (2010 No 40).
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10 years ago
Murray Weatherston
Ally
You need to go back to first principles to figure out where your problem might lie.
If I understand you correctly, you want the ability to instruct the platform to give instructions on behalf of the client (after the client has agreed to so do - i.e. the client has decided)to avoid the client being bombarded with paperwork by the platform. That is an understandable business practice.
If that is all that you want to do, then with respect you do not need a full blown power of attorney.
In that fact situation, it's the full blown POA that triggers the DIMS because it gives you the ability (whether you intend to use that ability or not) to make decisions of behalf of the client.
If your power of attorney (or client authority) was restricted to circumstances where the client had made the decision and merely authorised you to instruct the platform to implement those decisions made by your client, I do not think you would be offering DIMS. This is because as I pointed out earlier, it's who makes the decisions that determines whether you are DIMS.
Under the law as it is currently written, if there is any possibility that you can decide on behalf of the client, IMO you are DIMS.
If it is clear that the client has to decide in all cases, then you are not DIMS.
Note that making a recommendation to a client is not deciding. The client makes the decision when s/he accepts or rejects your recommendation.
So if I was you, I would look at the content of my authority from the client. Fix that if necessary to make it clear that you cannot make a decision for the client and you should not be DIMS
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10 years ago
Carey Church
Robert, Murray, Ally
Unfortunately - while Murray's suggestions would make common sense, I find I have to agree with Ally's interpretation.
My reading is that 'B' in the applicable legislation says that you are still providing DIMs, if you have a 'discretion authority' - even if it is just for administrative convenience - regardless of whether you have to get clients agreement or regardless of whether they can countermand your recommendations.
Having a discretion authority in place appears to be what constitutes a DIMs providers.
I would live to be wrong - any other thoughts if how to interpret B?
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10 years ago
Murray Weatherston
Let me have another attempt to show Ally and now Carey why IMO your interpretation is wrong.
Section 12 (1) of FA Act says(1)
A person (A) provides a discretionary investment management service if A—
(a) decides which financial products to acquire or dispose of on behalf of a client (B); and
(b) in doing so is acting under an authority granted to A (or A's employer or principal) to manage some or all of B's holdings of financial products.
The word between the end of (a) and the start of (b) is "and". This means both limbs have to apply to be a DIMs.
Sure, the 2nd limb talks about acting under an authority.
But the key word in the first limb is "decides". If the adviser doesn't decide, then the first limb can't be satisfied so that there cannot be a DIMS.
Also if there is no explicit power in the authority for the adviser to act without the prior approval of his client (or if you want to be more conservative, you actually deny in the authority any ability for the adviser to decide for the client), then I believe you will not be DIMS either. You will fail both limbs in that case.
I think the more difficult issue to determine is where is the boundary for Class DIMS (which needs an FMC licence) and personalised DIMS for which an AFA will need specific authorisation to operate that DIMS from the FMA. But that is another debate.
PS I am sure staff of the FMA read good-returns. It would be good if they were able to intervene when misinterpretations were being promulgated.
Or maybe there are public spirited lawyers who specialise in this field who might feel inspired to wade in with a view.
And yes this applies equally to my views as it does to other views expressed here.
Uncertainty over interpretation clearly fails the duty for "clear, concise and effective" communication
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10 years ago
Carey Church
Murray, valid points, but I think the main point is the lack of clarity and yes, it would be great for someone from FMA to clarify the intention.
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10 years ago
Alison Gilbert
I think the problem of interpretation arises because of this clause:
(2) In determining whether A has an authority under subsection (1)(a)(ii), it does not matter if B has the right to be consulted on, or to countermand, A's decisions
What prompted the legislators to add this clause ? What situation(s) did they have in mind ? And did they look up the definition of the word "discretion" before adding this clause (which seems to say that an advisor can have discretion but if the client can over-rule it, somehow he still has "discretion")
In fairness to the FMA, they had this legislation handed to them by parliament so perhaps they are just as confused as everyone else......On the other hand, they should have been pro-active in the submission process to make sure they were being handed workable - and understandable - rules.
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10 years ago
Brent Sheather
With due respect I think there is more chance of Mr Ross giving everyone their money back than there is of the FMA clarifying anything...no one wants to stick their necks out in case it impacts their career options further down the track.
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10 years ago
Brent Weenink
In response to Murray's request for a public spirited lawyer (of sorts)... Murray's correct - and very eloquently so. He’s particularly good with his suggestion of limiting the power of attorney so as to allow delegated actions but not decision making.
Ally/Carey, don’t get diverted by the rider provision – that’s merely saying that granting those rights doesn’t save what would otherwise be a DIMS.
This cannot be relied upon as legal advice.. blah blah blah.
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10 years ago
alan clarke
why are we discussing the interpretations?
The real issue is the FMA throwing the baby out with the bath water.
Those using platforms like Aegis simply cannot run Ponzi schemes or steal their clients' money.
Let's stop interpretating words and deliver the FMA a full broadside.
CLOSELY MONITOR THE ADVISERS WHO DON'T USE WRAPS AND HAVE DISCRETION
THAT'S WHERE THE RISK LIES.
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10 years ago
Alison Gilbert
It looks like the key thing is going to be the "Investment Authority" - or Power of Attorney. If this is worded correctly then advisors will be able to structure their DIMS models the way that best suits their business model. And a cunningly constructed Investment Authority may be able to bypass the more stringent rules in Act as they apply to DIMS providers.
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10 years ago
alan clarke
Actually I have one client for whom I have no DIMS authority, and it is a nightmare.
Two trustees - client and her lawyer.
The market could go up and down twice by the time she and her lawyer sign off anything.
More risk, not less for the client.
Where is the common sense practical application in all this ??
I predict less and less effective AFAs will be the result
And how does that help Kiwis with their money ? less advice, less help, less discipline, so just more risk and more losses in the future
The outcome of legislation
Think I'll take up gold prospecting outback Australia
One of the last freedoms on this mad planet.
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10 years ago
katrina hawker
Custody, pricing etc aside, there is another issue here. If DIMS doesn't apply when a client has the "final" say about any adviser's recommendation(s), how do the regulators control "dodgy" recommendations?
Is your average investor equipped to assess their adviser's recommendations?
Should advisers allow non-professionals to influence their investment management decisions?
There are some tough questions out there.
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10 years ago
Wayne Ross
Thanks for highlighting the issue Murray. I agree that the bigger question is the classification between what constitutes a Class DIMS and what is a Personalised DIMS.
However your point that an adviser can conceivable make a recommendation but not a decision for a client raises an interesting question. What if you recommend the purchase of say 1 NZ share. Under AFA obligations you would need to provide your rationale and analysis as to why it is the best. If you give the client no other option or recommendation or information, are they really making the decision or are you?
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10 years ago
Clayton Coplestone
I think that Katrina has highlighted the real issue here: are the majority of AFAs really qualified to determine TAA / nimble shifts in portfolios? If not, then DIMS is unlikely to be a major issue.
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10 years ago
Murray Weatherston
Hi Wayne
Using the same logic as I did above, then the answer to your question is as follows:
If you have no authority to make a decision for your client, then it can't be you. Therefore it has to be the client making the decision - which is either to accept your recommendation or not.
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10 years ago
Murray Weatherston
In reply to Katrina and Clayton
Katrina, your question about who controls "dodgy" recommendations suggests that you have fears about the efficacy of the Financial Advisers Act and the Code of Conduct. Pray tell us more.
And Clayton, does your rhetorical question mean that the real role of financial advisers is only to source money for fund managers to invest?
If I get the gist of what you were trying to say, I think you meant to say something more like "DIMS is unlikely to be the only major issue". By inference, you were also saying "advice generally is a major issue."
I hope I'm wrong in my interpretation, but I wouldn't have raised this if I hadn't believed it.
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10 years ago
Wayne Ross
And therein lies the rub Murray....Advisers are forced/directed to provide less rather than more advice, investors don't know what they don't know and the legislators are happy as long as the letter of the law is followed regardless of how practical or effective the final outcome is.
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10 years ago
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