Financial advisers today operate under a raft of legislation, enough to make even the clearest-headed compliance officer as confused as a chameleon on a box of Smarties.
First there is the Financial Advisery and Intermediary Services Act (Fais Act) which was promulgated in 2002 and implemented in full force since 2004. Then there is Treating Customers Fairly (TCF) as well as the Retail Distribution Review (RDR) currently in the process of being rolled out to the financial intermediary industry.
Financial advisers and intermediaries have been in the cross hairs of the regulators for over 20 years, ever since the collapse of the Masterbond scam but that still did not prevent the likes of the Sharemax and Picvest scams from flourishing and eventually collapsing with billions of rands disappearing into thin air. The advisers, many of whom were duped into selling these flawed products, are the ones now paying the price.
Financial advisers are seemingly always the culprits when things go wrong, particularly in the eyes of certain investors. Disgruntled investors are not shy to run to the Ombud for Financial Services, sometimes on very frivolous grounds. It also does not help much that some of the deliberations of the ombud have been on very shaky grounds, almost every time seemingly bending backwards to find in favour of the complainant.
The ombud has also only published determinations against investment advisers which creates a one-sided opinion in the minds of the public.
It would help if the ombud published the determinations which go in favour of an investment adviser, if only to illustrate that certain complaints are frivolous and groundless.
Several investment advisers have expressed the view that disgruntled clients use the potential of a complaint at the ombud as an ever-present threat against the adviser. I recently met a potential new client and within 30 minutes he told me he’d reported his previous two advisers to the ombud, one known to me. A phone call later and I established that his complaint was without merit (he wanted his adviser to move his living annuity from Ovation when its affairs became intertwined with Fidentia).
When she couldn’t, through no fault of her own, he lodged a complaint at the ombud on the basis of “she should have known”…. Fortunately his case was thrown out but the time and effort, not to mention the mental anguish that comes with defending such a complaint, was massive. I politely declined to take on this particular client. Forewarned is forearmed.
Many advisers openly admit that they have a little slush fund to be used in case a client threatens to lodge a complaint against them. Defending a case at the ombud is perceived to be a lottery, and they would rather pay some money than run the risk of losing a case which would have serious reputational consequences and possibly even the loss of an investment licence.
Product providers not treated the same
Product providers, on the other hand, seem to be getting of scot-free. There seems to be very little in terms of sanctions against product providers, be it as a fund manager or investment platform. They have conveniently shielded themselves from most of the regulatory sanctions that can be used against advisers.
The financial services industry is massive – one of the largest in the country with assets under management of about R3 trillion – and it has enormous amounts of money and influence to protect its turf. It has always astounded me how the large life-insurance companies, which created and foisted many toxic investment products onto the investing public in the not-too-distant past, now try to proclaim themselves to be the white-knights coming to the rescue of investors.
In a future column will I discuss some of these products, including back-to-back policies, 30-year endowments, smooth-bonus type policies and loan-backed endowment policies. A younger generation of investor (or advisers) would be aghast as to what these ethical financial giants used to sell to the unsuspecting public not so long ago.
The advice business still remains, for the most part, a largely fragmented and disparate group of individuals, with very little organised lobbying at the regulator on issues that concern it.
Perhaps I can be accused of being a little churlish but I seriously have a problem with the manner in which Nedgroup Collective Investments is handling the poor performance of its Nedgroup Managed Fund, one of the largest of the 43 funds that it manages under the Best-of-Breed (B-o-B) banner.
In terms of B-o-B, Negroup does not have its own in-house fund managers but rather smartly has gone to the market on the basis that it will select the B-o-B for the various asset classes that it offers to its retail clients. By and large it has been very successful, piggy-backing on hand-picking existing asset management companies to manage a portion of their funds.
For the fund managers themselves this is great because they don’t have to set up large and expensive distribution arms, but can rely on the very large marketing network of the thousands of Nedgroup investment advisers and independent investment advisers to shovel money their way.
When I wrote in December 2014 about the poor performance of the R5 billion Nedgroup Managed Fund, managed by value-style RECM, I was told that it was too soon to make a call on the fund’s underperformance. In addition, I was told Nedgroup does not like changing its fund managers too often.
It’s no secret in the investment industry that the value-style managers have had a very poor time in recent years, mainly due to the collapse in the commodity cycle.
Three months or so ago, however, it changed fund managers at its Global Cautious Fund, from JP Morgan to little-known The Killen Group in the United States. It’s telling what was said at the official announcement of this change-over in March. Simon Watts, senior investment analyst at Nedgroup Investments was quoted as follows: “The key attributes the Killen Group offered were stability, alignment of interests, consistency and strong long-term performance.”
The Nedgroup Managed Fund, on the other hand, has probably the worst short- and long-term track record for any fund I have ever seen. I have to wonder how retail investors would react if they truly knew just how poorly its so-called B-o-B fund has done over any period of time over the past ten years.
The chart enclosed tells one story but when you break up the performance of the fund against its peers, ranging from one month to ten years, you get the following picture:
YTD (128/128), one month (135/142), 3 months (136/136), six months (127/127), 1 year (116/116), 3 years (90/91), 5 years (65/66), 7 years $2/53) and 10 years 29/31).
All these figures are from the Morningstar survey to end May 2015.
When discussing this issue with Shaun Anderson, one of the senior executives at Nedgroup Investments last week, he agreed that the fund performance has not been good.
“Yes we are aware that performance is not good, and there are a lot of unhappy clients out there (more than R1 billion has been withdrawn in the last six months), but we will change fund managers when we change fund managers,” he said.
I don’t care one way or the other whether Nedgroup sticks to RECM as its fund manager or not, but I do care when it markets its offering to the investing public as the B-o-B, which in this case it clearly is not.
How would you, dear investor, feel if the balanced fund you were recommended by your Nedbank adviser loses you 10% in your first year as an investor, while the average in our peer group returned almost 8%.
And here again you can see the fault line in the greater investment space: the poor adviser takes the fall again. There is no recourse against the fund manager of the investment house, only against the adviser at the ombud.
Sir John Maynard Keynes, founder of modern day economics once said: “When my information changes, I alter my conclusions. What do you do sir?”
*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.