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New rules will make it harder for company's operating as DIMS to fly under the radar in the meanwhile here's some precautions mum and dad investors can take

New rules will make it harder for company's operating as DIMS to fly under the radar in the meanwhile here's some precautions mum and dad investors can take

By Amanda Morrall

Just when you thought it was over.

The Ross Asset Management scandal has resurrected fresh fears, sceptism and grave doubts about the ability of regulators and their litany of new rules to create a predator-free financial services sector in New Zealand.

To be fair, the transformation of the market, from one of the least regulated in the Western-world to one of the most stringent,  is so vast that the full force and effect of the rules will take time. With respect to fund managers and others operating in this investment space, it could be years before regulators are able to brush the cobwebs and sweep the corners clean of fraudulent players.

While regulators have busied themselves assuring the public that justice will be served and regulations put firmly into place to prevent subsequent RAM-like scandals from occuring, investors will undoutedly be left wondering about the integrity of those they have entrusted with their money and its security.

Obviously, there is no such thing as an iron clad guarantee when it comes to investing however the risk that most investors usually acknowledge has to do with the vagaries of the markets and the performance of their fund.

The competence and trustworthiness of their advisor or fund manager is quite often an oversight. The RAM case is another sharp reminder why investors need to bear in mind the full slate of investment risks, the least of which is the legitmacy, competence and integrity of one's advisor.

Although a bill currently before Parliament, called theFinancial Markets Conduct Bill, will subject businesses like RAM to greater scrutiny, investors will want to understand the difference between an advisor who is trading under this umbrella and a fund manager.

At present, more than 1,200 authorised financial advisors are permitted to provide discretionary investment management services (DIMS), which is what RAM was operating as, and yet DIMS are not held to the same standards as fund managers.

John Berry, managing director of  Pathfinder Asset Management, said it could be two years before regulatory changes aimed at fund managers catch up with the level of scrutiny that has been mostly directed at financial advisors.

Investors with money under management will be understandably nervous.

To help put some of their concerns at ease, Pathfinder offers the following six-point check-list to screen for potential problems.

When dealing with fund managers there are some simple due diligence tests an investor can run through, said Berry, adding that failure of any of those listed below should trigger a red flag of concern.  

If a fund manager or anyone posing as one is unable able to offer a satisfactory explanation, Berry said investors should treat it as a  “no fly zone” for investing your money.  

When deciding where to invest you must have an enquiring and questioning mind. Look beyond  glossy marketing brochures and colourful websites. Don’t be won over solely by knowledgeable and 

interesting personalities.  You are looking for facts. Whenever possible have information confirmed from a source independent of the product provider. Take your time, ask questions and consult a financial adviser – remember, it’s your hard earned money. 

1. Does the fund manager have a public face? 

Ross Asset Management (RAM) did not appear  to have a website.  It was invisible in the fund industry and never showed up on simple google searches. If a fund manager were to “fly beneath the radar” in the same way as RAM then there are red flags concerning both its business substance and desire for a low profile. Also check there a physical office you can visit and that the business is not “virtual” or  entirely offshore based. 

2. Does the fund manager outsource all key functions to independent third parties? Custody, registry and fund accounting (unit pricing calculations) should be out-sourced rather than done in-house. This provides independent verification of the fund value and how many units each investor holds. Also check if the fund has an external auditor and trustee who are from the “top end of town”. Finally, does the board have independent directors? 

3. Do the principals invest their own money (and enough of it to care!) in the funds? This is  likely to be disclosed in the prospectus or fund financial statements. If the managers don’t eat their own cooking, you shouldn’t either. 

4. Are past returns almost too good to be true? 

To achieve above market returns in any asset class a fund manager typically needs either an informational advantage over other participants or an access advantage in the market. If the manager has great past returns but cannot articulate their advantage, then either their past performance is down to luck or is illusory. This is a significant concern if the manager is also doing unit pricing in-house rather than having it out-sourced (i.e. they would be reporting suspiciously high returns and have no independent check on the numbers).  

5. Who has authority to pay cash out of bank accounts for the fund? 

Only the trustee (and not the fund manager) should have bank account signing authority. The manager should not have an open cheque book to move unitholder money outside the fund. 

6. Is the fund manager legally compliant? 

If they are an NZ based manager then search them on the companies register (  Check their most recent financial statements, annual return and prospectus are filed. It is a legal requirement for a fund manager (and funds) to file financial statements and be registered on the Financial Service Providers Register ( 

The above tests give a simple overview as part of your due diligence before investing.  The checklist will not (and is not intended to) tell you whether a fund will deliver good, bad or average returns.  The checklist will not be bullet proof, but is a useful starting point for looking over a fund manager’s business and governance structure. Warning – a governance or structural failure can result in total loss of your investment. Any “red flag” may have a rational explanation.  Be concerned if it does not.


Changes for DIMS under the Financial Markets Conduct Bill, as supplied by the Financial Markets Authority       

The FMCB will introduce a market services licence that will be required for the provision of discretionary managed investment services to retail clients.  This is intended to facilitate provision of services of the type we believe David Ross’ clients thought they were receiving by entities (rather than individuals).

Under the market services licence procedure, FMA will be able to undertake a “fit and proper” and broader capability assessment of an applicant and its senior management than that that we can currently make under the FAA 

Licence-holders will be subject to duties similar to those of a licensed funds manager. Investor assets will have to be held by an independent custodian unless FMA has permitted otherwise. However, any person who is an AFA under the Financial Advisers Act and is permitted to provide DIMS services under that authorisation will be able to continue to do so.

The FAA is amended by the FMCB so that AFAs providing DIMs will be subject to similar ongoing duties as FMC Bill DIMs licensees. This will include a requirement for client assets to be held by a separate broker (though not necessarily an independent one.)


* Separates six-point checklist from changes to DIMS proposed by the FMA.

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