Editorial: Crunch time for advisers on investment

Opinion

The spotlight is always at its most intense when times are tough. So it is that the fund management industry has been keenly analysed over the past year or two. In the process, investors, present and potential, have been left in little doubt about its shortcomings. Earlier this year, research house Morningstar gave it a D-rating, saying New Zealand was the worst of 16 countries for its use of best practice in fund management. This month, the Capital Market Development Taskforce, while framing its conclusions in less dramatic terms, also delivered a doleful verdict.

Addressing the industry's many weaknesses matters. Managed funds are an important investment option, not least because they offer diversification through a combination of shares, bonds, property and cash in a way that is beyond the capability of most investors. The advent of KiwiSaver has introduced many more New Zealanders to the advantages of having a fund manager investing their money and making decisions that, if competent, will achieve superior returns.

Both Morningstar and the taskforce, however, identified issues that give good cause for investor hesitation. Most of these involved disclosure and transparency, especially the lack of openness over fees and information that told investors precisely what they were investing in. The taskforce recommended that fund managers provide regular access to a breakdown of their funds to give investors a better idea of how much of their money was invested in shares versus property, bonds and cash.

The industry has always objected to such disclosure, saying it would allow managers to copy competitors. This attitude reveals a mindset that was also criticised by the taskforce. It said fund managers and those who supervise them should be directly responsible for putting investors' interests first. That implies as much information as possible should be relayed to investors, right down to what companies or property their money is invested in. To blunt the issue of commercial sensitivity, such disclosure could have to be made, say, within 45 days of any change in investment.

Such a change would acknowledge that better disclosure will be a powerful tool in attracting new investors. Happily, even if belatedly, this appears to be dawning on many in the fund management industry. One of the side-benefits of KiwiSaver has been the way competition prompted more transparency from managers, as well as lower fees. The Investment Savings and Insurance Association, the industry organisation, says it plans to build on this by introducing "improved voluntary standards for consistent disclosure of fees and charges and reports on investment performance".

John Atkinson, the chief executive of Plan B Wealth Management, is also commendably frank about the shortcomings of his industry. Writing in yesterday's Herald, he likened it to a teenager that must mature into a more fully resolved profession. In 10 years, he foresees greater accountability and competence, a client-centred philosophy and a multi-faceted service approach.

In many ways, that outcome would merely result in New Zealand fund managers catching up to best practice in other parts of the world. But it is no less important for that. If the industry cannot introduce greater disclosure and transparency itself, it will fall to the Government to implement the compelling findings of the taskforce. Either way, both the investor and the industry will be better off when more people put their money into managed funds.