Brian Gaynor: No bouquet - just blame the fertiliser

AMP deserves praise for taking a major leadership role by abolishing commissions for financial planners. Photo / Herald on Sunday

AMP has earned a well-deserved bouquet for its decision to remove inbuilt commissions on new investment products.

However, the country's largest standalone wealth management group deserves a brickbat for its half-hearted reorganisation of AMP NZ Office Trust.

Another brickbat goes to the retiring directors of NZ Farming Systems Uruguay, who told that week's annual meeting that they got everything right and the company's poor performance was the result of a large number of other factors including underperforming Uruguayan cows, low-energy grass, its New Zealand management team and, believe it or not, ACC.

AMP has taken a major leadership role by abolishing commissions for financial planners, which were an important contributor to the finance company debacle.

Financial planners or advisers generate income from commissions, which are paid by product providers, or from fees paid by investors.

Finance companies pay commission or brokerage to financial planners based on the amount of money invested and the duration of the investment.

In the mid-2000s quoted finance company commissions or brokerage were around 0.5 per cent for a one-year term, 1.0 per cent for two years and 2.0 per cent for five years. The actual commissions were often higher and most finance companies paid trailing commissions, which are an additional yearly payment over the duration of the investment.

Financial planners and advisers had a huge incentive to encourage individuals to invest in finance companies that paid the highest commissions. For example, the commissions or brokerage on $100,000 were as follows:

• A financial planner would receive just $500 if the individual invested for one year and the commission rate was 0.5 per cent.

• A financial planner would receive $2000 up front and another $1000 each year if the money was invested for five years and the initial commission was 2 per cent and the annual trailing commission 1 per cent.

A large number of financial planners advised individuals to invest in finance companies that offered the highest initial and trailing commissions. This was often poor advice as many of the finance companies paying the highest commission - with Bridgecorp being a good example - were some of the biggest disasters.

Under a fee-based regime investors will pay directly for advice. In Australia this can be up to $300 an hour but this is a much more transparent and soundly based payment structure than the traditional commission-based regime. The fee-based approach is preferred as long as the adviser is knowledgeable, experienced and recommends an investment strategy that is appropriate for an individual's age, risk-profile and overall financial position.

The governance of listed property trusts has been a long-running contentious issue and AMP NZ Office Trust (ANZO), which has more than 8000 investors, is no exception.

Most of these listed entities have been managed by a separate management company with the investors having no ability to scrutinise them or vote for their directors.

There is an inherent conflict of interest because management companies have a strong incentive to grow the trust, regardless of the profitability of the acquired assets, as its fees are based on the gross value of assets.

Under a new proposal, ANZO will become a company with its own board of directors but it will still be managed by the same external company, which will also have its own board of directors.

Unit holders will vote on the proposal at a meeting in Auckland on October 21.

Unfortunately, the new structure falls well short of what unit holders were hoping for and a large number of investors are likely to vote against the proposal.

The main issue is the debate between external management, which ANZO is going to maintain, and the internal management model, which DNZ Property recently adopted.

The KordaMentha Independent Adviser's report says there is clear evidence, according to US studies, that the internally managed vehicles outperformed externally managed vehicles in the 70s, 80s and early 90s but there is less evidence of this post-1993.

Nevertheless, New Zealand investors have a clear preference for the internal model because of a number of dreadful experiences under the external management regime.

The ANZO proposal falls well short of the recent changes at DNZ Property, which have been greeted with enthusiasm by investors.

The other main features of the ANZO proposals are:

• The base fee will be reduced from 0.65 per cent of gross assets at present to 0.55 per cent for the property assets up to $1.0 billion and 0.45 per cent for assets above $1.0 billion. The current value of ANZO's portfolio is $1.28 billion.

• A performance fee will be introduced equal to 10 per cent of the amount by which unit holders' returns for a quarter exceed the returns of ANZO's listed property group peers.

• There will also be a large number of additional fees payable to the management company for new leases, lease renewals, rent reviews, project management, property management, developments and for acquisitions and disposals. These additional fees can be substantial.

However, one of the biggest outcomes of the proposed new ANZO structure is that the external manager will effectively have a contract in perpetuity whereas under the existing regime it could be removed if 75 per cent of unit holders voted in support.

The latter would have been difficult to achieve because the management company has an effective 21 per cent blocking stake, but under the new regime it will be able to reduce or sell this shareholding because the manager cannot be removed except for a material breach of contract or if another party acquires more than 50 per cent of the listed company.

This is totally unsatisfactory and demonstrates that AMP has been far less willing to take leadership in relation to AMP NZ Office Trust than it has towards the commissions/fees debate.

The NZ Farming Systems Uruguay (NZS) annual meeting was a stark reminder of the problems associated with the external management model as the South American-based company has been managed by PGG Wrightson.

Chairman John Parker answered a wide range of questions on the low productivity of Uruguayan cows, the lack of energy in the country's grass and supplementary feeds and question marks over the quality of soil in the eastern part of the country.

New chief executive Alastair de Raadt said production was 10 per cent below budget and Olam's Vivek Verma told shareholders the company wouldn't be in profit until the June 2015 year.

But the most extraordinary moment was when Parker asked retiring directors Keith Smith, Craig Norgate and Murray Flett to address the meeting.

There were no signs of humility or apologies from the three long-standing directors as they praised each other for their vision and enterprise.

Flett blamed the cows, land and poor-quality fertiliser for the company's problems.

Norgate said the Uruguayan employees had performed better than expected but the company had been let down by its New Zealand management team.

In other words, PGG Wrightson had made a botch of it, yet Norgate didn't seem to accept any responsibility, even though he and Smith held important PGG Wrightson board positions until just over a year ago.

Norgate slammed ACC and PGW Wrightson for accepting the Olam offer yet he accepted in respect of 600,000 of his 615,000 NZS shares and Flett sold 9.9 million of his 10.4 million shares to Olam.

NZS's external management will be internalised, PGG Wrightson will be paid another $24 million before year-end and the farm company's share price fell from 63c to 59c immediately after Thursday's meeting.

NZ Farming Systems Uruguay shareholders don't have many happy memories from their exposure to the external management model.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.