Inspired by alleged quasi-ponzi scheme operator, David Ross, the Financial Markets Authority (FMA) embarked on a fact-finding mission in the year's opening quarter.

The mission report, published last week, reveals almost 70 per cent of the entire stock of New Zealand's Authorised Financial Adviser (AFA) community have signed up as able, but maybe not willing, to run investments under the same legal terms as Ross - that is, by offering a discretionary investment manager service (DIMS).

DIMS advisers can invest in a range of underlying securities on behalf of their clients without necessarily seeking client permission for each trade. In effect, as the Ross saga demonstrated, a DIMS authority - especially when combined with a 'sophisticated' client opt-out of retail disclosure rules - can empower advisers to act like mini fund managers with little, or no, oversight.

The FMA report says an astonishing 1,300 of the total 1,900 or so AFAs are licensed DIMS-people.


Disappointingly, from a rabid journalistic perspective, the figures become less astonishing as the FMA investigation proceeds. As the regulator discovered, after surveying the entire world of DIMS, only 44 per cent (or 572) who are licensed to provide such a service actually do so.

The report also distinguishes between those advisers who supply DIMS under the aegis of a Qualifying Financial Entity (QFE) - generally large financial institutions - and those AFAs who do it off their own bats. QFEs take on legal responsibility for the behaviour of the advisers under their command. Individual AFAs have it on their own heads.

According to the FMA, 343 non-QFE AFAs admit to doing DIMS while 234 QFE-monitored AFAs also offer the service.

And the FMA says "not all" of the DIMS operators were doing things by the book.
Although it didn't quantify the extent of any problems. The regulator found several behavioural issues in DIMS-land, including:

* Not all AFAs were taking reasonable steps to ensure that the client is aware of the principal benefits and risks involved;

* Not all AFAs provided adequate evidence that clients are wholesale under the FA Act, and;

* Not all client agreements or investment mandates provided or presented the information [the FMA] would expect, in a clear, concise and effective way.

For the first time, however, the FMA has done some DIMS sums, giving punters the chance to estimate how much money is being managed this way.

The regulator asked 113 AFAs to report on the DIMS funds under management (FUM) across 10 ranges. Most reported reasonably small FUM sums - only two said they managed over $60 million, for example.

However, using some back-of-the-envelope statistical methods (taking the half-way point of each range and multiplying by number of AFAs with funds in that range - except for the $60 million plus range where I, because I felt like it, allotted each of the two advisers $100 million each) I came up with a figure of about $2 billion, or an average of roughly $18 million per AFA.

Multiplying that average by the total DIMS-active AFAs (572), that equates to just over $10 billion sitting in discretionary portfolios.

Some readers might complain there is some dodgy maths in my analysis but I assure you it's all good and I've got a spreadsheet to prove it.