Billion-dollar managers

Shortly after the finance company Bridgecorp went into receivership last July, Simon Purvis, chief executive of one of the country’s biggest financial planning firms, began sending letters to his company’s clients.

He had a lot of letters to send.

His company, Vestar, manages more than $1 billion on behalf of thousands of Kiwi investors, and it had encouraged many of them to put their money into Bridgecorp.

In 2005, Mr Purvis’ firm, then called Northplan, had even paid for the Australian ratings agency Property Investment Research (PIR) to evaluate Bridgecorp.

According to Duggald Higgins, associate director at PIR, it was a deal unlike any other his company has ever made. PIR normally contracts directly with the firms it evaluates, not with financial planning firms, said Mr Higgins, who noted that Mr Purvis handled the negotiations on the New Zealand side.

PIR judged Bridgecorp to be investment-grade.

Then Bridgecorp collapsed, and Mr Purvis started writing to his clients, attempting to reassure them that they could trust Vestar to continue managing their money.

But his letters – several of which have been obtained by NBR – may have raised more questions about Vestar than they settled.

For instance, there is the issue of Vestar’s brokerage fees, or commissions.

After Bridgecorp collapsed, many investors started asking how much money their financial advisers got for referring them to Bridgecorp, and whether those fees had influenced their advisers’ judgment.

Mr Purvis writes in his letters that “our decisions to select particular investments are made in the interests of our clients. They are not made on the basis of brokerage payments.”

But that’s not the impression some of Vestar’s managers gave Mark Thornton, executive director of New Zealand Finance, a couple of years ago.

Mr Thornton said at that time he was contacted by Northplan, now Vestar, with a proposal that Northplan send investors to New Zealand Finance in return for higher-thanaverage brokerage fees.

Mr Thornton said he declined the offer.

“It was definitely a quid pro quo kind of deal,” said Mr Thornton, who added that he also considered it to be unethical. “I’ve never been approached by anyone else in this way,” he said.

Mr Thornton isn’t the only finance company director who makes this claim. An executive from a different company – who asked not to be identified in this article – told NBR that he too was approached by Northplan a couple of years ago with a deal to refer investors to his firm in exchange for extra brokerage fees.

He said he also declined the offer.

NBR requested an interview with Vestar’s chief executive, Mr Purvis, formerly director of Northplan, to discuss these allegations. We also requested an interview with Vestar’s managing director Kelvin Syms, formerly managing director of Northplan.

Both men declined. But through a public relations firm, Vestar denied any of its managers ever proposed any kind of quid pro quo deal related to brokerage fees and said that “at all times, commissions and rates were fully disclosed to clients.”

Vestar is certainly not the only financial planning company whose practices have been questioned. And it is not the only company that recommended Bridgecorp to investors.

But it is an important case study for New Zealand, because its management team includes some of the country’s most well-established financial advisers, whose firms were merged into Vestar this year when they were bought by Vestar’s parent company, MFS Ltd.

As a result, Vestar manages more than $1 billion worth of investments for more than 3400 people throughout New Zealand. Its decisions and policies can have a significant impact on New Zealand’s finance industry.

For an individual finance company, a recommendation from Vestar could be crucial. In light of the growing influence of companies like Vestar, the government is putting in place a set of regulations that will require financial advisers to disclose more information about their commissions to their clients.

“This industry is founded on commissions,” said Commerce Minister Lianne Dalziel.

“But of course, when the person paying the commission is also the one selling the product, it muddies the waters.” Ms Dalziel said the new regulations, which should be in place by the end of the year, would also require financial advisers to disclose any conflicts of interest.

She said yet another upcoming set of regulations would help clarify the structures of individual finance companies and the relationships between companies for investors.

That would certainly please South Island accountant Pat Houlihan, who said he had seen a number of his own clients lose money with financial advisers, including Vestar.

Speaking from his office in Gore where he was reading through several of Vestar’s letters to his clients, Mr Houlihan took issue with the company’s claim that “our strategy is that diversification is the best way to reduce investment risk.”

His clients’ Vestar portfolios had some “weird and wonderful stuff” in them, he said, but after doing some research he’d found many of those investments were actually interrelated companies.

In his opinion, he said, their portfolios were actually “very narrow.” Some of Mr Houlihan’s observations seem to be borne out by a letter Mr Purvis wrote on July 25, in which he names the seven fixedinterest investments on Vestar’s approved list.

One company on the list is Bridgecorp. Another is Property Finance Securities, which went into receivership about a month after Mr Purvis wrote his letter.

Two more companies on Vestar’s list, Capital+Merchant Finance and Cymbis Finance Australia, appear to be separate entities in Mr Purvis’ letter but are actually “sister compan[ies],” sharing some of the same directors, according to a ratings agency report.

It is possible that Vestar discloses the relationship between these companies elsewhere in its client literature.

The company did not respond to NBR’s question on this point. Another company on the list, MFS Pacific Finance, is 40 per cent-owned by MFS Ltd, which also owns 100 per cent of Boston Finance, the next company on Vestar’s approved list. MFS Ltd also owns Vestar.

The last company on the list, St Laurence, has no corporate connection to Vestar but last year it owned 50 per cent of St Laurence Private Equity, which managed a fund that owned 25 per cent of Northplan, as Vestar was then called.

In September 2006, that private investors’ fund sold its stake in Northplan to MFS Ltd, Vestar’s parent company. In the end, then, Vestar’s approved fixed-interest investment list comes down to two failed companies, two sets of interrelated companies, and St Laurence.

Nevertheless, Mr Purvis maintains in his July 25 letter that Vestar’s strategy is to diversify its clients’ investments, adding that “this strategy has proven successful throughout history.”

Vestar also pointed out that it offers more than fixed-interest investments to its clients. “A Vestar client portfolio,” the company said in a written statement, “will include investments in fixed-interest debenture investments, international equity funds, Australasian equity funds, international property funds, direct property securities and equity investments.”

As for the fact that Vestar has a corporate connection to two of the companies on its approved investment list – MFS Pacific and Boston Finance – Vestar said that was a good thing for its clients.

The company cited a press release announcing that its parent, MFS Ltd, had more than $1.8 billion in assets and had agreed to support MFS Pacific and Boston Finance “in the event that it may be required.”

What the press release didn’t say was that Vestar’s managers commissioned a PIR ratings report for Boston Finance in 2005, then shelved the report when the company failed its evaluation.

In the report, Boston Finance earned a dismal one-and-a-half-star rating, far below the three stars necessary for investment grade, said PIR’s Duggald Higgins.

“They had a lot of issues they were going to have to address,” he explained.

Ms Dalziel said in her opinion that was exactly the kind of information a financial adviser should have to disclose to his clients.

Although she said she could not comment on Vestar specifically and that each case had to be judged individually, she pointed out that “an adviser who deliberately doesn’t disclose information about known risk may be in breach of the Fair Trading Act.”

Ms Dalziel’s office also explained that “breaches of the Fair Trading Act could result in criminal or civil penalties.”

Nevertheless, when NBR asked Vestar whether it ever told its clients about Boston Finance’s poor rating, the company answered in effect that if clients don’t ask, it doesn’t tell them.

“If a client requests information about what is behind any of Vestar’s recommendations, including Boston Finance, then as part of this the client will be told the relevant PIR rating,” the company wrote.

And what if a Vestar client were to read this NBR article and then ask his adviser for a copy of the full PIR report on Boston Finance?

According to Vestar, he would probably be out of luck: “If a client requested a full copy [of the ratings report], this is unlikely to be provided because it does not reflect the current position of Boston Finance.”