The value of fiduciary advice

The value of fiduciary advice

Posted by Ethical Investing NZ

Thursday 13 December 2018

If you ask the board members of any of New Zealand’s top businesses, “What’s the value of good governance?” the answer is likely to be, “It’s absolutely critical.”

But what does good governance mean in relation to investments?

In this article we’ll look at why investment governance and due diligence is important. We’ll explore what happens when due diligence is ignored or not followed, and will introduce an international best practice process and explain what it means for you.

It’s hard to know the value of good governance until you see the alternative.  For example, a portfolio reviewed in 2014 included an investment called Epic.  Epic was a very small infrastructure investment company which had a concentrated portfolio held mostly in a motorway service operator in the United Kingdom.

Epic had a number of performance issues, including losses of over 70% of the share value, as well as eye watering fees and what appears to be near corruption. Subsequently, Epic went into voluntary liquidation.

Of course, no one can predict how an investment will perform, but there are certain things about Epic that should have caught the adviser’s eye.

  • It was very small
  • The portfolio was concentrated in basically one asset
  • It couldn’t be easily traded.  Once you were in it was very hard to get out
  • The fees were far from transparent, and quite high (if you took the time to understand them)

Yet Epic raised about $100M from New Zealand investors.  Why would any adviser have recommended Epic?  Perhaps it was a great sales presentation.  Perhaps they were being told that the “smart money” was going into infrastructure assets.  Perhaps it was the impressive credentials of the management team.  What’s clear is that proper due diligence was not performed.

Put simply good due diligence and investment governance ensure you avoid the age old approach to investing: following what everyone else is doing.

A rigorous international governance standard has been developed by fi360 and the Centre for Fiduciary Excellence (CEFEX) which helps advisers who are striving to deliver the highest quality advice to clients.  This standard includes a focus on the process around due diligence.

In the handbook “Prudent Practices for Investment Stewards & Investment Advisors (New Zealand Edition)”, fi360 lays out four steps and 21 practices that make up a complete investment due diligence and governance process.  To reach the required threshold for each practice, there are several criteria.

Firms that feel confident they meet all the best practice requirements of governance can apply for an audit by an Accredited Investment Fiduciary Analyst.  If they pass and receive CEFEX certification, they are then subject to an annual audit to ensure they maintain the standards.

At C2C Partners we take due diligence and investment governance very seriously.  We’re interested in working with the best professionals, who follow thorough processes.  Our investment governance partner, Consilium, voluntarily subjects itself to a CEFEX audit on a regular basis.  This includes a full review of their processes, procedures, documentation, minutes and files.  The most result was a pass and subsequent receipt of the CEFEX certification.  Consilium is among less than 200 firms globally that have reached this threshold for quality and best practice.

But what are the benefits to our clients?  The primary benefit is confidence. They know that our investment policy, investment selection, monitoring and quality control are amongst the best in the world.  Furthermore, it underscores a critical element of our services – we use an evidence based approach to construct portfolios, and we continuously collect new information to ensure our choices are prudent.

This all happens in the background, so we are able to focus on working with our clients to create strategies to help them to achieve their financial goals.

The value of fiduciary advice

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