First Steps or a Dreaded Crawl

Nationally around 7,000 investors have been caught up in the First Steps saga.  In 2006, there was around $457 Million locked up in six trusts.  The trustee has warned that more than half of this may be at risk.  First Steps was a managed fund that was exclusively promoted by Money Managers.  In the Eastern Bay of Plenty there could be several hundred investors involved.

The managers made the decision in 2006 to wind up the trust and pay back investors over a two year period.  Investors have so far received $223.5M.  Last week First Step's trustee company Calibre Asset Services wrote to investors warning them of the "significant challenges in realising the remaining assets.  The managers are confident of further capital repayments over time but it is only appropriate to emphasise that there is also growing potential for further loan defaults by borrowers and, as a consequence, for further write-downs or losses to occur."

Almost all the remaining loans are either to a geothermal project or are property loans, mainly on Auckland apartments.  The Taupo geothermal development is thought to have been the largest loan at around $79 million.

Why is this so significant? It is yet another example of a sales network successfully selling product not suitable for their clients’ needs.  To make matters worse, there may be no viable comeback for these investors.  They do not have the safety valve of a banking ombudsman to whom to make a claim.  The vast majority of the advisers who sold the products are not members of a professional body such as the IFA, where there is a recognised independent disputes and disciplinary process in place. 

It is likely that the manager or the trustee will use the old standby excuse that the market conditions were unfavourable as the reason why loans were not repaid, or property prices were very depressed.  The advisers would also come in with their standby excuse that they diversified the investment as the clients also brought property and maybe some shares.  It is just not good enough. 

The managers had an obligation to lend money appropriately.  By appropriate there should have been strict parameters around exposures to individual borrowers.  What were the options if for example a private power geothermal development got into trouble should have been considered before any money was lent.  The old adage of “Would I invest my mothers’ money into it?” is a good measure of the safety of some investment decisions.  There is a duty of care which professionals need to exercise at all times.  It appears that acting in the client’s best interest is often overridden by the sales process.

We have seen examples of troubled portfolios where the investor has large exposures to First Steps, amalgamated Property Syndicates, and Orange Finance.  If asked, when was the Orange Finance investment made, invariably the answer is “from the proceeds of the partial First Steps repayment”.  Unhappily, Orange Finance is also now in default.  Unfortunately, for these investors, there is nothing much that can be done about the portfolios.  They are all locked into defaulting investments or investments where there is little liquidity such as from amalgamated property syndicates.  Often it is the mature adult children of the investor who have the real concerns about their elderly parents’ investments.

If investors took independent fee based advice prior to investing, then the chances of real problem portfolios dominated by associated parties’ investment products would be extremely low.