Why we started Bradley Nuttall
I got into the industry in 1986, largely due to the fact that I have always been interested in business and money. For a long time I had enjoyed reading the business pages and the previous three or four years had seen me become involved in a number of businesses.
What I found most fascinating was how ordinary people could be so successful, while those who had gained a number of tertiary qualifications through universities often didn’t encounter that same financial success.
I started out by joining National Mutual. In reflection, I realise I was trained entirely by fund managers and (to a lesser degree) a research house, known as the Financial Planning Group. The training led me to trust that fund managers and managed funds were the best solutions for clients. I was convinced that returns were everything. I can recall one particular occasion, where the promotion of a fund had earned 365% in the previous year. The fund manager had said, "look we can’t make promises, but next year we should be able to do at least half that." Well, at least in some way they were right; the next year the fund was worth half its previous value.
I believed you could pick the best managers and, perhaps worse, I believed there was no point in worrying about tax or fees, because returns would surely solve these problems.
By around the mid 1990s I had grown disillusioned for a number of reasons. Chief among these was the fact that fund managers' promises regarding returns and volatility seldom aligned with what was actually being delivered.
Fund managers were very quick to promote the funds that had achieved fantastic returns in the previous 12 months, and were equally fast getting rid of any significantly under-performing funds. They would often merge the poorly performing funds into better perfoming funds, which would conveniently drop the fund - along with its ugly performance - from their records.
I also became aware that fund managers weren’t actually interested in what was best for the client. Instead, they simply promoted products they thought they could sell. A great example of this was during the technology boom. BT promoted their Time Fund on the basis that growth over the next five to 10 years would be in technology, information, and media. One year later the fund was worth 50% of its previous value.
After some rigorous research, which included travelling to North America, I realised that less than 30% of all fund managers achieved market returns. In fact, once you took fees and tax into account, you’d be lucky to find 25% of fund managers who outperformed their benchmarks. Of course you never hear about the 75% of funds that underperform their benchmarks; naturally, you might conclude that investments will be reallocated into the 25% that outperform. The problem was that the managers who outperformed in one year didn’t necessarily repeat in the next year; there were of course some who did, but no more than you would expect by chance.
In simple terms, I realised the industry’s products were not client centred.
Furthermore, the fees were very, very high, and tax was a problem with many products. Fund managers couldn’t (or didn’t want to) answer my questions or concerns, or they would privately acknowledge them without offering any real help.
Another major issue for me was that commissions and margins were being taken on top of fees. A number of financial planning firms in the market place were claiming they were independent, however non-disclosure ran rampant. How could they say they were independent when they were getting paid by the products in which they were advising clients to invest? Was their advice truly “independent”, or was it coloured by the size of the commissions?
In short, I reached the conclusion that clients were not being rewarded for the risks they were taking.
Together with my business partner Jacob Wolt we decided that there had to be a better way. We spent some time overseas in both Australia and North America researching the best options, and discovered that there were advisory firms that had made a stand in the market place without listening to the stories told by sharebrokers, fund managers, financial institutions, and research houses. In 1998, we decided that we would be fee only. This meant that our interests would be completely aligned with our clients' and there would be no temptation to take a large commission-paying product.
We acknowledged that it was impossible to pick tomorrow’s best fund managers today, recognising asset class investing to be a superior option. At that time in New Zealand, all of our investment options from a fee and tax perspective were unappealing, so we developed direct portfolios of NZ shares and direct fixed interest portfolios. This enhanced returns while reducing fees and tax. Tax laws have changed since then and I am pleased to say that better fund options have now emerged.
We agreed that fund manager fees were an issue; the fees that many fund managers charged could range from 1.5 – 5%. We decided we would only deal with fund managers who were not only low cost but also had the integrity to do what they said they were going to do. Transparency was key; our clients would know exactly what they were investing in, as well as the associated fees and costs.
What we also realised was that the academic theory that had been formulated and developed since the 1950s provided a proven theoretical basis for asset class investing. A model now known as the 'Three Factor Model' showed that investment returns were based on exposure to risk, rather than ability to pick shares and managers.
It wasn't just about managing clients' money though; we also wanted to be a financial coach for our clients. This meant we would become their confidante and guide in areas such as estate planning, family issues, retirement planning, risk management, etc.
So we developed a process that focuses on rewarding clients fairly for the risks they take when investing. In addition, we reduce unnecessary risks, minimise taxes, and put our clients' financial houses in order. We find our process particularly suits prudent investors rather than speculators.