Somers-Edgar clips the ticket on First Step

Special investigation by Campbell McIlroy

Friday 18th January 2002

Scrutiny of Money Managers' First Step investment product has brought into question the impartiality of the advice the financial planner gives to its clients.

Examination of publicly available records highlights a complex web of inter-relationships between Money Managers founder Doug Somers-Edgar and NZ Funds Management directors and shareholders Gerald Siddall and Russell Tills through at least six companies that benefit financially from First Step.

Mr Somers-Edgar was unavailable for comment at press time yesterday and Messrs Siddall and Tills also could not be contacted.

The First Step prospectus was suspended by the Securities Commission last year over claims of "no fees" and financial forecasts that were annualised even though the fund had only been running for nine months.

The annualised returns were also the subject of an Advertising Complaints Board decision last year, as was the Macquarie Gilt Edge Access Account into which First Step investors must first deposit their funds.

While Money Managers resolved the issues with the prospectus to the satisfaction of the Securities Commission, rivals in the investment community were amazed by the level of related-party lending and the potential to repeatedly earn income from the same pool of investors' funds.

Financial statements for First Step for the period ended June 30, 2001, show almost a third of the more than $165 million raised by the scheme was lent to finance companies associated with Messrs Somers-Edgar, Siddall and Tills.

What is not clear is the level of risk taken on by these finance companies, what they use the money for, the level of security First Step Investors have and the amount of money Messrs Somers-Edgar, Siddall and Tills are also making out of these finance companies.

Under the basic structure of the scheme investors put their money into one of four trusts based on the level of risk they wish to assume and on the advice of their Money Managers adviser.

Money Managers collects a commission of 0.8125% for placing its clients into the First Step scheme.

But the money is first placed into Macquarie's Gilt Edge Access Account which attracts management fees of 0.95-1.3% of the daily average balance.

The trustee, Global Investment Services (Two), which is ultimately controlled by interests associated with Messrs Siddall and Tills, is paid a fee of 0.12% a year.

The money from the four trusts is then lent to Securities Registry Ltd (SRL), which is owned by Messrs Siddall, Tills and Somers-Edgar, who therefore share in the profits of the company.

SRL's profit is derived from the difference between the interest paid to the First Step trusts and the interest rate at which it lends out its funds.

SRL also acts as trustee for Securities Registry Trust, of which Messrs Somers-Edgar, Siddall and Tills are the ultimate beneficiaries.

The First Step investment statement states the funds from the four First Step trusts are invested through four separate Securities Registry trusts.

But the financial statements for Security Registry Trust for the six months ended January 31, 2001, appear to indicate only one trust.

It is understood it was only on December 7 last year that separate trusts were established.

Before this, investors in the four First Step trusts ultimately shared in the same level of risk, which was quite clearly the opposite of the scheme's advertised intention.

The same financial statements also show the beneficiaries (Messrs Siddall, Tills, and Somers-Edgar), were paid a total of $150,000.

First Step's June 30, 2001 financial statements show a total of $165.29 million was lent to SRL.

SRL is responsible for then lending the money on according to the investment policies of each of the trusts.

One of the largest single loans made by SRL, totalling $39.3 million, as detailed in the First Step financial statements, was to Structured Finance (NZ) Ltd.

Structured Finance is a 50% subsidiary of SRL, the company that lent it the money, and therefore 50% owned by Messrs Somers-Edgar, Siddall and Tills. The remaining 50% of Structured Finance is ultimately owned by Martyn Boyd Hamilton Reesby and Martin Wisler Poulsen.

A further $9.58 million was advanced to CTT Financial Services, which is ultimately owned by interests associated with Mr Somers-Edgar.

What is not known is the nature of the loans, the level of risk associated with the loans, who these finance companies then lend their money to, and whether Messrs Somers-Edgar, Siddall and Tills have any association with them.

Given the beneficial nature of Mr Somers-Edgar's relationship with SRL, Securities Registry Trust, CTT Financial Services, and Structured Finance, many industry participants have questioned the impartiality of the advice offered by Money Managers.

The company's website promotes Money Managers as "Your impartial investment advisers."

In September 2000 Money Managers had another complaint to the Advertising Standards Complaints Board upheld over a newspaper ad that criticised traditional family trusts as being "a charity for accountants, solicitors and the bank."

One industry commentator said this was almost a case of the pot calling the kettle black.

Financial Planners and Insurance Advisers Association chief executive Phillip Matthews said its members were bound to act in the best interests of their clients and it was mandatory for them to disclose any business relationships they had that might affect the impartiality of their advice.

"We have no rules prohibiting advisers from being involved with the companies related to an investment product but we would expect them to expose that very clearly to the client."

He also said that to the best of his knowledge very few if any Money Managers investment advisers were members of the FPIA.

The central question is one of disclosure.

There is no suggestion the scheme in any way breaches any law.

The Securities Commission recently circulated a discussion paper that raised the possibility of mandatory disclosure by investment advisers.

Disclosure of interests by investment advisers is required only if it is explicitly asked for by investors.

There are also no regulations covering how many times a company, or an individual, can derive income from the same pool of investors funds - what is known in the industry as "clipping the ticket."

One investment analyst said as long as the client was adequately informed about what was going on there was no problem and the choice was ultimately that of the investor.

But as Mr Somers-Edgar and his associates were not available for comment it is not possible to ascertain whether the company has a policy of disclosing its conflicting interests and how many investors were given copies of the full prospectus.

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