There's an apocryphal story about the financial services business. It may not be true, but then again, it is repeated often because it sounds like it should be.
OPINION: It goes like this: a visitor to New York is being shown round the financial district. Arriving at the Battery he is invited to admire all the fine yachts in the harbour. "Those belong to all the city bankers and brokers," says the guide. "So where are all the customers' yachts?" says the visitor.
The anecdote was so popular it gave the title to a 1940 book about greedy old Wall St by a bloke apparently called Fred Schwed.
It seems Schwed had quite a few sayings to keep investors on the straight and narrow, such as: "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little."
Judging by the stocks favoured by financial adviser David Ross, whose business is now in the hands of receivers, Chalkie reckons Schwed was not on his reading list.
There was Oncothyreon, a Nasdaq-listed biotechnology company working on anti-cancer drugs. Like many biotech stocks it is hugely volatile - in the last 12 months the price has varied from US$3.35 to US$9.23.
There was Petrobank Energy & Resources, a Toronto-listed oil and gas explorer based in Calgary. In the last five years its price has gone from C$60, to C$17.70, back up to C$57 and is now trading around C$13.
There was B2 Gold, another Canadian resources company, whose shares quadrupled between 2009 and 2011, then see-sawed wildly.
There was Australian oil explorer Roc Oil, whose share price five years ago was A$3 and is now around A47c.
Add in Biogen Idec, Catamaran Corp, Santos and AWE, and you can see a heavy concentration on resources and biotech.
What these stocks have in common is the ability to produce big gains (and big losses) in a relatively short time - perfect for someone who aims to build a reputation as a stockpicker who can generate unusually high returns.
That being said, Chalkie reckons anyone who claims market-beating investment expertise in oil, gas, gold and hard commodities, as well as biotechnology and healthcare, all at the same time, has to be brilliant, lucky, or a fantasist.
Of course, while Ross's clients may have had statements showing these stocks in their portfolios, we don't know whether they actually owned them. Receivers have so far found only $10.2 million from portfolios supposedly worth $449.6m.
It's possible they do exist somewhere, but although receivers from PWC and brokers from First NZ Capital had only nine days to do their research, it was surely long enough to find everything if Ross' affairs had been in order.
When you look at the cashflows in and out of Ross' investment group, it would take an incredible series of returns to keep up and still have assets under management of $450m.
Since 2000, investors had put in $303.2m and taken out $289.2m. When you count the hefty fees of $29.8m extracted by Ross' group over the same period it's clear the numbers can add up only if the firm already had substantial assets under management before 2000, or the returns were extraordinary - 25 per cent a year, compound, according to PWC.
According to people who know Ross, he did have funds under management before 2000.
For example, Ross Asset Management was the investment manager for equity funds run by Renouf Asset Management until they were sold to Direct Broking in 1999 after the death of Sir Frank Renouf.
Direct ended Ross' role, although sources say it wasn't because of concerns about his management. But they say even then Ross had private clients in addition to his formal fund contract.
As an investor Ross was a familiar figure on the broking scene. "I know him well," said one investment professional. "In Wellington everybody knows him."
Everybody knew him, and nobody suspected anything amiss. Ross was still keeping regular lunch appointments with friends three weeks before the Financial Markets Authority raided his offices.
Well, not quite nobody. Chalkie, in a previous incarnation (Chalkie is like Doctor Who and regenerates periodically) had noticed oddities at RAM.
In 2010 he wrote: "Your columnist knows of at least one reasonably substantial investment operation in New Zealand that would not pass the commonsense questions that investors should have asked Allan Hubbard before giving him their cash."
He was talking about Ross.
In addition, Chalkie is aware of a member of the Securities Commission being told of concerns about Ross before 2010, but those concerns were never passed on to commission staff - according to the FMA, no correspondence about Ross was received by it or its predecessor the Securities Commission before October 25 this year.
Perhaps few would be surprised the commission had a blind spot, but the FMA has also revealed some flaws in the Ross affair.
Once investors raised the alarm the FMA acted with admirable speed and decisiveness, but in granting Ross Authorised Financial Adviser status in July last year it has shown the weaknesses in its scrutiny.
AFAs, it seems, have only to show they have relevant skills and an absence of criminal convictions - their handling of client funds is not an issue at the point of authorisation.
Thereafter the FMA monitors advisers, but can't look at all 2000 of them in depth, so it prioritises according to its perception of risk. Apparently the FMA saw risk in geographical areas with lots of retired people, so looked at AFAs in Tauranga first.
Chalkie wonders whether it might be a better idea to target AFAs by how much money they purport to have under management.
Still, things should be better once the Financial Markets Conduct Bill gets through Parliament. Ross, in theory at least, ran client money as individual discretionary managed accounts. This is common among traditional sharebroking firms and gives each client their own portfolio which may have different asset allocations.
But while NZX firms operate those portfolios under strict protocols, AFAs have had virtually no such supervision.
That should change under the FMC Bill, which will require any firm providing discretionary investment management services, or DIMS, to be licensed, and a condition of the licence is that client funds must be held by an independent custodian.
This will help prevent money going missing as it has with RAM, which did not use a custodian.
But just as the law starts herding advisers into a regulatory corral it goes and leaves a gate open, in this case through a carve-out for individual AFAs who can continue to provide DIMS without a licence.
The FMA says a further amendment to the Financial Advisers Act will require AFAs offering DIMS to use custodians, although they will be allowed to use related parties.
Chalkie reckons that's a bit of a loophole.
Still, the FMA thinks the FMC Bill will give it the powers to keep a lid on AFAs despite the carve-out.
Meanwhile let's hope the Ross episode encourages the investment community to keep a closer eye on each other and blow the whistle when necessary.
The PWC report shows RAM dealt with 32 broking firms, seven of them in New Zealand. If just one had raised a red flag the episode might have had a different ending.
The FMA has criticised investors for being too trusting - maybe the industry was no better.
After all, these investment scandals are not just bad for investors, they are bad for business.
And that means fewer yachts in the harbour.
Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.