Newsletter August 2009

August 1, 2009

Adviser Regulation

The Sunday Star Times recently ran an interesting article regarding financial advisers. It appears we are one of the least-trusted professions in the country. It’s hardly surprising given some of the losses experienced by investors over the last couple of years. There has been some truly awful behaviour from advisers (salesmen), particularly around the finance company sector. The Institute of Financial Advisers made the unprecedented move recently of naming and shaming two of its members (insurance salesmen) who funnelled excessive proportions of individual clients’ funds into finance companies. In one case a couple was advised to invest the total proceeds from the sale of their home into Bridgecorp, while they looked for another property to purchase.

There are currently three separate pieces of adviser regulation being considered by the Government. The Ministry of Economic Development is looking at disclosure proposals, and the Securities Commission is looking at adviser competence, and regulation and supervision. By the end of next year all financial advisers will need to be authorised to practice by the Securities Commission. Disclosure may become stricter, and advisers will need to meet yet-to-be-determined levels of experience and qualifications. Under current law anyone can hang their shingle out and begin practice as a financial adviser. I would be more than happy to see the bar being set much higher. The new requirements for disclosure, experience and academic qualifications don’t worry me in the least, however I do worry the Government may take a heavy-handed approach to how advice is delivered. In Hong Kong, for example, apparently advisers are required to establish the risk profile of each investor, and then sign a contract with the investor disclosing the nature of the investment and its risks. Someone has to pay for that added level of complexity, and ultimately it is the investor. My other concern is that regulation may go so far as to convince investors their adviser has taken the risk out of investing. Advisers don’t take the risk out of an investment, however they should be able to explain its characteristics and ensure those characteristics fit the objectives of the investor.

 Commissions Versus Fees

A certain amount of the negativity around financial advisers has been the payment of commissions by product providers. Many are calling for a ban on commission payments, instead charging clients a fee for advice received. Historically finance companies have paid commissions to advisers to sell their debentures to investors. The managed funds industry (Tower, AXA, ING, AMP) pay various commissions to sell their funds. There is no question there is potential for a conflict of interest when commissions are being paid to advisers, sometimes at different rates. This is where the integrity of your adviser comes into play, and a ban on commissions in my opinion is short-sighted. On many occasions I have advised investors to keep their money in the bank because I have been unable to offer them a better return considering the risk they are prepared to take. This is where many advisers (salesmen) have let themselves down recently – greed, and the possibility of short-term gain has got in the way of the interests of their clients, and ultimately the long-term interests of their own business.

Disclosing commissions is perfectly adequate protection for consumers in my opinion, and in some cases removing them would see investors paying for a service they have previously received for free. We have provided our clients with numerous new bond issues over the last year including Fonterra, Contact Energy, South Canterbury Finance, Wellington Airport, Rabobank and the BNZ. No money was paid by investors to acquire these bonds as we were paid directly by the issuing firm. The proposed legislation will go some way toward weeding out the self-interested financial advisers in New Zealand; however I believe investors need to educate themselves on financial matters. Read the likes of Gareth Morgan, ensure your adviser explains all the characteristics of an investment, ask them to disclose any fees or commissions, and don’t be afraid to consult another adviser for a second opinion.

Government Guarantee

The finance company sector continues to struggle in the current environment. South Canterbury Finance have suffered write-downs of $58million, and will post their first loss since 1934. Marac have sold $160million of bad loans to its parent, Pyne Gould Corporation and I believe UDC and Equitable may even have losses on some of their loans. Is there a future for the finance company sector? The Government is currently drafting legislation that will regulate the non-bank deposit takers, including the building societies and credit unions. There will be rules around capital adequacy and each organisation will have to have a credit rating from one of the three main ratings agencies. But will this be enough for the Government to lift the guarantee in October next year? Currently most investors are only depositing money with the non-bank deposit takers within the Government Guarantee. Finance companies are awash with cash that they can’t do anything with. They want to lend the money but are concerned it will all go flooding out in October next year if the Government withdraws the guarantee. Australia has extended their guarantee for another year and our Government needs to state exactly what they intend to do so these companies can plan accordingly.

KiwiSaver

The KiwiSaver anniversary has just passed (June 30) and many investors were scrambling to make payments on the last day. If you have been a member of KiwiSaver for a full year the Government will match your contributions up to a maximum of $1043. This sum is equal to $20 per week. The simplest way to ensure the maximum benefit for members not contributing through their wages is to set up an automatic payment of $90 per month directly to their KiwiSaver provider. Those who are contributing through the PAYE system need to work out how much they have contributed throughout the year and top up to $1043 some time in June.

Those members who have reached age 65 since joining KiwiSaver can still receive the matching Government contribution. It will be paid for five years since joining. This is also the period of time an account must be open before the contributions can be paid out. If you want to discuss KiwiSaver in more detail please call the office.

Barramundi Warrants

We continue to monitor the price of these warrants. At present the underlying Barramundi share price is at 0.58 cents, and the warrants are trading at 0.001cents. The share price would have to move significantly closer to $1.00 for these warrants to achieve any value. The warrants expire on October 25th.

Apology

My sincere apologies to Garry Daniell re the Lotto win. He was clearly set up, and I, along with many others was sucked into believing he had asked the Big Wednesday winners to fund council projects. This was not the case.

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