Newsletter February 2011

February 1, 2011

Scams

It’s disappointing to see Bernard Whimp making further ridiculous unsolicited offers to buy shares over the New Year period. Investors may have received offers from the likes of Cargill Securities, Powershares, NZ Investment Securities, and Carlyle Securities. All of these organisations are registered as limited partnerships due to the fact Whimp has been banned from being a company director.  Previously Whimp managed to buy 2.2 million DNZ Property shares from unwary investors at sixty cents. These shares are currently trading at $1.20. Unfortunately he is not breaking any laws – the offer price is clearly stated, and there is even a statement admitting that “the offer price does not, and should not be taken to constitute a representation as to the value of your shares.” He even suggests shareholders seek advice.

So why do people accept these offers? The offer price per share is generally in small print in the middle of the offer document, while the “TOTAL AMOUNT PAYABLE TO YOU” is highlighted at the top of a transfer form requesting your signature. The Fletcher Building offer was at $5.64 when the shares were trading at $7.75. An investor with 2,000 shares would have been offered $11,280. I’m guessing mainly elderly, inexperienced investors see the headline figure being offered, and having no idea of their true worth, accept without question. It’s difficult not to be cynical about his timing, also – just after Christmas when people are struggling to balance their finances, and when the Securities Commission was closed for the holiday period. If you ever receive unsolicited offers to buy your shares, don’t hesitate to ring the office and check the validity of the offer.

Asset Sales

The sale of state-owned assets is back on the agenda, and both sides of the argument can point to previous successes and dismal failures. My view on the politics of the subject isn’t important; however I hope any sale proceeds are used to stimulate the economy. There is plenty of misinformation in the press, particularly around the size of New Zealand’s overseas debt, with the distinction between Government and private debt often not being taken into account. If the partial sale of the likes of Meridian, Genesis, Mighty River Power and Solid Energy do go ahead, we would expect to participate in the initial public offerings. We would want an early indication from clients on the level of interest, so we can ensure an adequate allocation is available to satisfy demand.

The Code of Professional Conduct for Authorised Financial Advisers

I started discussing the eighteen code standards in the December newsletter, and will continue here.

Code Standard 8 – When providing a personalised service to a retail client an AFA must take reasonable steps to ensure that the personalised service is suitable for the client

This standard requires me to make reasonable enquiries to ensure I have an up-to-date understanding of a client’s financial situation, financial needs, financial goals, and tolerance for risk, having regard for the nature of the personalised service being provided. This code standard, together with code standard 9, will have the greatest impact on the way we conduct our business. Under the new laws I will not be able to offer investments (bonds, shares, debentures, KiwiSaver) without conducting an analysis of the client’s financial situation. This sort of analysis does not come without cost, and I intend to charge clients an hourly rate for this service. Experienced investors who use our services for broking only (with no advice) will need to sign a form instructing us not to determine the suitability of the service provided.

I can see significant differences in the requirements under this standard between clients wanting to sell securities, and those wanting to buy. Selling the shares of a deceased estate, or selling some of your Contact Energy shares to help pay for your daughter’s wedding does not require a great deal of financial analysis (if any) on my part. Buying shares and bonds as part of a long-term investment plan does. The code standard softens the requirement for the adviser to have an up-to-date understanding of the client’s financial situation with the caveat, “having regard for the nature of the personalised service provided.” My interpretation of this is that a financial adviser can exercise a certain amount of discretion regarding the amount of analysis required. Who needs a full analysis of their financial situation when their car has blown up, and they need to sell some shares to pay for the repairs?

Code Standard 9 – Where an AFA provides a personalised service to a retail client that is an investment planning service or that relates to a Category 1 product, the AFA must provide a written explanation to the client of the basis on which those services are provided. The AFA must also take reasonable steps to ensure the client is aware of the principal benefits and risks involved in following any financial advice provided as part of that service, having regard to the characteristics of the personalised service

As with code standard 8 this standard imposes obligations on advisers that incur a cost. If I have to provide a written explanation each time a client takes out an investment through our office, the client can expect to be charged for that service. You do have the ability to opt out of receiving a written explanation, and I can see this occurring for a large part of the transactional business we conduct on behalf of clients. There are occasions, however, where I think it is essential that recommendations and advice are documented in writing. As I said in the November newsletter, all clients will need to review what level of service they require from their financial adviser, and whether or not they are prepared to pay for it.

Code Standard 10 – When providing a class service to a retail client, an AFA must take reasonable steps to ensure the client is aware of the limitations of the service provided

A class service is a service where individual clients are not identified, and their particular financial situation has not been taken into account. An example would be the seminar on the Australian share market we held last year, or a KiwiSaver presentation to a group of people. This type of situation will require a general disclaimer from the adviser informing those present that their individual situation, needs, goals, and tolerance for risk have not been taken into account.

Code Standard 11 – An AFA must ensure there is an appropriate internal process in place for resolving client complaints in relation to the AFA’s financial adviser services

This is in addition to the requirement for all AFA’s to belong to an independent approved dispute resolution scheme. My process for dealing with complaints is documented in my Adviser Business Statement (a document required by the Securities Commission) and I will provide a copy to clients on request.

Code Standard 12 – An AFA must record in writing adequate information about any personalised service provided to a retail client

This should be standard practice for any advisory business. If we conduct business on your behalf we should be documenting that and keeping it for future reference. In the past these types of records were paper-based, and kept in filing cabinets. We now store all our records electronically, which saves a considerable amount of space, and is less prone to loss.

Code Standard 13 – An AFA must ensure that records of all information and documents required under this Code are kept for a minimum of 7 years

With advances in computer technology it is easy to store records electronically. I see no reason why we can’t keep records for longer than 7 years, and will do so for as long as it is practicable. I am often asked to look into a transaction that was conducted more than 7 years ago.

Infratil

Infratil has extended its offer of unsecured, unsubordinated, convertible bonds. The initial offer had a maturity date of May 2016; however the new offer matures one year later.  Holders of the May 2011 bonds who did not accept the recent rollover are now able to participate in this offer.

  • Maturity Date – June 15th 2017
  • Interest paid quarterly
  • Minimum investment – $5,000
  • Interest rate – 8.50%
  • Closing date – May 2011 (or earlier at the issuer’s discretion)

The bonds are convertible, which means at maturity Infratil has the ability to issue shares to bondholders, rather than pay them out in cash.

Genesis Energy

Genesis Energy is considering making an offer of up to $300 million of unsecured, subordinated bonds. The proceeds of the offer are intended to be used as part of the funding for the acquisition of the Tekapo power stations. The offer is expected to open this month.

PLEASE CONTACT THE OFFICE AS SOON AS POSSIBLE IF THESE BOND OFFERS ARE OF INTEREST TO YOU

Marac

The merger of Marac, CBS Canterbury, and the Southern Cross Building Society has been completed with the new entity “Combined Building Society” achieving a BBB- investment grade credit rating from Standard & Poors. Those who invested previously in Marac will continue to benefit from the Government Guarantee, which has been retained by the new entity.

Equitable

Holders of Equitable Mortgages Government Guaranteed debentures should soon receive claim forms from Treasury. Unfortunately no interest is accruing during the period between receivership and repayment; however that is possibly a small price to pay for the security of the Government Guarantee.

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