Newsletter March 2011

March 1, 2011

The World Is Far From Fixed

I used this heading in the June newsletter, and I wonder if anything has changed since then. I’m no economist but I can’t help wondering about the merits of the U.S propping up their economy by effectively printing money. I receive numerous pieces of research from various sources, and the common thread in all of them is what is happening in the U.S and China. The U.S expects a budget deficit in 2011 of $1.645 trillion, dropping to a mere $774 billion by 2021! In my view the U.S never really acknowledged the problem they had when the global financial crisis hit – preferring to bury their heads in the sand and buy their way out of trouble. Like most developed countries the U.S uses monetary policy to influence their economy. Dropping interest rates stimulates an economy, and is a policy used by Governments in times of recession. We have seen it used here in New Zealand, with the Official Cash Rate (OCR) dropping from 8.25% in June 2008 to 2.50 % in 2009 and early 2010.

But what happens when you drop your benchmark interest rate to 0.25% and your economy still remains flat? In the case of the U.S they print more money to buy their own Treasury Bonds, injecting money into the economy to try and stimulate activity. This has a direct effect on their currency and is one of the reasons the U.S dollar has lost so much value over the last few years. Like New Zealand, other countries who export to the States complain about the exchange rate, and bemoan the fact the U.S is not putting in place the same austerity measures some of the other struggling nations are. Perhaps my grasp of economics isn’t what it should be but I’m certain at some stage any entity (individual/corporation/country), in order to prosper and grow, must earn more than it spends. The debt won’t miraculously disappear – it has to be paid back. At some stage they need to bite the bullet and stop spending more than they earn – this is what caused the financial crisis in the first place. Perhaps the U.S is happy to let inflation take care of their debt problem?

China is at the other end of the spectrum – increasing interest rates to try and keep a lid on rapidly rising asset prices. Their economy is growing very quickly, and is probably single-handedly responsible for keeping Australia out of recession. I saw some worrying statistics recently however, on Australia’s manufacturing sector, suggesting if it wasn’t for the current boom in commodity prices, Australia would be just as badly affected by the current recession as any other country. Anyone investing in Australia needs to question the sustainability of China’s growth as it could have a direct effect on the price of some of the shares they hold.

 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 14 – Before providing a financial adviser service, an AFA must have the competence, knowledge and skills to provide that service

This Code Standard is in addition to the standards that specify the academic qualifications required to be an Authorised Financial Adviser. We need to be able to demonstrate that we have a reasonable basis for believing we have the necessary knowledge and skills to provide the services we do.

Code Standard 15 – An Authorised Financial Adviser must have a knowledge of the Act, the Code, and other legal obligations relevant to the operation of the AFA’s practice as a financial adviser (including relevant consumer protection laws), that is adequate for the proper operation of that practice

All advisers need to have knowledge of the relevant legislation associated with providing financial adviser services, and all advisers must pass an exam, which I passed in November, based on the following legislation.

  • The Financial Advisers Act
  •  The Financial Service Providers (Registration & Dispute Resolution) Act
  • The Fair Trading Act
  • The Consumer Guarantees Act
  • The Trustees Act
  • The Code of Professional Conduct for Authorised Financial Advisers
  • Financial Advisers (Disclosure) Regulations

Code Standard 16 – To be an AFA, a financial adviser must attain the Unit Standard Sets within the National Certificate in Financial Services that are relevant to the financial adviser services provided by the AFA

My current qualifications (BBS and Graduate Diploma in Personal Financial Planning) surpass the National Certificate in Financial Services. The portfolio of evidence I submitted in December has been passed, and is currently with ETITO being moderated.

 Code Standard 17 – An AFA must maintain and keep current a professional development plan for each CPD period

All advisers must identify any areas for improvement in their competence, knowledge and skills in relation to the services they provide. We must document proposals for making those improvements, and must include details of courses, seminars or any other professional development planned to be undertaken.

Code Standard 18 – An AFA must undertake sufficient continuing professional training to maintain the AFA’s competence at a level appropriate for the financial adviser services the AFA provides or intends to provide, and keep up to date with developments relevant to the AFA’s practice

All advisers must complete a minimum of twenty hours of professional development per year, relevant to the financial adviser services provided. At least half of that professional development must be structured training (provided by a professional body). The Institute of Financial Advisers currently requires members to complete thirty hours of professional training each year.

I’m pleased to say I have satisfied all the requirements to become authorised. My application is now with the Securities Commission and I hope to have the AFA designation before the end of the month.

To sum up, the Code of Professional Conduct for Authorised Financial Advisers is a significant part of the new legislation designed to promote confidence in New Zealand’s financial services sector. Together with the Financial Advisers Act, the Financial Service Providers (Registration and Disputes Resolution) Act, and the new disclosure regulations, the Code should encourage consumers to have confidence in any financial adviser they deal with. Many advisers have decided the new laws, for various reasons, are too onerous, and are leaving the industry. Hopefully those that remain are committed to the principles of the Code, and the public can regain confidence in the professionalism and integrity of financial advisers and brokers.

For clients of Bramwell Brown Limited you can expect to see changes in the way we conduct business over the coming months. There are now significant compliance obligations on advisers, and even long-standing clients can expect to be asked to provide information on their financial position, their goals, and their tolerance for risk. Those not prepared to provide this information will need to sign a document instructing their adviser not to determine the suitability of the financial adviser services provided to them. I will try and make this process as simple as possible, but please remember I didn’t make the new laws, but I am obliged to comply with them.

Canterbury Earthquake

I would imagine the majority of us have been glued to our TV’s, following coverage of the devastating earthquake that hit Christchurch on February 22nd. It was a nervous time for those with family in the city, and our hearts go out to those who have suffered loss. It’s amazing to see the positive response, not only from the Canterbury community, but from Kiwis all around the country, and abroad. The huge sums of money needed to rebuild Christchurch must have a negative impact on the economy initially, however the longer term implications will be more positive. There is every chance the Reserve Bank will lower interest rates in the short-term to try and keep things moving.

AXA

Holders of AXA Asia Pacific shares will be aware of the current merger proposal between AMP and AXA. The proposal would see AXA shareholders receive AU$6.43 per AXA share made up of a combination of cash and shares in AMP. The exact value received is subject to a formula based on the average AMP share price between March 8th and March 22nd. A higher average share price sees shareholders receive more in shares and less in cash. I think the question investors need to ask is “do I want to be an AMP shareholder?” There is an understandable temptation to sell the shares and take the profit – AXA traded at $4.30 when the merger was proposed – they are now trading at $6.43. Tuesday March 8th is the last date AXA shares can be traded if the merger is approved. Call the office if you would like to discuss your situation.

Genesis Energy

We remain hopeful the proposed offer of up to $300 million of bonds from Genesis Energy will still proceed. We are keeping a list of clients interested in the offer and will make contact as soon as we have details. Please phone the office of you would like to be added to the list.

Infratil

We still have a small amount of Infratil’s convertible 2017 bond available.

  • 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)

DISCLOSURE STATEMENT AVAILABLE ON REQUEST AND FREE OF CHARGE

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