Newsletter May 2010

May 3, 2010

Infratil Warrants

Many Infratil shareholders will hold the warrants that expire on May 21st. You may remember the terms of these warrants were altered last July to allow investors to take up the new shares in two instalments. If you still hold these warrants you would have paid an instalment of 0.55cents in July last year, leaving $1.12 outstanding. Currently, the Infratil share price is at $1.74, so if you pay the remaining $1.12 you will have received your extra Infratil shares at a slight discount. I would encourage investors to take up the shares. Infratil is a well run company with stable infrastructure assets. If you don’t want to pay the remaining instalment please note the warrants themselves have value. They are trading at 0.61cents at the moment. Ring the office if you would like to discuss your situation.

Barramundi Warrants

Holders of Barramundi warrants will have received an exercise form in the mail recently. Holders are entitled to take up extra Barramundi shares at 0.75cents on set dates between now and October 27th, 2011. Currently, the Barramundi share price is at 0.73cents, so there is no point yet in exercising those warrants. Like Infratil, the Barramundi warrants have value, so investors should be keeping an eye on prices over the next eighteen months.

KiwiSaver

The KiwiSaver anniversary (July 1st) is approaching, and participants should be aware of how much they have contributed throughout the year. To gain the maximum benefit from the scheme you should be contributing at least $1,043 per annum. This is the amount (based on a figure of $20 per week) at which the Government will match your contributions. Self-employed or non-employed (retired) people should set up an automatic payment to their provider of $90 per month to ensure they reach the threshold each year. Employees who have their contributions deducted from their wages should make a lump-sum payment to their provider if they have contributed less than $1,043 for the full year. Ring the office if you would like to discuss the KiwiSaver scheme.

Code of Professional Conduct for Financial Advisers

The draft code for the regulation of financial advisers has finally arrived, and I spent a good part of my week off coming to grips with it. The underlying aim of the new legislation is “to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers.” The Code contains minimum standards of competence, knowledge and skills, of ethical behaviour, and of client care, and requires advisers to provide for continuing professional training. There are 21 Code Standards that I must satisfy before I can practice as an Authorised Financial Adviser. I have until July next year to comply; otherwise I will have to shut up shop.

Code Standard 1 – When providing financial adviser services, an AFA must place the interests of the client first, and must act with integrity.  Call me old-fashioned but I take it as given. In contrast there will still be plenty of advisers out there who won’t act with any integrity whatsoever – writing it down isn’t going to change that.

Code Standard 3 – An AFA must not imply they are independent if, in the circumstances, it would be reasonable for a client to consider that the AFA is not independent. I personally don’t have a problem with not being able to claim I am independent. The issue revolves around the payment of commissions and brokerage on products we promote. For example KiwiBank paid me brokerage when we sold their perpetual preference share to clients recently. That takes away my “independence” because I am apparently incentivised to sell.

Code Standard 9 – Any financial advice given to a client, and any financial planning service provided for a client, must be accompanied by an explanation of the basis for any advice provided, the risks involved in following the advice and the potential benefits of following the advice.

Code Standard 10 – In providing personalised financial advice an AFA must:

(a)   Take reasonable steps to determine that the AFA’s services are suitable for the client; and

(b)   Give an explanation of the basis for any financial advice provided

Code Standards 9 and 10 differentiate between financial advice and personalised financial advice. An example of financial advice would be if someone asked me “should they exercise their Barramundi warrants this month?” I could offer my view without analysing the client’s financial position – it would be generic advice based on the facts at the time and would probably be applicable to most clients. Personalised financial advice, however, requires me to consider the client’s financial situation, needs, goals, and tolerance for risk. Now for the interesting part. Both Code Standards require me to provide this advice in writing. I have no problem whatsoever in providing written recommendations when I’m putting together an investment plan for someone – I do it as a matter of course. However it seems ridiculous to have to write to a client who is thinking of taking up their Barramundi warrants, explaining “the basis for any advice provided, the risks involved in following the advice and the potential benefits of following the advice.”

There is the ability under the Code for a client to direct the adviser not to provide a written explanation for financial advice, but the adviser is not allowed to direct or influence the client to decline that explanation. I am, however, allowed to quote a fee for providing my explanation. This might be a typical conversation in our office shortly:

Client – Brett do you think I should take up my Barramundi warrants?

Brett – I’ll give it some thought and will have something in the post to you tonight. It will cost you $100 for my advice.

Client – Can’t you simply give me your opinion now?

Brett – Only if you instruct me that an explanation under Code Standard 9 is not required!

Whatever the Code Committee finally settles on, rest assured there will be more paperwork involved when you visit our office in the future. I have made submissions to the Code Committee; however I am not holding my breath.

Code Standard 17 – Before providing a financial adviser service, an AFA must be satisfied that the AFA has the competence, knowledge, and skills to provide that service.

There are very specific rules on the qualifications required to become authorised. Luckily for me I already have the qualifications, although I will still be subject to a workplace assessment that will cost me $1,000, and I need to pass an exam on the yet-to-be finalised Code which will cost me another $300. We will endeavour to keep operating our business as we have in the past; however it’s fair to say the landscape has changed considerably, and we may have to change with it.

Visit from Ronald Hay

As I indicated in last month’s newsletter, Ron Hay from E L & C Baillieu in Australia will be visiting New Zealand in May. He has offered to give a presentation on the Australian sharemarket to our clients, and we will be having an afternoon function starting at 3pm at the Masterton Club on Wednesday May 19th. All clients are invited; however we must have numbers for catering, so please ring the office if you would like to attend.

South Canterbury Finance

Soon after last month’s newsletter went out, South Canterbury Finance was awarded the extension to the Government Guarantee. This is great news for the company, and for investors whose securities mature after October this year. Your bonds and debentures are now risk-free through to December 31st, 2011. The 2012 bonds have improved slightly on the news, moving from 66 cents in the dollar to 75 cents in the dollar. Holders of these bonds will need to take a keen interest in the company’s fortunes over the next year, and make a decision at some stage on whether they see South Canterbury trading profitably past 2011, without the Guarantee. The company is offering a very attractive 8.00% on Government Guaranteed investments maturing between April 2011 and December 2011. Call the office if you would like to take advantage of this opportunity.

St Laurence

It almost seemed inevitable that St Laurence would follow Strategic into receivership. The company is yet another example of a property-lending finance company that has been unable to satisfy the conditions of its moratorium. The owner, Kevin Podmore, was suggesting a debt for equity swap, however the Hanover deal with Allied Farmers is an indication that such a deal is no guarantee of recovery. The KPMG 2007 analysis of the main finance companies showed St Laurence with well-above average equity, and the second-lowest ratio of bad debts behind Equitable Mortgages. However, this wasn’t enough to prevent it becoming subject to the contagion that affected all finance companies following the early collapses.

There is plenty of debate on who is to blame for the finance company collapses at present, as the Government moves to create a “super-regulator,” called the Financial Markets Authority. The finance company trustees come in for considerable criticism, and the new laws may go some way toward improving standards in that area. This, of course, will be cold comfort for those investors who have suffered considerable losses over the last four years.

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