Newsletter November 2010
November 1, 2010
KiwiSaver
KiwiSaver has been operating for just over three years now, and has gained a wide level of support. In the early stages I subscribed to a company who were providing independent research on the various offerings in order to determine which schemes I was going to support. ING came out on top based on them being the largest manager of superannuation funds in New Zealand, their proven administration and communication abilities, and the options made available to investors. Gareth Morgan and Fisher Funds didn’t feature prominently in the report; however I offered their products based on my view of their past performance, and their philosophy on investing. In contrast to ING neither Gareth Morgan nor Fisher funds offered commission to advisers who placed business with them. I attended a KiwiSaver course in the early days and was amused at the number of advisers whose decision on what to offer was solely based on commission. Fisher Funds has recently changed to offering advisers a commission on business placed with them.
Comparisons between providers are inevitable, however are often worthless when taken over a short period of time. A two-year performance comparison is of little value for those invested in a growth fund with a ten to twenty year time-frame. As time passes the comparisons should become more meaningful. Some of the performance figures make interesting reading – unsurprisingly the poorer performing funds have been in growth assets such as shares and property. Fisher Funds has bucked that trend however, recording the best two-year performance for an aggressive fund at over 6.00% per annum. Gareth Morgan has underperformed over the last two years after a very good result in the first year. Most of the ING funds have come in around the average or just above average mark. ING is a clear leader in the total of assets under management, with 25% of all KiwiSaver funds under its control. Gareth Morgan manages approximately 5.50%, and Fisher Funds has approximately 2.50%.
I don’t recommend investors rush out and change providers based on two or three years’ performance data. Investing requires a long-term approach, and after three years I would still recommend the three providers I chose at the start. For those who do want to switch providers the process is very simple, and I can organise that for you.
The Code of Professional Conduct for Financial Advisers
Commerce Minister Simon Power approved the Code of Professional Conduct for Authorised Financial Advisers on September 21st. The approval means the Commissioner for Financial Advisers can now determine when the code comes into effect. The new regulatory regime is governed by two pieces of legislation – the Financial Advisers Act and the Financial Service Providers Act. The two Acts, which will be in force by July next year, require all financial service providers – including financial advisers – to be on a public register and, if they provide retail services, to belong to an approved dispute resolution scheme.
The Code of Professional Conduct establishes eighteen standards to ensure all authorised financial advisers meet minimum standards of ethical behaviour, client care, knowledge, skills and competence, and continuing professional development. You can view the Code at http://www.financialadvisercode.govt.nz/ and I would encourage all investors to have a look at it.
Some of the code standards will alter the way we conduct our business. Advisers now have a legal obligation to ensure any financial security is suitable for the client concerned. Suitability is determined by having an in-depth understanding of the client’s financial situation, financial needs, financial goals, and tolerance for risk. Some of our business involves, for example, the offer of shares or bonds coming to the market. We advertise their availability, and clients make contact expressing their interest. In some cases the client makes the decision to invest without my input. Under Code Standard 8 I am obliged to determine the suitability of each investment based on the client’s financial circumstances. In my view determining suitability based on the client’s financial circumstances should be considered standard practice, and is a worthy goal of the new regulations. In the past I haven’t charged clients for the analysis involved in putting together an investment plan. Most of our business is transactional and that side of the business has largely subsidised the planning side of the business. As the pendulum swings with the introduction of the new laws I will be charging clients for the time involved in analysing their situation, and making recommendations.
Of course there are plenty of investors who aren’t interested in having their situation analysed, and simply want access to shares, bonds, debentures and the like. The new regulations allow for this. An investor can decline to provide the adviser with the relevant information, and in this case the adviser must take reasonable steps to ensure the client is aware that the personalised service is limited; and must specify those limitations. The client can also instruct the adviser not to determine the suitability of the investment concerned. This relief is only available if the instruction is provided in a document that is signed and dated by the client, and that includes a clear acknowledgement from the client as to the advantages of the adviser determining suitability based on the client’s financial situation.
My preference would be for clients to opt in to providing their adviser with all the information necessary to determine the suitability of the investments they are considering. This is not so I can make more money, it’s simply good practice. Those who opt out of providing the relevant information are effectively giving up their right to pursue recourse if an adviser makes poor decisions (the legislation is designed to hold advisers accountable for their actions).
Code Standard 9 requires an adviser to provide a written explanation of the basis on which a personalised service is provided, when that service is an investment planning service, or it relates to a Category 1 product. Category 1 product has a fairly wide definition, however for our purposes includes all the securities we deal in (shares, bonds, debentures, managed funds etc). If I buy or sell shares for someone I am obliged to provide a written explanation of the principal benefits and risks involved in following any financial advice as part of that service. As with Code Standard 8 the client has the ability to opt out of receiving the written explanation if they wish. An adviser must not direct or influence a client to decline the explanation, however that does not prevent the adviser from:
- Drawing the client’s attention to the ability to opt out of receiving a written explanation; or
- Quoting a reasonable fee for providing the explanation
Clearly investors are going to have to decide what level of service they require from their financial adviser, and whether or not they are prepared to pay for it. We will be renewing the administrative documents we have in place at present, so that clients can clearly state their expectations in relation to the service they are receiving from us. Before long we will not be able to conduct any business without such documentation. The choice will always rest with you, however higher levels of service (read that as compliance with the new regulations) will not come without a cost.
All financial advisers are required to sit an exam based on the new regulations, and most advisers will be required to undergo additional training and assessment in order to meet the requirements for registration and authorisation. Compliance is proving very time-consuming, and I will be out of the office for some time through November and December because of this. Please ring first and make an appointment if you want to see me.
Fixed Interest
The South Canterbury Finance money was paid back on October 21st, and many will be questioning where it should go. There are a number of new bond issues in the pipeline; however I would caution investors to be sure that any new investment suits their purpose. At times I think some people simply take whatever is available when they have an investment mature. Don’t hesitate to keep the money in the bank until the right investment comes along. The factors you should consider include:
- Risk – does the investment suit your risk profile?
- Return – is a non-bank investment paying enough to warrant drawing your money out of the bank?
- Duration – when is your fixed interest maturing? Try and stagger maturities so you are not subject to reinvesting large sums at the bottom of an interest-rate cycle.
- Liquidity – how important is it that you can cash up your investment? Recognise this advantage of bonds over bank deposits and debentures.
Goodman Fielder
Goodman Fielder has announced an offer of up to $175 million of unsecured, unsubordinated fixed rate bonds, with the ability to accept oversubscriptions of $75 million.
- Maturity Date – May 16th 2016
- Interest paid quarterly
- Minimum investment – $5,000
- Minimum interest rate – 7.25%
- Closing date – November 17th
- The bonds rank equally with Goodman’s bank debt
Other bonds are due out shortly including APN News & Media. If you think you may be interested in any new offerings please call the office – the sooner we can anticipate demand the more likely it is we can satisfy that demand.
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