Rumours had been circulating for a while that Gareth Morgan’s KiwiSaver business was on the market. Today we learnt that Kiwibank was the successful buyer of this business plus the other funds management and advice offerings from GMI.

The deal looks like a good one for Kiwibank – depending how much they paid for it. It may too have some pluses for advisers in the short term.

Both brands push their New Zealand owned pedigree strongly. They too like to pitch themselves as standing up for the average Kiwi. Kiwibank’s proposition is about lowering the cost of banking for New Zealanders, while Morgan is pretty big on the philantrophy (think Happy Feat and the Blanket Man) as well as pushing issues like fishing.

It’s smart for Kiwibank as it allows it to get into the KiwiSaver game. The recent 4^th annual ASSET Magazine KiwiSaver survey showed that banks are winning this game hands down. When they focus on a product they can make big gains.

Kiwibank as a relative late comer to the KiwiSaver business was a laggard. Just 15,000 customers and $50 million under management. In our survey it ranked number 18 while GMI was up at sixth spot.

One of the curious things is that Kiwibank will continue to run its KiwiSaver business as is and will offer GMI separately. Over time you would expect them to come together but that isn’t on the agenda short term.

With KiwiSaver being a category one product there is a need for AFAs. While the bank builds its advisory force there is an opportunity for other advisers to talk to the GMI members.

Where things don’t fit is fees. The two organisations are oil and water. Kiwibank trumpeted its low fee structure at launch while GMI is one of the more expensive. Take administration fees for example. Kiwibank is $1 a month or $12 a year, while GMI is $50 a year.

Likewise the fee analysis in the KiwiSaver survey shows each provider is at opposite ends of the scale.

The other potential opportunity for advisers is that each organisation appears to target different demographics. GMI’s annual member balance is around $10,000 while Kiwibank is around $3500. That would suggest GMI scheme members aren’t natural Kiwibank customers.

The deal was big news for the start of the year and potentially it heralds more rationalisation in the overcrowded KiwiSaver provider market.

I always thought selling insurance to people through their employers was the flimsiest of propositions – why would anyone talk to you about insurance in the work café, with their mates hanging around for the ‘convenience’ of paying for the same thing they can buy in the plush, private, offices of the bank for the same price?

But in many markets, the UK, the US, to name just two, employer-facilitated (voluntary group) insurance is a big market. So why does it work?

For employees it works because you reach them at one of the moments when they are thinking about financial matters more seriously than they usually do: at the time when they are hired, just after a raise, or when the payroll officer suggests to them that it is a good idea. That immediately puts them in a better frame of mind to discuss insurance. Placing an insurance discussion in the same context as their salary payment immediately helps them to remember what’s at stake – their ability to earn. They can’t earn if they are dead, disabled, or sick for too long – so the ground is prepared. They like the idea of paying out of salary because it means ‘don’t see it, so don’t miss it.’

For employers there are some good financial reasons why they should prepare the ground for you. Southern Cross got some research done by TNS a little while ago which showed that time off was reduced when employees have private medical insurance – why? Because they do not wait to seek treatment, and with many conditions early intervention is the key. Then there is the matter of a disabled employee – often the employer faces strong moral pressure to keep a job open for a member of staff who is disabled without knowing when, or even whether, they will return. If employees have good personal cover they won’t need to lean on the employer – who can then make a straightforward business decision when sick-leave runs out, and do the right thing for the business, because years before they did the right thing by encouraging the employee to take disability insurance.

It works best of all if the proprietor, general manager, or team leader, stands up and introduces your initial presentation. Being older and having a little more money they say that they have disability insurance, medical cover, and some life insurance and every sensible person should do the same. If you are exceptionally lucky they may have some personal experience of its value from family, friends, or employees. With the HR team you’ve negotiated a 15 minute appointment in work time with each employee. You have limited objectives – just to sell the concept and fact-find sufficient information to make a more detailed presentation in non-work time to the employee and their spouse or partner.

I’m sure someone with a sense of humour thought up this acronym.

Now some of you may be asking what an earth is FATCA? It is the: “Foreign Account Tax Compliance Act” to be imposed by the United States of America in 2013. What does this mean for little ol’ New Zealanders in the financial industry?

To put it simply the USA is going to impose fines on any financial company, investment portfolio or custodial service who do not collect tax for them and pay to the Inland Revenue Service.

Why is the rest of the world bowing to this draconian imposition from the USA? Are we all running scared – and from what I ask?

I bet there are quite a few countries that totally ignore this imposition and tell the USA to run and jump.

Anyway, back to FATCA, what does it mean for us?

From what has been issued to date, it is going to be a huge cost to companies in the financial sector.

The following are just a few things I have heard about:
• First you have to become a registered company and enter into an agreement with the US.
• You have to investigate all of your customers to find out if they should be US tax payers and,
• Annually report to the US.
• Also there is a requirement to withhold payments for ‘recalcitrant’ US folks (the naughty ones who try to avoid paying tax back home) – 30% of both Income and proceeds from sale, I have heard.

You might think how will they know, but if any other financial organisations you deal with in the chain is registered they have an obligation to report. And it seems that most of the global companies are already acquiescing. I suppose with electronic trading they can trace all sorts of things.

If you think you can avoid this problem you will have to: restrict who you deal with and what you invest in – that is, no US folk and no US assets.

Probably well nigh impossible so we will all have to run along like little sheep and agree to do the USA’s work for them.

Why didn’t the rest of the world just say, “No”?

The Green Party released its KiwiSaver policy yesterday which has all the hallmarks of a nice idea but probably not that realistic.

The crux of the plan is to introduce a seventh default fund to the mix, which they call the Public Option, and have the money managed by the NZ Superannuation Fund. In addition to this the administration would be provided by either Kiwibank or Inland Revenue.

The details of the policy are a little scant at the moment. However it appears to be predicated on the NZ Superannuation Funds’ performance and Kiwibank’s track record in challenging the big Australian banks on price.

The policy sounds good and resonates with this view that KiwiSaver fees are too high. Co-leader Russel Norman says “KiwiSavers’ nest eggs will be significantly higher, up to $142,000 higher in some cases ($64,000 in today’s dollars).”

The issue of fees is certainly something which all the main political parties want to look at. Our view is that yes working out how much people pay in fees is difficult. Yes they are an important part of how much an investor really makes. And there is lots of variation.

The NZ Superannuation Fund does a good job in managing money but one has to remember it has a mandate to die for. It essentially has one client and it has a long-term investment strategy where there are no draw downs for years. Commercial fund managers on the other hand have to deal with day-to-day redemptions and new clients. Investors are chasing short term returns and will move managers or investments if they aren’t delivered.

If people were to get access to the NZ Superannuation managers then they should also be made to lock their money in for a long period of time. Maybe even until they are 65.

Otherwise the managers won’t be able to continue with the strategy they use.

Having Kiwibank or IRD managing the administration is an interesting one too. Kiwibank already has is on scheme and probably isn’t that interested in being administrators and earning discounted fees. Likewise there is an emerging view IRD should be doing more with KiwiSaver. As we reported here there is a view it should manage hardship requests.

Such a move certainly takes IRD away from its core job of managing the tax system.

I’ve said it before and yesterday’s savings policy announcement from Labour demonstrates it again.

Labour understands savings issues far more than National.

Its package is potentially a circuit breaker for this year’s election and will get people talking.

Raising the age of entitlement for NZ Super is a no-brainer. It has to happen. Good on Phil Goff and the Labour Party for being prepared to address this issue.

Sure the increases it talks about are pretty small, but at least it is starting the process off and that is the hardest part.

John Key’s pledge to resign rather than change the entitlement is one of the most stupid policy things he has ever said.

Making KiwiSaver compulsory isn’t as clear cut. You would think that fund managers and the savings industry will be rushing to party vote Labour. After all such a move helps to underpin their businesses and for advisers it’s a huge plus as regulation has made it harder for new competitors to set up shop.

I must admit the comments former finance minister Michael Cullen used to make about compulsory super still echo with me.

His line was that compulsory super was the state going too far and interfering with people’s rights and decisions.

Again an odd comment from someone on the left of politics.

He is right, but then there are bigger issues and trends to consider.

With trends New Zealand for years has bucked what you could say are the international norms around savings policies. That is all changing now and compulsory super is part of the big package.

Unfortunately the government has some idea that we should be getting closer and closer to Australia on savings issues. Compulsory super is one of those things that is likely to happen over time anyway.

It is, though, frustrating that this is more tinkering with KiwiSaver. It was inevitable that politicians just wouldn’t leave it alone.

There are many other parts to Labour’s policy worth exploring, and we will do that later.

The funny thing is that many of the things it is campaigning on you would expect to see from a more conservative party than Labour.

A comment I read yesterday summed it up.

“Holy cow – now I’m really confused. I’m as right-leaning as they come, but now I’m wondering whether I should consider voting Labour?! Raising the retirement age is so obviously needed it’s not funny, and a capital gains tax makes a lot of sense.”

I suspect those comments will be shared by many others in the savings industry today too.

Earlier this week we reported that a number of KiwiSaver funds had missed their deadline to prepare and send their annual reports to members.

It has transpired that there is a common thread amongst the schemes that missed filing. That theme is the company which provides registry and accounting services to the providers. Yes another three letter name starting with A – AON.

We’ve been told that AON told the providers that everything was okay and “all would be to hand and filed on time after us being on their backs for three months.”

“Only two weeks before the due date we had another urgent meeting with AON and were told that they had received the resignation of the “accountant” who was the problem and had a marvellous plan of how they would meet the deadline. And they didn’t.”

Six months to prepare annual reports is heaps of times.

Trustee Bryan Connor told delegates at the Workplace Savings Conference recently that members should have more current information on their funds.

While some might argue members aren’t particularly interested in the annual reports they do contain good information.

Tardiness like we are seeing that moment does nothing to engender public confidence in the providers.

A good question is what sort of punishment, if any, should the regulators dish out? After all the NZX publicly censures and halts trading in companies that miss deadlines. Shouldn’t the same happen here?

The inequity would be that it is not the providers’ fault, rather the company that provides the registry and accounting service to the providers.

But they do have two of their own KiwiSaver funds.

Is it ethical for fund managers to continue to get management fees on funds that have been frozen?

Fund managers should not get paid management fees – or at best should have them severely discounted – for the period the funds are frozen.

It is immoral that trapped investors are forced to contribute to the profit of their tormentor, against their will and with no option to get out and prevented from making new investments of their choice.

Further, a fee cut would serve as a disincentive for fund managers to get in that position or to keep funds closed.

Currently it is quite attractive (especially in a bear market) to close funds indefinitely. This forces investors to withdraw from other liquid investments or when rebalancing, funds have to come from elsewhere.

It also retains a handsome profit for incompetence.

Maybe a receiver should be appointed to determine if the manager continues?

It seems incredible that investors are still trapped after three years in mortgage funds, infrastructure funds and other hedge funds etc, and with no say whatsoever and paying full fees for non-performing investments.

Regulators could include in the new legislation that fund managers who fail to provide the liquidity promised should forgo profits.

In many cases, when funds are frozen management fees are fixed at the old high levels. That’s not right.

Of course the corollary would be that advisers should not assess fees on frozen funds – and certainly not at moratoria value, not that many of those are left.

Moratoriums didn’t work did they?

The poor suckers who invested then voted for the perpetrators to stay in the existence to manage something they couldn’t manage in the first place – another bite at the cherry.

There are some things I don’t get about the newly regulated world at the moment.

One is the story we ran yesterday where to advisers with dishonesty convictions recently in Australia are allowed to be registered advisers.

We are still trying to get to the bottom of this and will report in again when we know where regulators sit on this.

Meanwhile the organisation they worked for reference checked them using Google and was happy with what he found.

I plugged their names into the search engine and the top results were ones which would make anyone wary about employing these people in a role like this.

The second is a speech Simon Power made a little while ago at the loan sharks conference.

While we didn’t attend the conference there was some interesting research which showed how many low income earners were being ripped off by loan sharks.

The stories are truly ones of woe. Ones where unscrupulous operators prey on the vulnerable.

These are people who are being ripped off daily. These are people who are having their lives ruined.

If there was an area of financial services which needed cleaning up it is the loan sharks. It’s not the financial planners and fund managers.

Yet, Power disclosed that between 35 and 40% of third-tier lenders are not on the Financial Service Providers Register, as they are required to be by law.

It is disgraceful that the good end of the financial services market is being maligned and put through significant regulatory hoops and hurdles, but this crowd isn’t. Yet the government knows they are out there breaking the law.

Here’s what Power said: “It’s clear to me that this fast-growing industry fuelled by advertising focused on ease, speed, and normality of third-tier loans all aimed at those on low incomes and beneficiaries is a recipe for, if not disaster, then danger.

“Add in the fact that sole lenders are not complying with regulations and do not belong to a dispute resolution scheme and you know we have a lot of work to do.

“I know that the Registrar of Financial Service Providers is taking a keen interest in this aspect,” Power said

Surely more than a keen interest (and a gabfest) is required here.

There are lots of things on my mind at the moment, but the one for today is the government’s proposed sale of state assets. It’s on my mind as National Radio asked me about it yesterday.

As a general comment the funds management industry are supportive of the idea – no doubt for their own commercial reasons as well as philosophy.

In a speech this week Bill English talked about Kiwis lining up to buy into these companies. Part of the logic was something about failed finance companies and less interest in property investment than before.

It’s hard to see people lining up to buy into these companies. I don’t detect strong investor demand. Am I missing something here?

Here’s where the problems are:
1. Polls show the electorate is against the idea of state asset sales (no matter what euphemism you wrap them up in.
2. The public aren’t stupid. They understand that they already own these assets and paying for something they already own is a bit like robbing Peter to pay Paul.
3. Likewise getting EQC, ACC or the Super Fund to invest is just transferring money within different Crown owned entities.
4. It’s hard to see KiwiSaver funds racing for these assets. The majority of money sits in default and conservative funds. These beasts are big buyers of NZ shares.
5. Do we really want a sharemarket that is overweight in energy companies, and has little resemblance to the NZ economy? How about getting more primary sector businesses on the bourse.
6. These companies aren’t the exciting growth type stories. They are not Apple or Microsoft, or Rakon or 42 Below. They are stodgy infrastructure companies that always have the sceptre of price regulation hanging over them. It seems to me Kiwi investors are quite comfortable with term deposits as their income plays these days.
7. Likewise I can’t see residential property investors ditching their boxes in the burbs for some energy company shares. That’s like asking a Muslim to go to communion.
8. Selling shares does nothing to help these companies raise capital. These proposed floats are a transfer of existing capital. Air New Zealand, with its current bond offer, has shown us there are options for raising funds.

Then of course there are all those chestnuts like foreign ownership.

National has got a massive sales job on its hands with this one. One thing that maybe in its favour, and this was demonstrated yesterday in the panel discussion I took part in, is that many people don’t know enough about these things.

We all learned from the finance company debacles that valuing a portfolio with a capital item that remained at the same value, lulled many financial planners into a false sense of security. That is, using finance company debentures in investment portfolios reduced volatility and so they assumed this was reducing the risk in the portfolio.

The capital value of a debenture in a finance company never reflected that company’s strength or otherwise. Unfortunately for their clients, a permanent loss of capital was a massive risk.

So, why do research houses still use volatility as the only measure of risk?

Correct me if I am wrong but quantitative research and hence technical analysis is the sole basis of most ratings. And, what does that measure – the past.

Sure, volatility is one measure but it is not the only answer to understanding risk in a portfolio.

I believe the clients’ of financial planners have a very clear understanding of risk, “Will I lose my money?”

What does not seem to be in the forefront of minds with those who construct portfolios, is whether the selected investments can battle through a huge storm without total loss?

The true test of risk – the survival of a Black Swan Event (of which we seem to have quite a few in recent years). The Black Swan Theory was developed by Nassim Taleb and he argues the silliness of trying to predict the unpredictable.

Nissim Taleb said: “We Don’t Quite Know What We are Talking About When We Talk About Volatility”.

If you believe the investments you have chosen will survive severe storms (irrespective of the volatility they may suffer during the storm) then you have de-risked your client’s portfolio.

If on the other hand something is dropped into the portfolio because the capital value is stable, maybe it is actually stagnant (i.e. difficult to value or not regularly valued), then risk persists.

For this very reason, some of the hardest hit during 2008 were the ‘so-called’ conservative portfolios.

You would be better off in most circumstances ignoring volatility – it is probably one of the contributors to many losses incurred since the jolly measure was introduced as a proxy for risk.

Sorry Mr Markowitz.

Can anyone enlighten me on why so many slavishly follow and utilise research house material which is a regurgitation of the past with one of the main measures applied being volatility?

Anecdotal evidence would suggest we would be better off without them. Maybe it is just simple ol’ human nature: “Got to have someone to blame when the going gets tough?”