The government’s plans to make it mandatory for finance companies to get credit ratings has made me think some more about the value of these things.

As I have commented before the average retail investor has little clue about how scales work, and in some ways that is no surprise because they are convoluted.

As someone put it to me the other day a company would probably be happier with a BB+ rating than a BBB- as it looks better. People are attracted to positives.

The other thing which has been on my mind is that ratings are meant to help people understand the risk/reward trade off. And if everything went to theory, the organisation with the lower rating would offer the highest rate and vice versa.

So what do you make of someone like RaboPlus with its AAA rating offering the highest rates in the market? Theoretcially it should have the lowest rates. One conclusion, which can quite sensibly be drawn, is that the bank is just buying market share.

While, yes, the offer is a good deal for investors it does little to help people understand ratings.

It also highlights the competitive nature of the deposit taking sector. It is absolutely clear that pricing of offers has nothing to do with risk. It’s all about market positioning. Some finance companies have said as much. They look at what their closest competitors are doing then set their rate.

This is not how risk should be priced. It makes me think the mandatory ratings thing is not the panacea to understanding the offers and that there needs to be changes in the way risk is priced.

As always I would like to hear your thoughts on this topic. Send them to blog@goodreturns.co.nz

Mike Heath, general manager of RaboPlus replies:

Hi Phil

Interesting to read your post “Pricing risk or buying market share?”, and very timely given the recent collapse of Bridgecorp.

With regards to our pricing policy, and the rates we offer to customers, we have pledged to always offer amongst the highest rates in the market. The fact that we specialise in savings and investments, and leveraging our global business model, means we can honour this commitment.

Secondly, with regards to credit ratings, I believe it will help people make more balanced investment decisions, assuming the ratings come from respected and reputable agencies such as Standard and Poor’s and Moody’s (RaboPlus, as a division of Rabobank, have a Triple A rating from both of these agencies – the highest rating available, and the only bank in New Zealand with this rating).

At the moment it is pretty difficult for investors to answer the question – how risky is this opportunity, and equally as difficult to compare those opportunities.

There is a lot of technical jargon/information to interpret from prospectuses, and the current finance company practice of quoting credit rankings, as opposed to credit ratings, can mislead investors to think and opportunity is safer than what it really is. Credit rankings are after all simply a description of where an investor sits in the pecking order should the company fall over, and who is in front of them when it comes to getting their monies back. Whereas credit ratings define how risky an opportunity is.

As we know from our research, investors are not asking the classic risk versus return question, and they are predominately only looking at the reward side of that equation. Credit ratings, from Standard and Poor’s and Moody’s, will provide investors with a appropriate measure of how risky an opportunity is; make it simpler to compare opportunities; and at the end of the day make better informed and balanced investment decisions.

Regards
Mike Heath
General Manager

I listened into Commerce Minister Lianne Dalziel’s press conference on changes proposed for advisers and non-bank deposit takers the other day and was pleased with what I heard.

It appears Dalziel has a pretty good handle on what is a large and complex process. Also the way the government has gone about the changes by establishing expert groups and consulting is to be applauded.

It’s also useful to note that she has been watching the stouch between adviser associations and has effectively told them to pull their heads in.

Added to that she made it clear that there will most likely be more than one APB.

Multiple APBs is something which does make sense. In this area advisers should have a choice and be able to join one which suits their needs. At the moment it looks like there will be a range from the minimalist to the highly controlled.

What I am not so keen on is choice with disputes resolution services. It seems far more sensible to have one ombudsman to keep costs down and provide consistent decisions.

It’s interesting to see that the politics and spin from the industry started almost immediately after the announcement. I see that some are renaming the Approved Professional Bodies (APBs) as “co-regulatory professional associations”. This seems a little mischievous and also it is not the term either the minister or officials use.

It would be wise for associations to heed the minister’s advice on co-operating.

One of the things which I find puzzling is this oft-heard comment that there are thousands of people out there giving advice who don’t belong to any of the existing associations.

We have spent years studying the shape of the industry and trying to work out how many people fall into this category. It seems to us that yes there are quite a few, but do 50% of advisers not belong to any association. I don’t think so. I’m happy to be proved wrong.

Advisers nearing retirement shouldn’t be too worried about the changes. Looking at the timetable it appears that it won’t be fully implemented till 2012.
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We’d love to get your thoughts on the proposed changes. Likewise if you have any questions for the minister send them through to us and we will try and get an answer. Questions and comments can be sent to blog@goodreturns.co.nz

It seems things are moving along at Broadbase with the retirement of founder Marshall Garrett.

Broadbase is one of the longer standing advisory firms in New Zealand and also one of the bigger medium sized firms. Because of these factors and its success it has been a group many of the fund managers have wanted to get their hands on. AXA has sniffed around the business and about 18 months ASB nearly bought the business.

Broadbase has an unusual set up. Broadbase Consulting, run by Marshall Garrett, provided marketing and other services to the advisers. However all the Broadbase offices have been individually owned by the advisers, rather than run as a group with a common shareholding.

It looks very much like Marshall’s business has been taken over by the advisers, and a new company Broadbase New Zealand has been established which is owned, equally, by each of the advisers.

Maybe with a new structure the group will become more “corporatised” (an industry buzz word I hate), and no doubt will look far more attractive to potential purchases. (Some people in the industry even suggest that the $52 million MFS/Northplan deal may be a catalyst for change!)

A change may also help the group grow. Because of its structure Broadbase has over the years had a habit of calving, a bit like icebergs. Every now and then a group of advisers decide to break-off and form their own groups.

The most recent was Colin Austin in Auckland and a bunch of other upper North Island advisers which formed Decisionmaker.

Other to leave in the past include Fiona Judd, and the people in the Capital Financial Planning Group in Christchurch.

No doubt there will be more news from Broadbase soon.

Yesterday’s story about a compliant against Instant Finance’s advertising raises a couple of issues.

We headlined it as Instant Finance dodging a bullet. There is no doubt that is true, it did dodge a bullet fired at it. The question is should the bullet have been allowed to have been fired in the first place?

My answer is no. This is the equivalent of a drive by shooting. What is a little sinister about it is Instant Finance’s view the bullet may have been fired by a competitor or someone with links to a competitor.

I have no idea who the compliant is and whether this is true or not.

If it is there should be some thought about changes to how the advertising complaints system works. I am aware that often it is a competitor who lodges complaints with the ASA, and that the system is described as self-policing. What possibly needs to happen is that there should be some sort of disclosure involved in the process.

The other thought, and anyone who reads the 12 page decision will see, is that the original decision made by the ASA about the use of the word trust was pretty uninformed. Basically it boiled down to the use of the word trust in financial services.

One could argue that maybe Instant Finance didn’t argue its case strongly enough in the first instance and it was fortunate that an appeal was allowed and that the original decision was suppressed until the appeal was finished.

The whole process makes one think there should be some changes to the complaints system which sets very high standards for financial advertising and that disclosure would be a good thing too.

It also shows that the finance company sector is highly competitive and people are prepared to have a crack at companies doing well.

Gareth Morgan isn’t too pleased with my comments in the previous Blog giving some initial reaction to the Budget.

His comments are below, but essentially he says he wasn’t calling for a government guarantee on KiwiSaver funds.

Thanks to the beauty of the net the recent development of some of the larger media sites the interview is available online.

I listened to the interview with John Campbell on TV3’s Campbell Live, and these are the comments which made me react.

Morgan said: “What really concerns me about KiwiSaver John, is that your savings and my savings are not government guaranteed.”

“There is no guarantee here.

He went on to say that Cullen has “not really addressed that issue.”

“I think that area of KiwiSaver has a hell of a lot of work to be done (on it) in terms of making peoples’ money safe in this thing.”

“That part of KiwiSaver is work to do.”

The full interview is here http://www.tv3.co.nz/VideoBrowseAll/CampbellLive/tabid/367/articleID/27222/Default.aspx

On my reading of it is that you have two options a guarantee or none at all, especially in the light of no other options being put forward. Therefore the conclusions I drew at the time of writing were fair.

I suspect Gareth was trying to articulate his concerns re reserving and fund managers’ fidicuary duties. For more on this see here and here.

Gareth’s comments.

Phillip

It’s been drawn to my attention that you have said I’m advocating a government guarantee for KiwiSaver. Wrong.

What I said on Campbell Live was that KiwiSaver has no government guarantee – it was a point of information for public knowledge. Campbell had said to me off air he thought it was government guaranteed. I’m just completing a public speaking circuit of 15,000 people where it has been clear that people are under the impression it was government guaranteed- quite logical given it is a government initiative.

Sometimes those of us in this sector get so close to the trees we lose perspective. I too had thought everybody knew it wasn’t guaranteed until I started these speaking engagements. Quite the opposite was the reality – people saw it just as an extension of the Cullen Fund.

Maybe you should get out more. I also notice your industry-funded magazine has so far failed to grasp what is inherently wrong with KiwiSaver – that it gives the industry carte blanche to dodge fiduciary duty and to continue its old tricks of creating and manipulating reserves for its own ends and at the expense of the NZ public. Have you never even thought why people who come out the other end of these long term savings products do so very poorly. It would be great if you had public rather than sector interest as part of your value set.

Probably too much to ask.

Gareth

WHAT DO YOU THINK? If you would like to comment on this Blog send your thoughts to blog@goodreturns.co.nz

Responses

Gareth Morgan certainly succeeds in fanning the flames of fear. He has spent some time criticising the essence of Kiwisaver and now he is setting up a scheme himself. This latest rant on Government guarantee is another publicity stunt that Richard Branson would be proud off. Is he going to guarantee the funds in his scheme? I think not. Fiduciary duty is expected for all participants in an investment programme which includes investors, trustees, fund mangers, stockbrokers, advisors etc. Ultimately it is buyer beware and it is up to the government to start educating the public what fund managers and advisors (including Gareth Morgan) actually do and teach them how to monitor their performance and control fees etc. It’s a brave new world to protect and manage the billions that will flow into these schemes in the next decade or so. Steve Joynes