The biggest news for advisers in this year’s Budget was the announcement of nearly $12 million in funding for adviser regulation.

The government made quite a bit of noise about this announcement (well it did have its own press release), but one can’t help thinking that it’s not that big.

Firstly the $12 million is over four years. Secondly the government is saying that from 2012 onwards the regulations will have to be self-funding. That means advisers and companies, and ultimately consumers, will be paying for the protection.

The other thought is that this isn’t that new. The previous government had flagged something similar.

The next point of interest, and something that was unexpected, was the plan to can KiwiSaver mortgage diversion.

The general feedback on this is that it’s an OK move. Not many savers had taken up the option and also with the changes that National made to KiwiSaver late last year in reducing contribution rates it was almost not worth having the ability.

Anyone in KiwiSaver with a mortgage is better to increase their current repayment rates.

I would say that removing the diversion option will remove some of the administrative complexity of KiwiSaver for fund managers and also that mortgage diversion always seemed at odds with the savings regime.

The good news, and it is good news, is that there are no further changes to KiwiSaver. That means the industry can get on with promoting the scheme and educating members. Also it should give advisers confidence in dealing with clients.

The other Budget announcement worth mentioning is the decision to stop contributions to the NZ Super Fund. It is easy to understand the logic, but on the other side one wonders if it is too short-sighted as this is the time to pick up cheap assets. Much of the money investors will make in the medium term will actually be in the short-term.

Of more concern is that this decision will have a significant impact on New Zealand’s capital markets. While many argue not enough of the fund is invested locally, many millions of dollars do go into New Zealand assets. Well they used to until now.

Commentary by Pattrick Smellie, BusinessWire.co.nz

I think I need some new pills. Last year’s Budget from Labour’s Michael Cullen was all about tax cuts. It looked like the Budget Bill English would like to have delivered.

Instead, English’s first Budget in the Key Government is all cancelled tax cuts, home insulation funding, new roads, school construction and preserving social welfare entitlements during the harsh recession. It kind of reads like a Labour document. There’s even a press statement from the Greens in it, for goodness sake.  Far from slash and burn, Government spending continues to increase, just not as fast as before.

There’s plenty of scary rhetoric about the potential for Government debt to explode and the Budget documents  show 10 years of deficits ahead – we haven’t seen anything like that for at least 20 years and this year’s will be the first deficit since 1994.

At first glance the forecast Budget deficits for the next two years look particularly scary as they approach $10 billion. Put that in perspective though. Peaking at a bit over 5% of gross domestic product, these forecast deficits are still lower than in the last Muldoon Budget, in 1984, when the projected deficit was peaking at 6.5% of GDP.

In other words, this may be the most crapulent time for any Finance Minister to have to write a Budget since the 1930’s, but New Zealand’s been in worse shape than this far more recently.

In response to that outlook 25 years ago, the incoming Finance Minister Roger Douglas introduced fundamental economic reforms which eventually tore his Government apart, even as those reforms produced the kinds of productivity gains that the 2009 Budget says it wants to achieve.

That was then, this is now.  New Zealand’s politics no longer favour crash-through economics, so the question becomes whether Key and English’s first Budget really does enough to set New Zealand up for faster, smarter growth once the recession ends.

Some investments are admirable.  The $323.3 million home insulation fund is a welcome acknowledgement that there are big health and productivity gains available simply by helping people live in houses that don’t make them sick.  But it’s still an old Labour policy recycled.

Likewise, the Primary Growth Partnership is ultimately Jim Anderton’s Fast Forward science investment fund in drag. The creation of a $1 million Prime Minister’s Science Prize is a stake in the ground signalling that this Government recognises how important new discoveries will be to the New Zealand economy in the future, and there appears to be some welcome new funding for Crown-backed research.  However, there is barely a word in the Budget to acknowledge the vital role of universities in creating wealth-producing knowledge.

Tertiary education will have to wait till next year.  For the moment, the only action there is to pull back about $200 million of annual spending which the Government says Labour never set aside money for.

An extra 600 police and 246 more probation officers is no doubt politically attractive, and may make sense since crime and recessions do tend to go together.  However, there’s something just a bit depressing about this being the single largest source of new job creation in the Budget, accompanied by major new prison funding to house what is already one of the largest prison populations in the OECD, per head of population.

The appearance of an additional $90 million to support the operating expenses of KiwiRail also underlines low quality investments which this Government remains saddled with.

At his Budget press conference, Bill English described the quest for the elusive grail of higher productivity as a matter of “getting 200 things right, not just one or two”.  In that sense, this Budget is barely a start.

Productivity forecasts assume that fewer people will do the same amount of work over the next two years, creating a short-term jump in productivity on an hours worked basis to around 3% annually.

However in three years’ time, that rate drops back to 1.5% a year, and flatlines from there.  Given that the Budget disparages New Zealand’s average annual productivity growth of 1.8% over the last decade, we have to assume that there is more, better, cleverer policy to come.

To the extent that the Budget lays out a credible path for Government debt control – always assuming there isn’t another big jump downwards in the world economy – English’s first effort does represent “a plan”.

What the Government’s economic policy doesn’t yet represent is a credible vision for what New Zealand should look like once it comes out the other side of the recession.

Labour’s Helen Clark and Jim Bolger before her struggled with “the vision thing” and got away with it because they both governed during periods of generally strong economic growth.  The 2010 Budget therefore represents a test of whether this Government, led by the charming and possibly visionary John Key, can paint the big pick seat as English delivers debt-control budgetture any better.

The debate on how our fund managers stack up against those in other countries has certainly seen some polarised views. The one we subscribe to is that the report was a bit harsh, but there is room to improve.

There has been another vein of argument bubbling along which has used this report as a lightening rod to diss all fund managers.

A final thought is this. A couple of the niche managers, and relatively new players in the market, have gone on record saying the rules and practices of the funds management industry are awful and should be changed. Isn’t this a little hypocritical? Why did they want to become fund managers and play in an industry which was so bad? Love to know the answer to that one.

This week’s Blog on the topic has a number of comments including the responses from several fund managers and industry players. Read them here.

Last week I commented on the IFA’s decision to name and shame advisers.This week we have had the IFA defending the decision and the Professional Advisers Association distancing itself from what is happening and urging advisers to make a distinction between itself and the IFA.

To add a little flavour to the debate our Insurance columnist, Russell Hutchinson has waded in with his opinion.

The other big news of the week, which Good Returns was the first to report, is that Sovereign’’s managing director Simon Blair is leaving our shores. Details in People.

Today’s story is a take on investment markets from GAM’’s Asia Pacific boss, Helen Ng. Her view, which is explained here, is that equities are still a risk, but don’t rule them out.

Other investment news this week is an update on tougher rules for the non–bank sector, BNZ entering the market to raise another $150 million and our regular Rates Round Up.

The Insurance news section has been busy too, with the Newpark/PIS deal off again. Our story here has views from both camps and they seem to be telling different stories.

We have an update on what is happening at AIG Life. The IPO is progressing and it seems the company in New Zealand is going back to the AIA brand.

Also this week is our latest monthly column from AXA:

Trauma insurance – life insurance for the living

Trauma or critical illness cover is one of the life insurance industry’s best kept secrets.

Have a great weekend.

Philip

So Morningstar has given New Zealand’s funds management industry a D- essentially calling us the dunce of the world.

Well I think this is unfair. Australia got a C and the United States, that place where you have had Bernie Madoff and the sub-prime crisis, gets an A.

Sorry this just doesn’t compute.

Now let me be quite clear, I am not saying New Zealand is perfect, or the best of the 16 countries Morningstar surveyed. Yes, there is room for improvement. Yes, striving for “global best practice” (whatever that is) sounds like an admirable goal.

But are investors really getting such a bum deal from the funds management industry? No.

Here’s what I think. Do away with Investment Statements. They tell investors nothing meaningful.

They are glossy, bland documents which tell you little useful.

Increase the resources of regulators and make sure the Securities Commission is really providing investors with protection. I struggle to think of an instance where it has done anything to help retail investors in managed funds.

Acknowledge that KiwiSaver encourages long-term savings and has some incentives. Apparently we got marked down because countries like Australia have tax systems which encourage long-term savings.

Hey, Morningstar, didn’t you notice New Zealand is one of the few places without a capital gains tax?

The PIE tax regime is a huge plus for investors. Apparently that didn’t count much as around one third of the funds in the market are not PIE compliant.

That is an issue for the industry. I have argued for years that fund managers need to get rid of crappy legacy funds.

One thing the industry needs to do urgently is have a clear set of rules for reporting on fees. There is no industry standard these days and managers can massage fees and therefore performance willy nilly.

When you are at it, make it in dollar terms please.

The final point, of course, is that Morningstar wants full disclosure of portfolio holdings.  Yes, it’s a point of frustration, but it’s probably more frustrating for the researcher than investors as it needs that information for its fund manager analysis.

Do you thing a D- is an accurate rating? What do you think the funds management industry needs to do to improve its practices?

Survey on Fund Managers too harsh

Two news items dominated the headlines this week. One was the appointment of the first Commissioner of Financial Advisers and the second was the Institute of Financial Advisers’ decision to name and shame two members.

Both are significant and both have some interesting background.

With the commissioner appointment, one has to wonder why the Ministry of Economic Development can’t find a suitable candidate. The appointment of Annabel Cotton to the role in an interim capacity shows there are troubles with recruiting someone. Also we understand the Minister of Commerce hasn’t even got a short list of candidates to choose from. It does make one wonder if there are some power plays going on in the background.

The bigger headline this week, arguably, was the IFA’s decision to name two advisers who were found guilty of various charges by the institute’s disciplinary committee. This is a big story for all advisers, not just IFA members, as it has had major media coverage, even making the front page of the NZ Herald.

Sure it makes the IFA look as though it is doing something about members who do wrong. But read the two judgments (Ryder and Lunn) and decide whether the naming and consequent shaming of the two men was appropriate. I bet there are many worried advisers out there, and I bet the IFA has had a few resignation notices since its announcement.

Advisers aren’t the only ones facing tougher rules. This week the Reserve Bank told us some more about its plans to regulate the non-bank sector. Included in this story is further details of what is on the agenda. No doubt the regime will force more change on the industry in the next year.

Another story on Good Returns this week also focused on regulation. This one tells advisers about a new set of guidelines for advisers from Standards New Zealand. It is something all advisers should read and copies are available here.

In the Good Returns People section this week we have the search for a new chief executive of the PAA and the appointment of a new general manager at Newpark.

Meanwhile in Insurance news we have our latest practice management piece from the Million Dollar Round Table, Transforming wealthy friends into clients, and some news on an Auckland firm, Brokers’ Independent Group or BIG.

The Mortgage world continues to be busy with rate changes, including some fixed rate cuts from banks. Also in the Good Returns Mortgage Centre we now provide you with views on the interest rate market from some of the experts. Two pieces there this week are; Borrowers could be $1.2 billion better off and Floating rates too low.

Across on the other side of the market we have details of a new PIE compliant fixed income fund from First New Zealand Capital. You can read details about it here, and find out more by using this link.

Have a great weekend.
Philip

www.goodreturns.co.nz

The most contentious issue with adviser regulation is going to be around qualifying financial entities or QFEs as they are now known.

Today’s story on Good Returns gives an indication of this issue. What looks like happening is that category two advisers will be treated quite differently depending on who they work for. The advisers who are most at risk here are those in the insurance and mortgage categories and the two groups will be the independent advisers versus ones who work for a QFE.

Essentially the independents will, it appears, have higher thresholds to cross and costs. An adviser in a QFE will not have to do this, rather it will be done by their employer.

Another strand in this argument is which organisations will be allowed to become QFEs. One would expect banks and the big financial services firms with adviser distribution networks (like AMP and AXA) to be QFEs, but I know many smaller groups would like this status too.

Some sessions I have heard on this have generated quite heated debate. It could become the new version of the rather fractious and fierce fight years ago over “grandfathering”. (This was were old hands were accepted into the industry without having to attain certain qualifications while newer advisers had to complete a lot of study.)

Sticking with regulation we have the issue of how adviser competency will be measured under the new rules. ASSET Magazine has an article which explains what the expected standards will be.

Also the organisation responsible for industry training in financial services, the ETITO, is planning to hold some sessions on how the National Qualifications Framework works and what an Industry Training Organisation does; the purpose and structure of unit standards and national qualifications, and; how workplace assessment takes place.

You will need to let the ETITO know by Monday if you are interested in attending these sessions. See the Good Returns Diary page for more information.

To add a little more spice to the story we have the head of the Securities Commission calling for a single Australasian advisory market.

The home loan market continues to be a stand-off between the banks and the Reserve Bank. Very little of last week’s cut to the official cash rate has been passed on yet, although ANZ National yesterday made some small cuts to short term rates. To see what’s on offer at the moment check out Good Returns’ comprehensive mortgage rates table here. In the variable rate market two of the smaller lenders took on the banks with cuts this week.

Good Returns news for insurance advisers this week focused on Russell Hutchinson’s lates opinion piece: Folly, money and pain, plus there are a few updates on health insurance sales and Southern Cross. The news stories are here and you can find out more about Southern Cross here.
Have a great weekend.
Philip

The Institute of Financial Advisers (IFA) has slammed insurance firm Lumley for unfairly rejecting the professional indemnity (PI) claims of many of the industry body’s members.

In a statement issued yesterday, the IFA said Lumley had shown “a distressing pattern of behaviour” in rejecting PI claims from financial advisers.

Tony Vidler, IFA director, said “several dozen” advisers had provided strong anecdotal evidence that Lumley was “consistently” knocking back legitimate PI claims.

“Incredibly, Lumley’s has decided to apply some twisted logic in reading its own policy wording to suit its claims management objectives,” Vidler said in the IFA press statement.
However, Lumley refuted the IFA criticisms in a statement issued to Good Returns.

“All claims presented are treated on their individual merits, and in accordance with the specific policy cover,” Lumley said. “Given the variety of coverage, and the individual circumstances of each claim, it is difficult to offer generalisations on policy response, but we can offer assurance that all claims are evaluated fairly, and in accordance with the policy wording.”

According to the IFA statement, Lumley provides PI cover to approximately 75-80% of the financial advisory industry, mainly via group schemes including the IFA’s own offering.

Vidler said the IFA was in talks with a number of alternative insurers “both here and offshore” to provide PI cover to its members.

“We’re confident the PI cover is available,” he said. “We’re also talking to the Financial Planning Association in Australia who recently negotiated a PI solution for its members.”

Vidler said another option would be to drop the requirement for New Zealand’s financial advisers to take out PI cover, which is stipulated by many product providers and is currently IFA policy.

“It would be very easy to do,” he said.

Vidler estimated that New Zealand’s financial advisers spend between $800-5,000 each year to secure PI cover.

It is understood PI insurers have seen a strong increase in claims and notifications from advisers, chiefly due to the collapse of finance companies and fund shutdowns over the last two years.