Making sense of the government’s oddly-named Savings Working Group is something which is not that easy; nor is it easy to understand the reasoning behind it.

With a name like Savings Working Group you’d be forgiven for thinking that it is all about personal savings. You’d think it would be all about making New Zealanders save sufficient capital for a decent retirement.

Well that’s not the case. Finance Minister Bill English made it very clear to me that this group was mainly focused on looking at reducing the amount of money we as a nation borrow.

That’s a good thing. The numbers and the story around this suggests it is an important issue.

I wonder whether it is really a savings issue, as the name of the working group suggests. Added to that our offshore borrowings are made up of government, private sector and business and household borrowings.

The first one is something English and his government need to deal with. One could argue it is doing that and that on an international basis New Zealand’s government borrowing as a percentage of GDP is actually quite low.

Statistics NZ says that net core crown debt at June 30 was forecast to be $26.5 billion. If there was no change in net international liabilities in the three months ended June, government  debt would be just 15.9% of total net debt.

That brings into sharp relief the business sector. On this point you have to wonder how the government, especially one which believes in economic freedom and international markets is going to address this. Surely the government believes in free markets and the freedom of capital and labour to move globally? To try and stop New Zealand businesses borrowing overseas seems oddly contradictory to National party idealogy?

On the household sector the main part of this borrowing is the money we lend from banks to fund property investment and other things. With the Reserve Bank introducing the Core Funding Ratio and forcing banks to source more of their funds locally we must already be on the way to reducing our foreign borrowings?

Some comments from Statistics New Zealand suggest we maybe on the right track to fixing this offshore borrowing issue. It says:

“Overseas debt with a time to maturity of one year or less was 40.4% of the total at 31 March 2010, a decrease compared with 44.3% at 31 December 2009, and 43.0% at 31 March 2009. This was the lowest level since the time series began at June 2000. In general, overseas debt with a time to maturity of one year or less as a proportion of total overseas debt has been trending down from 31 March 2008. This is consistent with the Reserve Bank of New Zealand’s Prudential Liquidity Policy for banks which requires banks to hold longer-term foreign funding.” — Statistics New Zealand.

Back to retirement savings issues. It’s good that saving for retirement is not the group’s focus. Why? Well the government has taken off the table many of the key issues that need to be discussed. These issues relate to New Zealand Superannuation, the age of eligibility, even the rules around eligibility and the quantum of pension payments.

These are vital issues that need to be discussed and debated. Unfortunately this government is to gutless to address them.

The SWG has been given a bit of a brief to look at things like KiwiSaver and tax. What is interesting here is that these issues have already been debated at length and there is plenty of information out there.
Surely there is enough information for a government to make some policy decisions – as they should be doing, so why another taskforce?

This government has shown a predilection for these task forces. Generally they come out with some “radical” suggestions to start with then tone their comments down as they go along.

This group is likely to do just that. It’s likely to include comments around personal savings, although its main focus is elsewhere. Then the government will use its focus groups and polls to see what it can get away with.

I suspect English sees an opening for making some changes which previously he believed he couldn’t get away with.

Maybe the SWG is really some sort of Trojan Horse. We will find out in time for Christmas as the group is due to report then. Very suspicious!

One of the stories that has interested me in the past couple of weeks is around the types of investment products we should have for retirees.

The need for these sorts of products is, if you believe we need them, only a couple of years ago.

Jack Regan at AMP pointed out yesterday that in two and a half years’ time people will be at the point where they can start taking money out of KiwiSaver. Some of the figures being bandied around show that the sums involved run into the hundreds of millions of dollars. This is no surprise when you look at the age distribution of KiwiSaver members.

Figures show that the two main areas of concentration are children and young workers, along with the pre-retiree cohort.

Years ago I was a fan of annuities, but it seems getting that market going is pretty much impossible at the moment. One drawback is tax. The other is building up some sort of critical mass.

Maybe there isn’t a need for special products for this part of the market, rather retirees should just have a good fixed interest portfolio.

A couple of recent comments and stories illustrate that putting such a portfolio together isn’t that easy.

Rob Stock in the Sunday Star Times highlighted some of the problems in this area. Likewise, a discussion with some, what I would call, intelligent investors in Auckland recently reinforced the theme putting fixed interest portfolios together properly can be hard.

Their two concerns were perpetual securities where investors don’t really have much of an out, and reset securities. The basic argument here being when rates rise the issuer will buy them back as they become an expensive funding line and therefore investors miss out.

Overarching all this is that debt offerings often don’t provide enough return for the risk.
That, though, has been a common problem.

New Plymouth-based adviser Peter Hensley has written a “white paper” on the issue of suitable products and it’s worth reading. If you haven’t seen it you can read a copy here.

A couple of points he makes is that other countries have dealt with this issue are there are a range of products available. New Zealand is one market which hasn’t addressed this issue.

What is worrisome is that, although many people agree there is an issue, little appears to be happening.

I suggest time is running out and we need to look at solutions for clients, especially those who become eligible to take money from KiwiSaver.

Hopefully the stories we have run, and the comments so far, will help create some debate around this area. (In that sense it has been pleasing to read these comments.)

What planet is Gareth Morgan on? His rant, I mean article, in the NZ Herald this week attacking advisers is an odious, boring piece of copy which is best used to wrap up fish and chips.

I wonder if it was timed to coincide with the Institute of Financial Advisers conference which I have been at this week. As it turned out it was published on the day the Code Committee and Commissioner of Financial Advisers, David Mayhew, addressed the conference.

Morgan’s piece was a talking point of the conference. A common theme being here he goes again.

One highly placed man in adviserland described it to me like this: “My eyes glazed over after the first couple of paragraphs.”

“Gareth’s an unhappy man.”

Sure some of Morgan’s points maybe valid, but not all of them. His claim that the Code Committee is subject to “industry capture” is plain wrong. This group has worked diligently to deal with some difficult and complex issues and it has listened to submissions from a wide range of people and organisations.

The Code has to be approved by the Commissioner and also the Minister of Commerce. They won’t be signing it off, if it doesn’t meet the requirements of the Act.

A huge amount of time and effort has been put into creating a set of minimum standards for advisers. Thousands of advisers have been working hard on meeting these new requirements which come into force next year.

Why, oh why, do people like Morgan and Consumer go out of their way to build up this public perception that all financial advisers are bad? There are plenty of excellent and professional advisers helping New Zealanders.

Using the Consumer Institute mystery shop of advisers as proof the sector is flawed is in itself flawed logic.

The mystery shop has been discredited by Auckland University Director of Research and Policy Solutions Dr Michael Mintrom.

The survey is like Morgan’s book he talked about, After the Panic. Full of errors. In fact his book was so inaccurate it had to be pulled off the shop shelves and fixed.

If there is a problem, then it rests with product providers and investors themselves. There have been plenty of investments allowed into the market that have been duds and failed to deliver promised returns.

Secondly, as I have said countless times, the majority of people who lost money in finance companies chose to make the investment themselves. They did not use intermediaries such as advisers.

The main issue is here we have someone who is both an adviser and a fund manager criticising the adviser reforms. It seems there is only one good adviser in New Zealand – Gareth Morgan.

The good thing is that once the Code is implemented Gareth will have to become an AFA. One of the items in the code is about good behaviour. Will it make Gareth shut up?

It’s not a good look when the head of an association representing an industry group has to walk.

But Vance Arkinstall probably had little choice in the matter after charges were laid against in his role as a director of failed finance company Dominion.

What has been the surprise is that it took a week between the two announcements (charges being laid and resignation) and that the resignation wasn’t immediate

I note Chris Lee had a go at directors the other day. Here I agree with him to some degree. There are a number of directors out there with form and just seeing them being involved with a company is a warning sign to investors and advisers.

I don’t, for a minute, put Arkinstall into that camp.

I never understood why Arkinstall accepted a board position at Dominion Finance (I haven’t asked either). There was always the possibility it could be seen as a conflict of interest.

Curiously you could argue that finance companies were the enemy, or at least fiercest competitors, fund managers (whom the ISI represent) faced.

It seems to me that Arkinstall has become collateral damage in the finance company fallout. Only time (and a court case) will reveal the full story.

Arkinstall’s resignation is a blow for the ISI. It is an association without a lot of profile and one which was in the process of change. Arkinstall was leading that process and had already done at lot at the ISI including getting it more streamlined and functional. During his time he succeeded in getting good engagement with officials, bureaucrats and politicians in Wellington.

It’s the sort of stuff we don’t see, but is a critical for the industry when it comes to lobbying for change.

I have no doubt Arkinstall has always had the best interests of the industry (including advisers) at heart.

The timing of the move couldn’t be worse for the ISI in many ways. It has been in the news quite a bit this year advocating some changes.

Readers of Good Returns will see the great debate going on about its “anti-churning” policy around life insurance.

Also the ISI has announced that its members were going to introduce a voluntary code of practice and stop remunerating advisers on a commission basis for investment product sales. While the policy was promised sometime ago, details haven’t been revealed – yet.

Maybe they will come before July 31 when Arkinstall steps down?

I attended the Morningstar Fund Manager of the Year Awards during the week and there was one topic on everyone’s lips. It wasn’t who was going to take out the gongs that night, but what was going on at Huljich Wealth Management.

A couple of people did wonder if Peter Huljich was going to turn up on the night. Who knows, before all this news broke of what had happened Huljich could have been in the running for one of Morningstar’s awards.

The unanimous theme is what had been done was wrong.

The funny thing though is that it was wrong, but wasn’t a situation where investors were being ripped off. The closest, I think you can come, is that people signed up to the fund under false pretences. They were sold on returns which it turns out are questionable.

There are still unanswered questions though. For instance, why didn’t Brash and Banks know what was going on in the business? They are directors and sign off accounts.

They are not scot-free on this one and have some explaining to do themselves – although I note an explanation is not likely to be coming anytime soon.

Brash makes a point in his press release that says “some of these allegations (made against Huljich) are unfair and some are untrue.”

It would be helpful if he explained them.

Secondly I don’t think changes in the rules around funds would ever prevent this sort of thing happening in the future. The only likely outcome is that penalties for anyone caught could be tougher.

I also note many people have jumped on this story to push their own agendas – particularly the business presses page three pinup Gareth Morgan. Surely we can find someone with less conflicts of interest?

Added to that, Morningstar used it as a hook to push its call for fund managers to disclose all their holdings.

I do have to defend the research houses though. They can’t be expected to audit every managers’ books to confirm the data sent to them. That is ridiculous.

The other oddity here is that Brash is now running the show and is chief investment officer. Sure he ran the country, and used to print money, but can he manage money for investors?

We will be watching the returns to see.

It was a bit of coincidence yesterday that we were finishing an article on what the government’s utterings about tax and property investment really meant when it put out the response to the Capital Markets Taskforce.

The story, for the NZ Property Investor Magazine asked, amongst other things, whether changes to tax rules would end the Kiwi love affair with residential property.

It will come as little surprise that the answer was no.

Kiwis will continue to place their faith in bricks and mortar.

There are many reasons for this but one which came up a number of times was that there is little faith in other assets like shares.

Also distrust came through of corporate, big business and managers. The coincidence here was that the government’s response to the Capital Markets Taskforce addressed this very subject.

In looking through the responses it seemed there was little there which would change Kiwis attitudes.

Sure they the government supported a few ideas like putting investment statements into plain English, adding warnings when products were “particularly risky or complex” and a few other things provide a bit better quality of information to investors.

However, some of the things which are key to improving New Zealanders investment outcomes is better financial education and literacy.

The taskforce recommended that initiatives are employed to raise investment literacy including a targeted campaign promoting key investment messages.

To this the government said “further consideration required”. Then there was this one: Include investment literacy concepts in the school curriculum and resolve the issues preventing approval of the Personal Financial Management unit standards.

The government says it doesn’t need to as schools are self managing and they can include financial literacy if they consider it appropriate. Surely the government can be more proactive than this?

If it wants economic growth and a step change in the economy then having a financially literate population is a must have.

Reserve Bank governor Alan Bollard made a remarkable comment at yesterday’s MPS/OCR announcement which stunned me.

He said that at the start of the year New Zealand was in a highly vulnerable position, facing much uncertainty and was surrounded by high risks. We were teetering on the brink.

All it would have taken to bring the country down would have been one irresponsible headline in the media.

Then he thanked the media at the press conference for being responsible and not triggering an economic disaster.

This showed how perilous things were at the start of the year. Secondly, the same couldn’t be said in regards to how the media have handled one of the other big business stories this year.

Those stories were about Hanover and the treatment of shareholder Mark Hotchin.

It has been quite stunning to see what has been happening in some of these investor meetings around the country. Read this piece at the Herald to see an example.

These investors are quite rightly and understandably upset and emotional.

But, in my view they didn’t get to this point by themselves. Their anger has been fuelled by the media, and in particular TV3’s John Campbell and Shareholders Association chairman Bruce Sheppard. The latter in particular has been a disgrace making ill-founded and incorrect comments on prime time telly.

Last night TV One’s Close Up presenter Mark Sainsbury signed off the show acknowledging comments made by Sheppard were false. The media should stop using these rent-a-quote, barrow pushing people as the voices in their stories.

I will defend Hotchin to the point that at least he has had the courage to front up in person to investors. Likewise he and fellow shareholder Eric Watson have come to the party and put additional money into the company, which they didn’t have to do.

We have seen first hand on Good Returns the sort of mob behaviour which has been fuelled by this sensationalist reporting. Some of the comments posted to stories have been unbelievable, highly emotional and in some cases threatening violence. We haven’t approved those comments and they won’t see the light of day. We encourage discussion, but we won’t be part of this orchestrated campaign of hate and vilification.

After a little absence I’m back! I wrote this post a little while ago as  it touched on a theme that had been on my mind for a while. Also once I started sounding it out on others I realised many agreed with the thoughts. As usual would love to know what you think.

My other little – pre Blog announcement – is that since Blogs had been a little thin on the ground I thought I’d add a Twitter account too. This way I can give you some other thoughts on things as they happen.

You can follow me at http://twitter.com/PhilMacalister

Now for the Blog! There is this view at the moment that adviser regulation is the answer to all our financial woes. Woes could stand for “when over-excitement strikes’ and examples include people losing money in finance company investments and dodgy property schemes like Bluechip.

Sorry, adviser regulation is not the panacea for preserving us from future ‘woes”. I support raising the standards and improving the quality of advice (and have argued overall it isn’t bad in New Zealand). The harder problem to solve is investor education.

No matter what the powers-that-be say about recent “issues” an underlying problem is people making dumb decisions to invest in dumb products.

I am a little tired of hearing about investors calling themselves “victims”. In many cases their woes are of their own making. They looked in the paper for the highest finance company rate and invested their money there. No advice was given. Things weren’t helped by unqualified self proclaimed experts providing ratings for these investments that may have given encouragement to the investor.

The recent case Bluechip court case makes the point the law isn’t there to protect bad investment decisions – nor should it be.

Now don’t get me wrong. There are things that can be done to improve the advisory industry (and make it a profession).

But if you are going to put an ambulance at the top of the cliff it is regulation of product manufacturers. Someone should be looking at finance companies, CDOs and these other non-mainstream offerings and making sure they are properly represented to investors.

Yes there should be an ambulance at the bottom of the cliff dealing with the dodgy investments and their fallout.

The curious point here is that neither of these are about the advice process; it’s at the product and regulation levels.

My biggest concerns are that advisers are held out as the scapegoats when there are others that are more culpable – mainly Mum and Dad investors who take no advice.

There are plenty of advisers who do a bloody good job for their clients. Yes, there are some who don’t do such a good job too.

But what is being proposed is going to drive good advisers away from the business and add significant costs to those who stick around.

Making it harder isn’t going to automatically produce the outcomes some want.

I don’t hide the fact I am pro- advice and think it is in an important part of the process.

If regulators and others want to fix the problem start with financial education. Punters are often their own biggest enemies.

Financial advisers have been widely vilified in recent times and have become a divining rod for derision. If you believe the media, all financial advisers are Madoffs.

Recent case in point, the just published report by the Capital Market Development Taskforce reads like a diatribe on the financial advice industry.

Almost a third of the report is devoted to the deficiencies of financial advisers when in reality advisers control only a fraction of the assets invested through our capital markets.  Somewhat perversely, the entities the authors of that report represent collectively wield far greater influence over New Zealand‘s capital markets than the entire financial advice industry. But they seem to have chosen to deflect rather than reflect.

It seems to us that financial advisers are punching well above their weight.

Granted, the financial outcomes for investors the world over have been poor in recent times. But, while convenient for some, it is wholly inappropriate to lay the full responsibility for those outcomes at the feet of what is a critical but still relatively embryonic industry in our country.

We profess to know a little bit about, and a lot of, financial advisers. NZ Funds, is the only investment management group in New Zealand that makes its living exclusively from working alongside financial advisers. We have followed that course for more than 20 years now, from the genesis of our industry to its currently troubled point.

We work with advisers of all denominations. From one man bands to large national chains; from the truly independent (I will come back to that hoary old chestnut) to those that rely on us for a wide array of investment and business services; from those qualified primarily through experience to those who hold doctorates in finance.

They are generally good, honest people of strong integrity and ethics. They do not need to be told to put their clients’ interests first. They are acutely aware morally, if not necessarily technically, of their fiduciary duties. Their recommendations are not, in our observation, tainted by remuneration factors. But we do frequently observe their genuine concern for their clients’ financial outcomes and well being.

The distribution curve of financial adviser capability is no different than that of any other profession – some outstanding, many average and a small minority whose less than exemplary behaviours draws all of the others into disrepute. Ask any lawyer, priest or male primary school teacher about the stigmas of association.

People’s wealth is second in importance only to their health and their families. It is a source of enormous anxiety and uncertainty for them. This is especially so as the average client of a financial adviser in New Zealand generally has a significant shortfall between the life they desire to live in retirement and their current and prospective financial resources. They have an unfunded superannuation liability.

It therefore follows that as a profession, financial advice should be held in similar regard to the other profession that deals with the issues of our life enjoyment, namely, medicine. But it is not. Far from it.

The maligning of financial advisers has three primary legs to it:

1. they pursue their financial interests ahead of their clients
2. they are underqualified to perform their role
3. they lack independence.

With respect to the first issue, if it were true one would expect to see abhorrent remuneration and great wealth being accumulated amongst advisers, much like that which has occurred in the investment banking and sharebroking industries globally. This has not occurred. Most advisers make a living, not a killing.

With respect to the second there is strong and unequivocal basis to this criticism. Most advisers we talk to would dearly love to see a stronger professional qualification criteria develop.  But, like any industry in its relative infancy, the availability and level of professional qualification takes time to develop. It requires concerted investment from industry participants and government.

With respect to the last, there is much confusion and obfuscation around the issue of independence. There is no evidence that we are aware of that supports the contention that a wide range of choice (commonly referred to as independence) improves a client’s financial outcomes. To the contrary, there are very strong arguments and evidence that fully integrated advice and investment management services can deliver a superior outcome.

Advisers’ remuneration or commercial arrangements are not matters of independence, they are matters of disclosure. It goes without saying that they should be disclosed. But to say that an adviser delivers a lesser service because they utilise a narrower range of investment providers implies that is possible to fully understand all available products and securities – which is nonsensical.

Independence should be defined as the ability for an adviser to recommend what they believe to be in their clients’ best interests. Nothing more, nothing less.

Much of the noise in the media directed against financial advisers comes from those who hold a vested commercial interest in maligning the advisory industry (read their competitors). They are often advisers in drag. They, more than those they malign, are exploiting the investing public’s inability to discern the veracity of the distinctions they are making – many of which are spurious at best.  They are patronising those they purport to protect.

An example from the Capital Markets Development Taskforce report bears this out. The report argues that funds are flawed investment vehicles because “individual members’ asset holdings may be distorted when other members buy or sell units in the fund”. Given that this same flaw could arguably apply to all traded securities (the circularity of which is perplexing given the Taskforce’s stated aims), one can only assume that the statement represents the interests of one or more of the contributing parties, not those of investors generally.

The real destruction of wealth that has occurred in New Zealand has been driven much less by the direction of advisers and much more by the lack of it. Most of the investment directed to failed finance companies for example, was and still is, made without the benefit of advice. There is strong empirical evidence globally that it is human behaviour, not bad advice, which is the primary enemy of individual investors.

The poor financial outcomes achieved by investors over the last decade have been exacerbated by the laying bare of the imperfections of modern portfolio theory. While modern portfolio theory is beautifully elegant it is flawed in its application for individuals. The returns from risk assets are not as predictable as the theory implies over the investing timeframe of most individuals; the outlier events occur more often and to greater extremes than the theory accommodates; and diversification does not provide the protection necessary to sufficiently smooth the ride. Despite all assurances, investors can not cope with the true volatility of the assets in which they are invested and their self defeating behaviours prevail.

These are failures on the part of academics and investors, not advisers.

One factor on which most will agree is that New Zealand and New Zealanders would benefit enormously from a widely accessible, professional, efficient, profitable, and client centred financial advice industry.

We believe that investing in the advice industry is a better means to that end than deriding it.

Richard James is the chief executive of NZ Funds Management

Yesterday we held the ASSET Magazine Insurance roundtable. This is where we get together a group of people from various parts of the life industry to discuss current issues.

I wasn’t going to discuss this until a little closer to when we publish the Round Table discussion in ASSET.

However an item on TV3’s Campbell Live last night picked up on one of the issues discussed.

The issue is simple – the public perception of life insurance and risk advisers.

On Campbell Live there was a piece getting stuck into Sovereign for not paying a claim made by a guy who was dying of prostate cancer.

It seems the key issue is the man had failed to disclose a number of important conditions when he filled out the application form.

What was fascinating is that although Sovereign’s clinical director John Mayhew tried to put the case, it was impossible to make any headway as Campbell clearly didn’t understand how life insurance works. Rather he played on a strong emotional line: How can you deny paying a claim to a man who  is dying?

This isn’t the only example of bad press for life insurance. The whole financial sector took a hiding in the Sunday Star Times this week when it published results of a survey. The key point, and it is little surprise in this market, is that there was little trust of the either advisers or the firms who provide investment and insurance products.

Perhaps most galling was a comment no one trusted insurance advisers anyway so it was no surprise there wasn’t a positive public perception.

When things go wrong it makes headlines. It’s really easy for the media to be critical of life insurance.

Also when things go wrong there are plenty of willing outlets for the story where it is current affairs shows like Campbell Live or Fair Go.

The point is that the media totally ignore the great work life insurance plays and the thousands of claims they pay out each year worth many millions of dollars.

What the life insurance industry needs to do is get out and sell its good news story. It has a great story to tell. It has thousands of people who have benefited from having life insurance.

It’s time the industry put aside its differences and works together to get the facts out there.

The sooner it happens the better it will be for everybody (except the uninitiated who want to tell sensationist stories).