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The role of financial planning

Despite all the hype about "do-it-yourself" investing, especially buying and selling shares over the Internet, it seems getting professional advice is still more popular.

Monday, October 11th 1999, 12:00AM

by Philip Macalister

Despite all the hype about "do-it-yourself" investing, especially buying and selling shares over the Internet, it seems getting professional advice is still more popular.

Research shows that the bulk of the $15 billion New Zealanders have invested in managed funds is done through an adviser and less than 10 per cent of funds come directly from the public. This situation mirrors what is happening in the United States. Researchers Strategic Insight says that the "confident do-it-yourself" investor represents the minority of individual investors; "At most 30 per cent of retail investors buy managed funds today without the assistance of a sales intermediary."

It says, in a review of the US mutual fund industry, that there are two factors that are likely to drive people more towards the advisory industry. Firstly, as an investor's assets grow in size and complexity they will seek advice to help manage their money.

This is already the case in New Zealand as financial planners tend to target people with bigger sums of money (eg: more than $50,000) as clients. The reasoning behind this is that it is very difficult for them to add value to the small portfolios and make them tax-efficient. At the top end of the scale there are a number of firms which deal solely with the high net worth clients, and instead of using easily accessible retail managed funds they will be able to gain access to more specialised wholesale funds.

Secondly portfolio returns throughout the bulk of this decade have been fuelled by the strong performance of offshore markets, particularly the United States and Europe. During this time people with internationally diversified portfolios have enjoyed high, double-digit returns.

This situation is unlikely to continue and investors will have to learn to accept far lower returns.

AMP Asset Management investment strategist Paul Dyer says that over the past 200 years returns have been incredibly consistent. For instance an investment in global shares is likely to return between 7 per cent and 9 per cent annually, while New Zealand shares are slightly higher at between 8 per cent and 10 per cent.

A medium risk balanced portfolio, Mr Dyer says, should aim to return between 6 per cent and 10 per cent annually. He says property will give returns similar to shares, and cash can range from anywhere between four per cent and seven per cent.

The high current returns are "unsustainable", he says.

Retirement Commissioner Colin Blair, speaking at the Financial Planner of the Year Awards in Auckland on Wednesday, says another reason New Zealand needs a strong advisory is because of its "level playing field".

In most developed countries there are savings incentives, widespread access to subsidised employer schemes or compulsory savings schemes, Mr Blair says. These set ups tend to lead the average saver into particular savings vehicles because they are seen as authorised or approved. Additionally savers tend to accept these as the right place to put their money because parents and peers are using them.

"With our level playing field in New Zealand there are no signposts which point the average saver in a particular direction.

"So here they are in foreign territory unable to understand the language and with no map to guide them," he says.

What's more while they are out there searching for their route to financial nirvana they are being hounded by strong messages of the need to save.

"It is no wonder that our research shows that many people are seeking guidance and help," he says.

The huge range of options on offer intensifies this situation. For a start there are more than 600 retail managed funds, added to that are individual shares, peripheral investments such as forestry partnerships and of course, New Zealand's favourite residential property.

An investor could go out and buy a selection of managed funds which have four or five star rankings from one of the two research houses, however that isn't foolproof either.

Strategic Insight says in the United States "most equity fund net inflows have gone to highly star-rated funds, especially those performing well lately and offered by an effective distributor."

However, by some measures using an "overall star-rating as a one-stop solution may even appear to be misleading."

This is because the rankings are largely determined by the relative performance of the sectors, and doesn't take account of how sentiment changes. For instance, the US sharemarket is being driven by a tiny handful of large cap stocks and a time will come when their outperformance wanes and another sector such as small-cap value stocks will be in the ascendancy.

It takes time for this shift to be captured by the star ratings as they include historic performance figures in their assessment.

Blair says because of the complexities of investing the financial planning profession has an increasingly important role to play in assisting New Zealanders to manage their money.

Auckland-based Rodger Spiller, who this week won the inaugural Financial Planner of the Year Award, says advisers help people to "reliably" reach their investment goals.

In many ways a financial planner is like a financial doctor, he says.

"Clients view me as their financial doctor looking after their financial wealth and health. This requires expert diagnosis, prescription and on-going monitoring."

He says a first meeting with a client is like a financial check up, where he determines their financial health and discovers what their goals are and how they can be achieved.

After that there is a focus on change. Because the client's situation changes, as does the economic, investment and legislative environment, the plan has to be monitored to ensure it is the best strategy to meet the client's lifestyle and financial goals.

He says financial planning, as an industry in New Zealand, has become much more professional in recent years, especially since Financial Planners and Investment Advisers Association embraced the internationally recognised Certified Financial Planner (CFP) designation.

Spiller says to be a CFP advisers have to be committed to the profession and have to be experienced, comply with a code of ethics and undergo a course of continuing education.

Strategic Insight says people who do use an adviser are likely to buy and hold onto their investments rather than "churn" them. Contrary to popular belief investors tend to reduce (not increase) their level of turnover in times of financial uncertainty.

Spiller says one of the roles a financial planner plays is to "hold the hand" of their clients when things get tough.

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