[Weekly Wrap] Default advice

One of the big stories this week was around the future of the KiwiSaver default schemes, and the role that financial advice should play.

Friday, February 8th 2013, 9:12AM

by Niko Kloeten

According to IFA president Nigel Tate, offering advice for those in default funds is a better option than getting rid of defaults, as suggested by Kiwibank.

Some of the default providers have had success moving members into other funds (which, cynics say, tend to have higher fees), but there is a real question as to whether it is fair to other players in the market that the default system gives them this opportunity.

Financial advisers not associated with the scheme provider would have no access to these people unless they contacted them directly.

There is also a debate about whether a "life stages" investment strategy should be used by default funds.

There are a couple of interesting issues raised by submitters: Should default providers try to mimic financial advisers and do they have the moral authority to place auto-enrolled investors into potentially risky asset classes?

If the "life stages" strategy was suitable for everyone there would be little requirement for financial advice, but people have different circumstances and attitudes to risk. This criticism could also be applied to the current, ultra-conservative default settings.

This week also saw the latest update in the Ross Asset Management saga, with receivers saying funds withdrawn exceeded funds invested by $60 million since 2007.

Their efforts have been frustrated by inadequate record-keeping, a theme of the failed business run by the ex-AFA David Ross.

It's no surprise Ross owed money ($200,000) on a flash car, as this is a feature of many failed businessmen in New Zealand who have turned out to be more style than substance (the exception being Allan Hubbard's now-infamous yellow VW). The report offers little hope for Ross investors.

Also this week, concerns are growing about investors chasing yield in products they don't understand.

This has been mentioned to me a number of times recently by people in different parts of the financial industry, and it shows the importance of the role of financial advisers in explaining to people the things they've seen advertised.

And Westpac is finding success cross-selling its wealth products, with a large increase in the percentage of its customers with these products.

This strategy is important for banks because competition in the lending market means making money from mortgages isn't quite as easy as it used to be (although they are still making big profits).

Wealth products are an additional revenue stream to be tapped, and with a growing number of super-wealthy, New Zealand seems to be following the trend for banks to place an increasing focus on their private banking operations, providing greater competition to non-bank financial planners.

Meanwhile, the FMA has finished its investigation into failed finance company Strategic Finance and says six directors likely breached the Securities Act.

The regulator looks set to lodge civil charges against the directors, as it has against directors of Hanover Finance. Civil cases require a lower level of proof than criminal cases where the prospect of jail time is involved, but the FMA will still be under pressure to get a result and justify its use of taxpayer money to seek compensation for private investors.

In this week's commentary, Pathfinder looks at how to protect portfolios against market falls. There are a number of different options and, as with anything in investing, each has its own benefits and drawbacks.

In deposit rates, Infratil has begun a new buy-back of its infrastructure bonds, while in mortgage news ASB says the Reserve Bank may use other tools to delay an OCR hike.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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