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Workplace Super Schemes

Still more in the Sunday press on workplace super schemes.

All in all there are so many more questions than answers. Also, since no official policy pronouncements are being made the only thing we know for certain is that a bunch of trial balloons are being flown. They want to see who takes pot-shots at them, or supports them. They want to see how the ideas layer up. They were paying attention when Winston's proposal for compulsory super was floated. Compulsion is an evil word and so it is avoided like the plague - but... the articles talk about very modest incentives and 'discouraging' people from opting out. How big does discouragement have to be before it is compulsion?

But over here in managed funds land - are we happy with these plans? Yes, we probably are! A complicated scheme, administered, say, only under a properly constituted trust - these are the kinds of schemes we excel at providing, and it's highly unlikely that there will be many small do it yourself type schemes. Take the tax away on capital gains and we're doubly pleased. Can there be any downside in such a scenario for an industry that has been crying out for some sort of incentive to save for so long?

  • Fee maximums - like British Stakeholder pensions, which have been (policymakers should note) generally a failure.
  • Disruption in distribution - as a result of higher distributor costs, reduced numbers, and a difficult transition.

These are risks, mind you, not reality - yet.


Anthony Davies: Karate Kid

A veteran of financial journalism in New Zealand and also an all round very interesting guy (having spent time in Antarctica as well brief sojourns in corporate life) has recently competed in a full contact Master's Karate tournament. He came a valiant second pointing out that his opponent has nine years younger, and Anthony himself has not participated in serious competition for a long time.


Consumer Correction

Remember the Consumer's Institute letter we were concerned about last week? If you don't just scroll down a couple of stories to "Consumer Gaffe?"

We wrote to consumer to alert them to the issue, and they've told us that they are publishing a correction next month.

We're delighted to see it, and as a subscriber and reader of Consumer also delighted to continue recommending them to everyone. It's well worth having an advocate like the Consumer's Institute, and the magazine is a valuable buyer's guide.


Books

Recent reading has included Liars Poker, a memoir of a young bond trader at Saloman Brothers during the eighties. Brilliant read. Especially interesting because he recounts the early cowboy days of trading mortgage backed securities in the US in the late eighties.

Mortgage backed securities are now respectable, largely predictable bonds - they've become the method that has enabled many non-bank mortgage lenders to offer competitive mortgages without requiring big balance sheets. That included Sovereign back when I worked for them, and today includes Sentinel - doing innovative things in the home equity release market.

But back in the 80s Lew Ranieri was thumping boardroom tables trying to shift these things in the midst of the US Savings and Loans crisis. Not a lot was known about mortgage bond pricing and the market was struggling to come to terms with appropriately handling mortgage prepayments. But not, obviously, struggling THAT hard - as this book reports 'feeding frenzies' by the spoilt traders on the mortgage desk; when trainees would be sent out to buy vast quantities of food: pizzas, mexican, and very large cigars.

Also great fun has been A Foregin Affair, a different memoir altogether, by Valerie Barnes. Barnes was a translator, who warns of the many dangers of translation. Two bites to get you going:

"A translation is like a woman: if she's beautiful, she's not faithful, and if she's faithful, she's not beautiful"

"You may refer to the Pope as 'His Holiness the Pope', be careful to avoid slips like, 'His Poliness the Hope', or worst of all, 'His Hopelessness the Pole'"


Taskforce, Michael Webb, and Somers-Edgar.

Michael Webb and I got a grilling over potential regulation on Friday last week. Michael spoke about the task force process and I spoke about the possible regulatory environment and how that may affect advisers. Questions were definitely easier on me than Michael. But all were in good form.

Michael could not, of course, lead us as to exactly what was being considered. The taskforce has not yet completed its work. However, he endeavored to reassure the audience at the Fundsource conference that issues dear to the hearts of planners were being considered; especially:

  • The scope of the definition of financial advisers - i.e. will it include accountants, property investments 'coaches' etc.
  • The potential costs of the regime.
  • The concerns about the outcomes generated by the Australian regime - and therefore a determination to do our own thinking, not simly to replicate their approach.

As I've written before, any change in regulation has an effect on costs. A mild form of change like making the current 'on request' form of disclosure a mandatory one, would incur little expense. But this review looks bigger than that to me.

As part of the prep for the session I spoke with several different sources. David Hindley of Consumers Institute was probably the most revealing. He favoured a disclosure-based regime, which is relatively low cost. However, he also favoured tougher educational standards for advisers. These could be costly indeed for the industry unless extensive grandfathering were allowed, an approach David specifically didn't like or want to see.

Completing a relevant qualification and maintaining that through a tougher continuing education requirement could be seen as a form of licensing. This looks a lot like the 'Aussie lite' scenario which most industry commentators are forming a consensus around.

If costs rise, businesses get bigger - you need more production to support fixed costs. If the levels of cost are large enough, you see businesses coalescing into larger groups. National netoworks. Platforms are getting some of the blame for this, but we've had platforms for several years now and business size has not moved a jot. Ronald Coase, an economist, won a Nobel Prize for his work on business size - and he drew attention to fixed costs and required capital as a major driver in firm size. For example: three years education per adviser is a significant additional capital cost. Tougher registration and compliance are significant additional fixed costs - required whether you sell $1 of investments, or $100million. Hence tending to make larger firms more profitable in higher fixed cost environments.

We do not yet know how big an issue this is, but it will be an issue. In Australia when dealer groups were formed they have often gone to fund managers for capital and a cornerstone shareholding. Perhaps an unintended consequence of the regime has therefore been that fund managers own so much more of the advisory business than they once did - reducing the independence of advice.

So in question time, Doug Somers-Edgar pipes up and says: "If regulation means bigger firms, and they are all owned by foreign-owned fund managers, won't that mean we'll have no New Zealand owned advisory business left?"

Of course, Doug knew the answer, in the worst of all possible worlds, it is "yes".

This and the other questions fielded were all a great piece of feedback to the taskforce chief. It was a good session. Good on Michael for coming along. It was immensely useful. Another great point raised was that it is so much easier to regulate cost into the businesses of the 'good guys' while missing many of the 'bad guys' who will continue to proffer dodgy advice at the margins just escaping the edge of the net - wherever that line is drawn.

I thought Michael was strong on this point, and the concern that you cannot regulate away ALL poor outcomes. "We are aware of the limits of what can be achieved with law".

However, as I left the hall I felt that the advisers believe its limits are, or should be, somewhat narrower than the approach that will be tried.

To clarify on one final point. One questioner referred to me as saying that regulation would take effect in six to twelve months. While it's hard to recall exactly what I did say, this is obviously too quick. What is definitely the case is that if drafting of legislation commences quickly after the task force reports (say any time before the end of the year) we will have a fair idea of what will finally come and when. At that point it will have an effect - and that point is likely to be within 6 to 12 months. At that point you will know the shape the regime, and therefore begin to estimate its costs. The market will already factor those into business values and expectations for the coming years - ready or not. Hence the 6 to 12 month timeframe for 'impact' rather than 'implementation'.

Links:

www.fundsource.co.nz

www.med.govt.nz/buslt/bus_pol/task-force/index.html

www.goodreturns.co.nz


Consumer Gaffe?

I read with concern a letter in a recent edition of Consumer. A readers letter was quoted in the March issue, number 445:

“As a general rule, does one need to inform an insurance company of a health problem after a policy has been taken out? Could non-disclosure affect any future claim?”

The answer given, was:

“Most certainly. Policies are renewed annually; If you don’t declare a health problem, the insurance company could void the policy and /or refuse an otherwise legitimate claim. Customers have a “duty of disclosure”, which means it’s your duty to supply the information, the insurer doesn’t have to ask for it. This applies to other types of insurance too, not just health insurance.”

I've written to Consumer to try and get this straightened out because, while I am not sure what ‘other types’ of insurance are being referred to, even for Health Insurance, this answer, is generally wrong.

The three largest health insurers in the country, Southern Cross, Tower, and Sovereign, all market as their leading – and therefore most commonly found, and most likely to be held by your readers – products, policies which do not require continuous disclosure of the sort described in Consumer's response to the letter. The comment about a duty of disclosure is correct – at time of application. It is at this point that the term annually renewable may be confusing – with these contracts it refers to a change in the premium according to your age. The same would apply to life, total and permanent disablement, major trauma, and income protection insurance as a general rule as well.

Some contracts offered by general insurers are genuinely ‘annually renewable’ and after a bad year’s claims, they can be cancelled. But these are rare by comparison.

You might want to write to them as well... and I'll let you know what the result is.


Overspending?

There has been recent focus on the survey of Household wealth by Spicers. One report is here. A claim is made that:

"Households consistently spend significantly more than they earn"

This claim can only be true if Spicers define earnings as perhaps 'taxable earnings' or 'from personal exertion' and do not count, for example, the increase in the value of a house as an investment gain. Otherwise net worth would have fallen, not risen.

I am not saying that spending your equity gains is a good thing - especially at the age of the average kiwi household. It may be justified when you are 70, but at age 40 it would look a touch ambitious to fund lots of future consumption on the back of rising property prices.

The point is that spending equity gains is not always a bad thing. It will be a damn bad thing if it mens you are hung out to dry as interest rates rise, and if the value of your property falls significantly. But if you own a couple of rental properties and the market has pushed their value up considerably, and you remain relatively conservatively geared, and you really, really want a new car. Why not?


Life After Hank...

CNN has a good piece. One thing that I like was the comment:

"In a widely anticipated move, announced late on Monday, AIG said Co-Chief Operating Officer Martin Sullivan, 50, would take over as CEO.

So much for all the overblown concern about who would succeed Hank, it seems 'the market' was expecting that one of the co-chief operating officers would take it.