« November 2007 | Main | January 2008 »

What will make the news in 2008

Most of the future is predictable - at least broadly - and an industry that prides itself on insuring the future, investing for the future, or planning for it should be ashamed if it can't chance a few predictions. So here goes my shot. Drop me an email with yours and we'll keep publishing them:

There will be so much talk about regulation you will get heartily sick of it - apart from a few dedicated policy wonks who get excited by supervisory models and theories of advice. Brokers, planners, and sales managers, will especially suffer from reg-fatigue. Hopefully the industry will recover from the collective delusion that at the next milestone 'all will be revealed'. It hasn't been at each of the last three. Time to start inventing the future before you simply become a pawn in someone elses game.

The standard of advice will rise, but the volume will fall. Credit crunch, finance company failures, and a dramatic slow-down in housing all guarantee that investors will be more willing to turn their ear towards the sensible approach of diversifying and employing professional managers. But, sadly, the volume of advice given will fall considerably. Having noticed that the first 10% of financial advice gets you 90% of your wealth (study hard, work hard, spend less than you earn) I think this bit is a shame. You might hate the folks down at Rich Mastery, but their guide to saving money while you  shop came right out of a mainstream budget adviser's handbook. Hopefully burned property investors will carry those lessons with them into better diversified portfolios.

Recruitment will slow, just when it should, in fact, increase. Uncertainty and bad news are not great macro-environmental factors for recruitment. Combined with a pretty robust labour market, and generous welfare (where else can you get $60k plus for being unemployed) it will not be a big year for new people joining the industry. Except at larger banks and fund managers - they've got KiwiSaver to keep the tills busy - the consequence is that the independent sector will once again shrink relative to the whole. It will keep doing this for a number of years. The reason why it should increase, is because financial services is one of the best rewarded occupations (for employees) and sectors (for the self-employed) and as barriers to entry look set to rise, new recruits should get in now while it's cheap.

Innovation in advice-giving will come from the corporate sector. The next few years will see little innovation in advice-giving, and especially high-advice services. What innovation there is will come from the corporate sector. Independent advisers are in a phase of codifying advice which is likely to see it solidify - rigidity is not the ideal environment for innovation. Whereas corporates, driven by the relentless need to grow will respond by examining what advice is, breaking it down into manageable chunks, and seeking to automate, systematise, and deliver it through a variety of mechanisms to a market that is hungry, above all else, for advice.

Credit crunch news will worsen before improving. One fund manager I spoke with recently says it'll take another six months before we're past the worst. My pick is a year... witha  fair amount of residual debris for a while after that. Beneficial side-effects will be less leveraged investment, more focus on income rather than asset growth, and some bargains for the brave as we go through.

Financial services will continue to enjoy a place in the sun: lots of government focus, KiwiSaver as an issue in the election (it may even turn up on a taxpayer funded pledge card - grrr!), and all that bad news - will keep proper financial journalists, plus yours truly, busy at their keyboards, and will better placed articles across more column inches in papers, internet, TV, and radio across the land.

It's a great business to be in, and I can't wait to get stuck into 2008.


Argosy

The following statement was issued by Argosy this morning:

"Pursuant to their investigations in irregularities in the handling of a non arms length loan by a former staff member, Argosy's lenders mortgage insurers have declined to provide cover on any new lending by Argosy. This being the case Argosy is no longer able to process loan applications and the residential loans book is now closed."

When credit is tougher, so is the enforcement of rules, since lending in the middle of a crunch is hard to do anyway...


On Giving Advice

I was with a group of mortgage brokers a couple of nights ago and listening to them talk about discussing affordability with clients made me suspect that these are the real financial planners. It doesn't matter whether they are working in banks as mobile mortgage managers, or as independent mortgage brokers. What matters is that they get a snapshot of the financial disaster that is the average kiwi's money situation. Mostly the news is not good.

Some contrasts.

People spend money and waste it. One story was of a person that had a legal settlement of about $100K four years ago and today they have debts of $40K - they've gone through $35k more than they earn each year - with nothing to show for it.

Other people are 'super-savers'. Some new migrants came to the country and within 6 years they had a net worth of about $400,000. So they gained an average of $65k per annum. Helped by property gains, true, but its still a valid contrast.

The gems they came up with:

  • Financial planning is not complicated.
  • To get rich: spend less than you earn - and repeat.
  • It's not how much you earn, its how much you save.
  • Never borrow for a liability (e.g. a car, stereo, etc)
  • Get out of debt.
  • Invest

It was financial planning 101. Funnily enough, this is the kind of financial planning New Zealand needs more of - not less of - and it comes from the daily activity of seeing different New Zealander's financial affairs pass across their desks and drawing logical conclusions about what works - and then applying it to their own lives.


Electoral Finance Bill...

With the passing of the Electoral Finance Bill - like many things that stir great passions - there has been some great political journalism. I think this issue more than minor ones, has actually improved considerably the objectivity of many media outlets. Its easy when an issue is minor to report it less critically than one would, which naturally tends to allow the bias inherent in all of us to be applied - by ommission, rather than action. But this Bill has been debated and scrapped over to such an extent, and it applies to an area so close to a journalists heart, that it demands the full application of critical intelligence. Our journalists have done that.

Two good links:

  • The Herald on the best and the worst of the last debate - read what they said about John Key.
  • The Free Speech Coalition press release.



The Privatisation of NZ Super

It's striking how things seem to appear to people. Last month I wrote an article for Money Marketing explaining that far from the UK situation becoming more like NZ, our system would become more like theirs - meaning that a means test and the attendant complexity was almost unavoidable. The risk that this would occur was identified even months earlier by Matt McCarten - but if nobody really notices Matt anymore. Now its been picked up again, this time by the Retirement Commission - so it should be mainstream. But I like David Farrar's comment that "It is the near ultimate irony that Michael Cullen's crowning achievement will be the effective privatisation of New Zealand Superannuation". Isn't it? Link.


Regulation of Advisers

It incredible to see just how much views on the draft Adviser legislation diverge. One person who spoke to me today said he thought the bill very well drafted, and admired the government for the balance and care the bill represents. Another person recently described the bill as very poorly drafted. That was also backed up by a professional opinion I have seen in regard to some current work. Significant sections of the bill leave many, many, questions unanswered.

One of the most significant is how corporate membership is intended to work. If the current bill were law this would leave some areas unclear: it is not clear whether an individual is still required to be a member if their corporate is, an exemption makes sense, but is not present. There are other areas where rules are simply absent - such as what would be the corporate's responsibility and what would not. These are not minor issues. Allow me to illustrate.

If the MED is right, and the range of cost per adviser is between $1,000 and $5,000 - then let's take the average - $3,000. Remember, this cost is just for the APB layer - not for education, training, or client remedies. Apply the cost to every individual person providing financial adviser according to the legislation and you will make significant distribution channels uneconomic. This cannot be the desired outcome - after all tha taskforce described this as an industry that is not 'in crisis'. They also pointed out that there exist a range of protections under law which were not faulty - just perhaps not as well used as they should be. The impact of knocking out distribution for say, 20%, of the market, which is already underinsured would be much larger than the cost imposed on distributors. It would be many more families uninsured. Not the intent, I am sure.

On the other hand, and this depends on the definition of corporate membership, the action of exemptions, and so forth - if the MED is wrong and the cost per head could be, say $200 per annum - that is, at least an order of magnitude lower than they estimate - then additional protection could be very good value, and the proposed law a success. Consumers and distributors alike benefitting from greater disclosure, transparency, education, and confidence in the overall system. That we can't tell how it will work out is of great concern. Something we should all be applying ourselves to over the coming months.


My Pick for the Democrats - Barack Obama

I would dearly love to see the Democrats nominate Barack Obama. He's centrist, enthusiastic, and just so unlike the other muppets. I especially want him to win after reading this crap. In a twisted way I admire how a democratic campaigner impugned Obama as a possible drug dealer, by saying this is the kind of question the nasty republicans would ask - but hey, those nice democrats saved them the bother and asked first!

On the flip side, I'd like John McCain to win the Republican nomination - with a strong VP. He couldn't be swift-boated. He's opinionated. He's actually got sensible ideas on farm subsidies, immigration, and free trade, and he likes to "Just go, go like hell".


Adviser Regulation - sense talked on impacts...

Dave McMillan's comments in Goodreturns are talking sense on economic impacts. Fewer people will talk to advisers because of the higher costs. Interestingly the bill contains some tools to exempt certain classes of advice or groups of advisers from these higher standards and costs, on a public interest basis. It will be interesting to see whether, or how, those tools are used, to try and avoid the danger that Dave has identified. If the MED is right and the cost per adviser is between $1,000 and $5,000 per annum - an average of $3,000 - then at that level there are literally hundreds of people in channels that are no longer economic distributors.