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Money Manager - or retirement expert?

There is more to this shift in focus than brandig alone. Specialisation and differentiation may help save financial planners from confrontation with resurgent banks, helped by recent advice failures and the implicit endorsement of KiwiSaver default status. Go read. It could also be the new focus for segmenting those same bank departments more successfully to increase the sale of added value services to retirees.

Yes, you will have to disclose

I have reviewed the excellent IFA guidelines for disclosure - if you are a member, go get them, if not, go ask, and if you work for a company, they'll be very reasonable about it.

They state that you need to disclose the amount or rate of financial or other relationships that may influence the giving of advice. It also states you need to quantify the nature and extent of any relationships that could affect the giving of advice.
So how would you do this?
I think that the rate of commissions and the practice of offering volume bonuses qualify as financial incentives that may influence the giving of advice. Clearly a commission of 10% is a lot less attractive than a commission of 200%. Also, for many advisers, the incremental effect of qualifying for, say, the next rung on the volume bonus ladder (which can add, say 10% bonus to all the commission they wrote with one provider, maybe worth an extra $10,000 for even run of the mill insurance brokers) could have a large effect on the advice they give at a moment in time.
You’d also need to disclose any contractual limits to your work. “I am contracted to sell insurance for XYZ Life – and can sell the products of others where necessary” or “I choose to give more than 85% of my production to Smith Investments Limited because…”
I think these two issues need to be disclosed to operate within the guidelines the IFA provides, and although it's not been tested yet - the law – hence you need to disclose a rate, or at least a range of rates for all companies. You need to describe the practical effect of arrangements. It is not sufficient to state a range from 0% to 200% - when in practice you may have an average commission with six companies of 110% and with one company of 180% because of the action of volume bonuses. It’s material.
Finally, on directorships, your statement is individual, but you probably have a beneficial interest in the performance of your business – as both Director and probably beneficial shareholder. Hence you’ll need a para on this.

Cost of Government Borrowing

A really good segment in Molesworth and Featherston about the cost of government borrowing. In fact, the article comes from being corrected by a reader. I often do some of my best work after correction by another - so double kudos to M&F. I hope they accept this wholehearted plug for their newsletter as sufficient payment for reproducing this segment:

Economist Brent Wheeler told us we erred in our item about


’s new waterview tunnel in the previous edition, when we commented the government can borrow more cheaply than the private sector.

This is a dangerously common fallacy that can lead to poor investment decisions by governments. Five or ten year Government bonds at 5% to 7% compared with private sector debt for similar periods at around 8% - 10% and it all seems obvious.

Oh dear. What you see with the Government bond rate is not the full cost of Government debt capital at all. Government debt borrowing rates reflect primarily the risk that a future government might default on the bond. This risk is generally perceived as low because of the stable revenues that governments obtain from taxation and the ability of governments to increase that revenue at will.

Note carefully that the government borrowing rate, unlike the private sector, has nothing to do with the economics of the projects for which government bond proceeds will be used.

The true cost of government borrowing is the opportunity cost of raising the extra tax dollars. In economic terms this is called the marginal cost of tax revenue to the government. The marginal cost is the value of the production lost when the money is taken from taxpayers plus the cost of administering the collection of the extra tax. In economic terms this is called the deadweight cost of tax. The several studies of deadweight cost of tax show it lies in a range of $1.45 - $2.46. This implies that a return on funds gathered by the government borrowing for a motorway project must return at least 15 percent to cover its true cost of
borrowing -- significantly higher than the private sector debt cost for a project of comparable risk.

Market rates for government borrowing do not reflect this requirement because investors in government bonds do not have to compensate the taxpayer for deadweight costs. The country as a whole is simply stuck with it (in the form of a lower economic growth rate and less wealth to go round) because not paying tax is illegal.

There are two big problems that accompany this “cheap government borrowing” delusion. First, if you under-price the capital funding of the project, then it is likely the project will be more expensive than is really justified and it is also likely that you will not earn a large enough rate of return on the investment.

Second, when the required rate of return is under-estimated relative to the cost of funding chances are you will get the price to consumers of the project services (tolls to commuters) wrong as well.


Go read them.

Weekend Off

I've had the weekend off - not thinking about work since I finally made it back to the house after a four and a half hour trip back from Wellington. The travel, and the various incidents that included (the taxi being hit by another car on the way to Wellington airport, and a two hour traffic jam in Auckland) were the signal for a complete break from work thought.

Now, of course, I am back.

Although I can't quite leave behind the issue of Auckland's traffic problems. Fixing our roads may be costly, but sitting in a trafic jam for two hours is very costly as well. So I was intrigued to hear about how the US reckkoned that during the 60's the construction of the Interstate network contributed 33% of all productivity growth, and during the 70's the figure was a still substantial 25% - and the 60's were a high growth period. We could get some growth out of new roads.

So now we move on to Sharia Law, of course. I opened up a conversation with my knowledgeable and religiously literate mother-in-law by asking her what she thought of Rowan William's recent comments about the applicability of Sharia Law in the cause of social cohesion in the UK. Before we could get the debate underway my father-in-law (who is a little deaf and wasn't paying much attention said "why, what's she done?". He thought Sharia Law was a person. This was such a delicious misunderstanding that of course it went right around the table. In short order we'd decided that Sharya Lore was a tarty East-ender elevated to breakfast TV for being famous, caught outside the wrong sort of nightclub, in the company of Rowan Williams. What we thought she could do for social cohesion...

For the record I reckon the UK could do with less involvement of religion in government, not more. So I am not a fan of any recognised role for the other kind of Sharia Law.