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Economics and Financial Planners

The science of Economics, I have always thought, is horribly misunderstood. Nobody thinks that physics is anything other than the study of why physical things are the way they are. Uncovering the underlying order of the universe, interesting ways things interact, and so forth. Interesting, usually. Useful, often. Nobody thinks that Physics should be 'the study of trying to make things the way they really, bloody well, ought to be if there were any justice in the world'.

Economists on the other hand can describe the world as it is and get denounced as racist, stupid, nasty, evil right wingers. Or they can engage in a special kind of popular fiction - going back to describing things as people would like them to be - and there is a special name for such fantasising: socialism, usually. Although increasingly big government conservatives in the US seem to be engaging some of their own economic fiction writers.

Instead of wondering why there are so few financial advisers that offer the three disciplines (cash management, risk management and investment management) on a pure fee basis - maybe we should be following the more scientific form of economics and wondering why in virtually every form of financial services people get paid out of the product they are selling.

"Foreign Owned" - but Locally Incorporated

Rather than spending too long focusing on the intellectual dead-end known as nationalism, which is inherent in a statement such as 'foreign-owned' it's worth checking up on who will get affected by changes proposed in the life company supervision regime.

Goodreturns reported a couple of days ago (link) The operative comment being:

"The toughest rules though are proposed for foreign-owned insurance firms – which is most of the big ones in New Zealand. A combination of two options is put up as the preferred approach: mandatory financial strength ratings which include any home country policy-holder the company may have, as well as any other provisions which might disadvantage New Zealand policyholders. If unsatisfactory, the Reserve Bank would require the insurer to incorporate in New Zealand."

Of course, those requirements are tough, but wouldn't actually apply to most of the big insurers in New Zealand, because most of them are locally incorporated anyway. Hat-tip to Peter Davies, here's the list:

Sovereign - Locally incorporated

CIGNA - Locally incorporated

AXA - Branch of Australia

AMP - Branch of Australia

Asteron - Locally Incorporated

Fidelity - Locally Incorporated

Westpac - Locally Incorporated

AIG - Branch of Bermuda

ING - Locally Incorporated

NBNZ - Locally Incorporated

Tower - Locally Incorporated

BNZ - Locally Incorporated

Medical - Locally Incorporated

Friday Fun

A man charges into a bank wearing a balaclava and wielding a handgun. He shouts 'this is a raid - everyone get on the floor!!', and proceeds to empty the cash drawers.

As he runs towards the door with the loot, a brave customer yanks off his balaclava. The robber immediately shoots the customer in the head and shouts. 'Did anybody else here see my face?'

The robber notices another customer peering from behind a counter and goes over and shoots him in the head also.

'Did anybody else see my face?' he shouts again, waving his gun around.

There is silence for a few seconds before an elderly male voice is heard from a distant corner.

'I think my missus caught a glimpse....'

Faked Middle East Coverage

I was once greeted on arrival at an insurance company as being the insurance industry's only war correspondent. So I try not to put up posts like this one very often - but the faking of coverage, which recently got a lot of play during the war in Lebanon, appears to be an industry with a longer tradition. Here's Farrar's take on it, and he links to the Wall Street Journal.

They should all go and get proper jobs!

That's Gareth Morgan's view on investment advisers calling themselves financial planners - its an interesting follow up to my piece below "there are no financial planners". This was written to me by a friend in the media who interviewed Gareth for a story:

In a nutshell, he says often people calling themselves financial advisers are hopelessly conflicted – and half of them are illiterate anyway in terms of investment markets. So the safest option is to educate yourself and take advice from accountants who will charge per hour.

He says: "How many of these so called financial advisers have put these poor suckers into finance companies left right and centre and now cost them all their savings?" He was very disparaging about unit trusts, and ING's diversified yield fund, whatever that is.

And he also says the sector is in total disarray and has no faith that pending regulation of the industry will improve matters. He hopes the industry will come to an end and people will increase their own literacy as he sees no place for it and thinks it has destroyed people’s wealth more than it enhances it. “I’d like to see them all go and get proper jobs,” were his words.

Freddie Mac and Fannie Mae

This is an interesting piece from Lance Wiggs on foreclosures. Although the relationship between guarantees and capital is not quite as simple as he notes. Although foreclosures as a percentage of loans are 2% that does not mean losses equal 2% - they are usually much smaller than the value of the loans, indeed it is extremely rare for them to be even a large fraction of a loan over a substantial portfolio. However, a number of the other points are very weel made, and the charts showing the market reaction clearly underlines the problems yet to be found. Here in NZ we are still, really, at the start of this process. Let me illustrate:

Scenario A: in August 2005 you fixed your loan at 8% for three years, it was 40% of your outgoings at the time. Your wife worked. On the back of a 30% rise in home values your wife quit work when you had a baby and you drew down equity to fund your budget shortfall. Right now your loan is refinanced at 9.7% fixed for three years. A little over a 20% increase in payments. So payments are nearing 50% of your previous, combined income. But now you are on one income, and the price of food, petrol, and nearly everything else is going up. You have to sell...that process is only just beginning.

Scenario B: in October last year you you contracted to buy a BS Corp apartment for $400,000. You are a single mom of three kids with a good job ($80,000 a year) but only a little equity in your home ($40,000). As interest rates have risen and credit criteria have tightened, although you qualified for a loan when you signed the contract that approval has now lapsed. You are committed to completing the purchase in September this year - four months from now. You cannot do so. Your deposit was a $1,000 cheque to secure a deposit bond. When you fail to complete the apartment will be sold at auction - say it fetches $250,000. The bond company pays your $40,000 to the developer and pursues you for payment. The developer sues you for $110,000 - the extent of your loss. Your equity is wiped out. You know it now, but you won't be declared bankrupt until at least October, and you may hang on into 2009.

Lotto Law Enforcement

Incremental gains. We are all looking, at some level or other, for the next extra 'good' in our lives for the lowest possible unit of expenditure. Even the coppers - the police on the beat - who we rely on, are at some level wondering - how can we nick more crims for not too much extra coin. After all, petrol prices are rising for them too. So Incremental gains.

No? Maybe some of you are still holding out to be plucked magically from the place you stand, sweating away in the insurance, banking, or finance industry, into some exhalted new position. You wouldn't have thought it, but given the news I heard on the radio, that some 75% of kiwis play Lotto at least some time in each year... I guess the odds are on. This, I suppose is a lot like binge drinking, you go out, spend a few bob, indulge in a wild fantasy of irresponsibility - and then you are back. Poorer, with a headache, and facing the same reality as before. So we can all excuse a little fantasy.

Except, to return to the point, when it's the people protecting us who are doing the fantasising. Sadly, the Chris and Cru Kahui case seems to have been brought by someone who had either been on a little binge, or had been doing a little "lotto law enforcement". I wasn't at the trial but to judge from the radio reports, it never, ever, looked likely.

How heartbreaking it must have been for the people on this job. Men and women who care. Joined the force to make a difference. A disgusting crime. Immediately they started with one hand tied behind their back - the family shut down, a number of commentators said to leave them alone to do their grieving. Ordinary police - although they would probably never admit it - were probably thinking... uh oh, they'll be getting their stories sorted out.

Much like the post-binge rationalisations that gradually get stronger as the day wears on, and you've managed to hold down a little lunch. It wasn't so bad, I didn't... did I? But unlike some others, I am not advocating a repeal of the right to silence. No, that is too important as a legal right. However, the place where we could have made a difference was before it happened. Probably a dozen cops sould have told you the family situation was a disaster in the making. Had more of the Kings and Kahui been doing something more useful (i.e. at work, or perhaps in treatment for drug and alcohol abuse) things could have gone better.

Or maybe not. Maybe stuff like this just always happens, and expecting to be able to do something about it is another fantasy. The same sort of fantasy which leads people to join the police, and slog their guts out trying to bring a doomed prosecution.