« April 2009 | Main | June 2009 »

Budget day, where less is more - especially in Financial Services

Following years of spending up and a nasty recession the hangover is definitely upon us. Many great words - and many less great will be written about the budget - for most of us in the financial services industry less is definitely more. We're already digested over 30 different changes in law or regulation that affect every aspect of our operations from sales through to taxation, from things as mundane as proposal forms to as complex as educational standards. We'd like there to be very little for us this time. A slightly smaller than expected deficit. No changes to KiwiSaver. Defer the tax changes to life companies. Then just leave us alone to sort out what you've handed us already. Time was, we used to moan about government indifference. Now, a little indifference would go down just fine for a little while!


Portfolios of the Poor

I recently found a fascinating book, Portfolios of the Poor. Read all about it here Link

Two highlights:

  • The poor pay a high negative interest rate (fee) for keeping their savings safe. This is still worth it, because the presence of savings helps them smooth out the ups and downs of financial life.
  • Having a loan can often increase financial discipline because of the demands of a regular payment. Having a loan is often the catalyst to start saving.

That's counter intuitive. It certainly runs counter to the advice so many financial advisers give people to pay off their home loan before developing significant savings. Budget advisers agree with the authors of the Portfolio of the Poor. So do corporate financiers who often see company financial performance improve with a modest level of debt as well as funding from equity and retained earnings.


The end of 'owning' clients...

Aviva in the UK has introduced a clause in their agreement with IFAs which effectively means the company can take back a client who they deem to have been 'orphaned' by their financial adviser. This is a move that product providers here are likely to take quite a long hard look at.

Although our distribution environment is undoubtedly different, the question will be asked - how different? Couldn't this work in New Zealand as well.

Product providers are annoyed by advisers behaviour in two areas of client servicing. One is the extent and frequency of servicing contact. A significant number of clients calling to cancel life companies say that since taking out the policy they have never heard from the adviser. The other is the suspicion that advisers 'churn' their client bases. I don't believe there is evidence of this as a widespread practice, but the suspicion remains behind grumbling about 'client ownership' - a detestable phrase as all it really means is a commitment to pay a renewal commission and an agreement around marketing.

There is likely to be a third, and arguably more powerful driver, for such a change coming soon. One part of the Aviva clause deems the client orphaned if they can no longer service the client due to losing their authorisation with the regulator (the FSA in the UK). Here is the excerpt from the Money Marketing article:

The clause defines an orphan customer as a customer who at any time after being introduced by an adviser has requested Aviva to provide financial advice, indicated to the provider that he or she no longer receives financial advice from their adviser or can no longer receive advice from their adviser because their adviser is no longer authorised by the FSA.

The clause allows Aviva to initiate direct contact with customers in order to promote and sell business without advisers’ consent where it conducts “generic marketing”.

The document states: “We will endeavor not to initiate contact directly with customers in order to promote and sell business without your consent except in circumstances where in our reasonable view the customer is an orphan customer.”

Read the whole article - link.


Quote of the Week

"That points to a Japanese-style future for western banks, in which a thinly capitalised system staggers along, insisting on its rude health, while the state follows holding crutches an inch beneath its armpits."


The Economist using powerful imagery to sum up its view of the American banking system in particular following recent stress tests.


It's easy to get into trouble

It's easy enough to get into trouble with firmly held beliefs in the field one knows a lot about and is therefore intimate with. I know it. One of our favourite financial commentators, Gareth Morgan, has probably done a lot of research into climate change - I don't know. But it's easy to get into trouble talking about the greatest political football of our time. Inexpert though I am, I am pretty sure we didn't miss a 2000mm rise in sea level. Here's the other side. Link.


NZ's poor performance in fund management survey

This survey by Morningstar - link here to goodreturns - doesn't ring quite true. I'll have to have a look at the survey - or what is actually released, but a glance at a result showing China's rating of a B+ and the UK's rating of a C- raisese some instant questions. If this really reflected the objective assessment of the fund management industry, then London would not be the global financial capital that it is. A similar judgement might be made about Sydney within the context of Australia's rating. Either this survey is picking a remarkable turning point, or it's measuring something other than what the industry is looking at.