What is your advice business like?

Seth Godin, in one of his pieces describing the shift to online absolutely nails the definition of which businesses can most effectively compete with big tech, and which cannot: 

What if the work you do is:
not based on innovative or flexible customer interaction…
If it is, it’s pretty likely that you’ll be replaced by a combination of robots, AI and outsourcing.
If they can find someone or something cheaper than you, they’re going to work overtime to do so.
The alternative is to be local, creative, energetic, optimistic, trusted, innovative and hard to replace.

If your compliance process makes your business compliance-based, standardised, and repetitive... then it is turning you into robot food. On the other hand, if it is helping you deliver that business described in the last line, you are future-proofing your business. 


What is wealthy in New Zealand?

All this talk about wealth taxes led Susan Edmunds, a regular writer in financial matters, to explore the subject. Her excellent article is at this link. 

The taxes proposed by the Greens would be as follows:

  • Under $1 million – Tax rate 0% 
  • Between $1-2 Million – Tax rate at 1%
  • Over $2 million – Tax rate at 2% on the value over $2 million

The Greens also propose that someone might be able to defer the taxes until death where virtually all the wealth is held in the property.

The question of whether a million dollars is wealthy requires some examination. One aspect of the question that keeps getting ignored is age and stage. Take these examples: 

  • My daughter is 20. It really doesn't matter that her net worth is negative and getting slightly worse right now: that's student debt. Trading money for a good education is a pretty good bet. The odds are that over her working life her degree will add to her income considerably. I asked her recently whether she would like access to the account we have with money in it for her uni education, she told me not to let her because she'd just spend it. Self-knowledge is a wonderful thing.
  • Consider a recently retired widow of 70 has just lost her husband. She owns a home in Auckland that is at about the median value - $850,000. Due to good saving habits and some life insurance she has a lump sum of $800,000 too. As a single person with wealth of $1.65 m she would be expected to pay the new wealth tax. This is how that works: term deposit rates are at 1.6% right now. Inflation is 2.5%. As her wealth falls between $1m and $2m, she would be taxed at at 1% on $650,000. The purchasing power of her capital (above the $1 million threshold) will now reduce by 1.9% a year - and she hasn't even spent a cent - add a withdrawal rate of about $40,000 per year to supplement her superannuation and wealth will decline quickly in the current low return environment (which looks like a sustained period). 

A big issue around wealth taxes (and capital gains taxes) is complexity, i.e. – identifying what is taxable and constantly having to value it. Then there is the question of having to find or release cash every year to pay for it (hence the reason most capital gains taxes are only payable on realisation).

In our business, views differ on what would be more efficient. Some prefer no additional taxes, some prefer a land tax to help address the current tax imbalance around property gains, while others prefer a capital gains tax. Still others say the focus should be on changes to reform tax to reduce carbon dioxide and other greenhouse gases. Both of the last two might help cool the housing market.

But I digress: people at different stages in life have different needs, if we don't take that into account, then we will miss the target of helping people that really need it. Of course there are people we should spend a lot more time and money helping. Regular readers of this blog will know my views on, say, helping those with mental health issues, preventing workplace accidents, and reducing suicide. We could do with better housing stock, preferably, by putting up a few more houses. 

Sorted sees the silver lining in huge increase of traffic

Sorted has had a big spike in traffic. Reported in Goodreturns, the focus in that article is on the demand for advice. That is true. The nature of the traffic also highlight the grim economic news: the most-used areas of the site were the mortgage calculator and the budget planner. But to return to the subject of advice, more than ever an holistic approach to financial advice is probably in demand now. We could do with a lot more capacity in this area - which currently is limited to AFAs. If you are an RFA, with relevant competence to offer financial planning, I suggest getting your transitional licence for the new regime and formalising your offer. It is needed.

Sorted: New Zealanders hungry for advice, Sorted says

In other news:

Fidelity Life: Fidelity Life makes board appointment

OBITUARY: Janet Brownlie

Suncorp: There is “no urgency” to return staff to offices - Suncorp

Pandemic risk mitigation and environmental policies go hand in hand

Lifetime wealth and insurance

So many New Zealander's feel that they may never have enough lifetime wealth (see this article by Rob Stock at stuff.co.nz). To focus on the positive: at least they are thinking about a good question. How much money is required to life out the rest of one's days is the number that underpins most strategic financial planning. It's the node which links planning for life and disability insurance to planning for retirement.

Most people in the financial services industry have several ideas about this number: a kind of rough rule of thumb, some assumptions about what should or should not be included, and then a much more detailed number they have worked out in their own case - and therefore a clear idea on how to do so. Most other people, unless they are working with a good financial adviser, haven't got that far. Just trying to work out the number generates the right kind of context to work on all sorts of financial planning questions, which is one of the reasons this question is such a good one to address.

For those of us with a strong interest in life and health insurance, it is interesting because that figure for lifetime wealth is essentially the amount of money required in order to never need to earn an income again. That's a circumstance broadly equivalent to total and permanent disablement. It is also a guide to the level of wealth at which insurance may no longer be required - although it may still be desired, in order to protect that wealth.

Of course, it is slightly more complicated in many risk planning situations. Costs can be higher in the case of disablement compared to retirement, but the time horizon may be shorter - as those with chronic health conditions affecting their ability to work have lower life expectancy. In the case of the death of a family member future financial requirements are affected by both the loss of income and the loss of expenditure by the deceased. Variations abound. When financial planners talk about their approach to calculating this number I like to hear the details of how they calculate the amount, and intrigued to hear if they consider age-adjusted life expectancy in the process. If you are interested in further discussion on this do let me know, I have a number of resources available to share.