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Small time SOE investors with mortgages may be better off getting a piece of the pie through KiwiSaver, says IFA
By Amanda Morrall
Conflicted about whether to sink $1,000 into the upcoming share offer for Mighty River Power?
If you're carrying debt or even still paying off the mortgage, financial advisors will likely tell you it's a bad idea, and yet your bank or broker may facilitate the process by allowing you to borrow against your mortgage, as a personal loan, or through "margin lending" - a specialised facility whereby you can borrow to invest at a slightly higher interest rate.
Ironically, for small time investors least able to afford the share offer, it's a proposition made worse by having to pay between $100 and $250 per hour for personalised advice on top of brokerage fees of around 1% of the transaction value (note: some brokers charge a minimum fee).
Institute of Financial Advisor president Nigel Tate said a more prudent choice for the "average Joe Blow" keen on claiming a piece of the family silver would be to get an allocation of the SOE offers through the institutional investment route, most notably KiwiSaver. He said the benefits were twofold; not having to go into debt to invest and also diversification.
"If they're looking to invest NZ$1,000 and they think it's a good investment and they have a mortgage, I'd be knocking NZ$1,000 off the mortgage."
The rationale is that the gain to be had through the investment is not likely to be better than the potential 7.5% (after tax) savings to be had by paying down debt.
"Effectively what they're doing is borrowing the money to put into an investment,'' he said of the mortgage financing option.
A more prudent choice for investors with a mortgage or other debt and little discretionary income would be to satisfy themselves with an allocation of shares through KiwiSaver, an investment vehicle that has been promised high priority when the shares offer goes public.
"The majority of the sales of the shares will go to institutional investors, among them KiwiSaver fund managers, and that's a good way for the general public to have a holding in the companies because it's in concert with a whole bunch of other investments as well. I'm not saying there's anything wrong with Mighty River Power or any of the other companies to be sold off, it's just investing in one company alone that's an issue."
One disadvantage of not holding the shares directly would be missing out on the bonus offer (an incentive to hold onto the shares long-term) however Tate didn't think that in itself would nullify the benefits of being invested via KiwiSaver for the small time investor. (See Alex Tarrant story here on bonus share offering).
That said, not all KiwiSavers will necessarily be getting an allocation of SOE shares. It will be dependent on the provider, and whether they see it as a good opportunity, and also the the type of fund investors are in. (To see how funds differ from one another read more here).
Tate said investors looking to make a quick buck by flipping their shares could be sorely disappointed.
"We're advising prudence over a quick buck besides which I don't think there's a quick buck to be had. There are opportunities to lose money as well."
It's estimated the Mighty River Power IPO will attract 200,000 prospective investors. That's despite the fact there are only 2,000 authorised financial advisors, the only professionals qualified, under the new Financial Advisors Act, to give personalised financial advice. (See Alex Tarrant story here for more).
Tate said investors thinking otherwise should take heed from the experience of the Wel Energy Trust share offer. In that case, many retail investors piled into the share offer of $7.50, which enjoyed a brief rally to the $11 mark, and then sunk driving many panicked investors to sell at $8, making a slim or no profit taking into account tax, fees on brokerage and advice.
Because the share offer is being marketing at the general public, and also in attempt to make the first initial public offering a success, Government is trying to make the buying process as simple and as accessible as possible. Prime Minister John Key has suggested investors will be able to invest on-line and at their bank branch, rather than exclusively through a broker or financial advisor.
The risk for uneducated investors, and even those with an intermediate level of knowledge, is that they will be easily led into an investment that simply may not make sense for them, regardless of its strength or merits as a investment.
Need for advice
While brokers may be able to discuss the merits of a particular share offer, their inability to discuss it within the context of an individual financial circumstances means that uneducated investors are unwittingly putting their money at risk. That was especially the case for those looking to borrow to buy shares; a facility known as margin lending.
A spokesperson for ASB bank, a member of the retail syndicate handling the offer, declined to comment on any specific lending policy related to the SOE floats short of saying customers were eligible to "apply for personal loans or home loan top-ups for a wide range of reasons according to their own specific circumstances." Also, that the bank "for some time" had a margin lending product for its customers.
As a qualified financial entity, under the new financial advisory regulations, generic banking staff working at the retail level would be able to offer "class advice" only on the SOE floats.
Whilst some brokers are also authorised financial advisors, Tate said the industry and its practitioners weren't in a position to give away their professional services for free.
In his case, Tate said the exploratory conversations with prospective clients are general in nature with specific investment advice being dispensed only after a formal relationship was established.
"The first consultation is not one of advice. It's one of disclosure and client building.''
Those for whom the share offer made greatest sense, in Tate's opinion, would be either debt free or have sufficient funds to build up existing investment portfolios.
In that case, he said the big question was figuring out what proportion of shares to pick up.
"Advice is the greatest benefit they can pay for. The question they should be asking is how would this share offer fit in their portfolio and if it did in what proportion and whether to buy more with a bonus.''
The answer would depend on an individual's time frame for investing, risk profile and reasons for investing.
For more information on the SOE share offer, see also Amanda Morrall's five point plan here.
For more on who is authorised to give what advice under the new regulatory regime in New Zealand, check out the Financial Markets Authority website here.
For more information on how to find an AFA, and what to look for in that individual, you can visit the Institute of Financial Advisors website.