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Ban commissions for financial advisors and bring forward KiwiSaver regulation, says Gareth Morgan
November 6th, 2009
Economist and KiwiSaver fund manager Gareth Morgan has called on the government to follow Australia’s example and ban commissions for financial advisors.
Speaking in the wake of Consumer New Zealand’s mystery shopper exercise that exposed ’shocking’ financial advice, Morgan also said the government should bring forward regulation around the way advisers are selling KiwiSaver plans to avoid commission-driven sales.
“Despite the awful pain felt by New Zealand investors over the last two years, the Securities Commission appear to have their head still firmly in the sand and have taken no effective action, and the new financial adviser regulations are still a year away,” Morgan said.
Gareth Morgan runs the Gareth Morgan KiwiSaver scheme which has 43,000 members and is sold directly, rather than through financial advisors.
Morgan said unregulated advisors were recommending small KiwiSaver schemes because of relatively high commissions.
“You don’t need to be a rocket scientist to work out what is going to happen over the next year until KiwiSaver selling becomes better regulated. Small uneconomic providers will pull out every stop to get enough members to make their business viable before the new adviser regulations recognise KiwiSaver as a category one complex product and restrict salespeople to those who hold a level five qualification. Commission driven, unqualified salespeople will have a field day,” he said.
Here is the full statement below from Morgan.
Consumer New Zealand’s recent analysis of financial advisors is further evidence that commissioned salespeople must be prevented from providing financial advice, according to investment manager and commentator Dr Gareth Morgan.
“Despite the industry’s promises to tidy up their act, the latest Consumer report shows that commissioned sales people are unlikely to offer unbiased advice. New Zealand needs to follow the example of the Australian authorities, who have moved to ban commission in the financial advisory sector,” said Dr Morgan.
“Consumer’s study found that less than 20% of plans provided by advisers were any good, that costs were not transparent and failed to equate to quality unbiased advice. The study also noted that until commissions are banned this won’t become the industry norm”.
Despite the awful pain felt by New Zealand investors over the last two years, the Securities Commission appear to have their head still firmly in the sand and have taken no effective action, and the new financial adviser regulations are still a year away.
“We see the same thing happening in the promotion of KiwiSaver where many advisers direct investors to KiwiSaver providers on the basis of commissions rather than the quality of the investment management or investor fit.”
IRD’s recent two year assessment of KiwiSaver found that 78% of KiwiSaver funds were with nine providers, leaving 21 providers battling it out for the remaining 22% of funds. On top of that the rate at which children are being signed-up to KiwiSaver has more than doubled over the last year to 26%. Struggling providers are likely to be more concerned with their own survival than the wisdom of joining up kids whose parents are in no position to contribute to their accounts. It tells us a lot about the ethical vacuum that still pervades the investment advisory business.
“You don’t need to be a rocket scientist to work out what is going to happen over the next year until KiwiSaver selling becomes better regulated. Small uneconomic providers will pull out every stop to get enough members to make their business viable before the new adviser regulations recognise KiwiSaver as a category one complex product and restrict salespeople to those who hold a level five qualification. Commission driven, unqualified salespeople will have a field day.”
“The Government must act now to bring forward the introduction of the financial advisor regulations to clean up the KiwiSaver industry and protect consumers,” said Dr Morgan.
Your views? Comments below please.
Tags: Gareth Morgan, Kiwisaver
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November 6th, 2009 at 10:20 am
agree
November 6th, 2009 at 10:22 am
How is your KS performing Gareth?
There is no place for commission in investment advice.
November 6th, 2009 at 10:30 am
Gareth is right on the money. There is a 12 month period where kiwi consumers will continue to be subject to unregulated financial advisers, both selling Kiwi Saver and selling mass market financial products. The regulation execution is a year too late. Buyers beware, poor beggars.
November 6th, 2009 at 10:32 am
Crikey Gareth, such actions would strike at the heart of the National Party donations revenue stream….can’t have that old chap…dear me no. And as for expecting prompt action from the Beehive…Haaarrrrrrhaahaahaa…fat chance of that.
November 6th, 2009 at 11:05 am
“You don’t need to be a rocket scientist to work out….”
No just basic common sense…
November 6th, 2009 at 11:11 am
Exactly , Gareth . Why wait another 12 months . Ring the bell on changes now . The Consumer report on financial planners showed the depths of ineptitude that riddle this industry . It is a no-brainer that mom&pop investors biff their spare dosh into property . Who-yer gonna trust !
November 6th, 2009 at 11:36 am
Gareth Morgan says the Security Commission have their heads in the sand ,i would think it was up there were the sun dont shine
November 6th, 2009 at 11:41 am
jill : I trust that the lad offered you one of his gummy bears , yesterday . Sometimes he is such a potty mouthed little urchin . Bless you , dearie .
November 6th, 2009 at 12:06 pm
@Rogers Mum, not a worry i know he could make Hone Harawaira blush,pf course mums are good role models????
November 6th, 2009 at 12:13 pm
The Securities Commission inaction over the mis-selling of Finance Companies – the selling of high risk mutton dressed up as low risk lamb – was unbelievable.
It would be refreshing to see them climb into this issue, rather than find another offshore conference to attend. Has anyone heard how their investigation into mis-selling of KiwiSaver is progressing?
November 6th, 2009 at 1:12 pm
It is so easy to have a knee jerk reaction to problems with financial advisers, however, there are good options available, and people ought to know and use some common sense about who can be trusted and what avenues are available for resolving claims for losses resulting from bad advice.
Firstly it should be noted that there are many avenues available for financial advice, including registered banks, who must be among the most deserving of trust. There are also chartered accountants, another source of advice that deserves a good amount of trust (and of course you can choose among registered banks and chartered accountants to choose the better ones, too.) So if you want good quality advice with low risk of getting put into the wrong product, it is not hard to find it.
Secondly, it should be noted that the law holds financial advisers to a high standard, and investors have access to compensation awarded by the courts, regardless of the wisdom of their choice of adviser, and they get a reasonably high standard, and investors have access to justice through the courts. These standards were not invented by parliament, but are common law and equitable duties discovered and developed by the courts.
Thirdly, if you want easy, confidential and no cost compensation, the registered banks that are members of the banking obudsman scheme provide this. Didn’t you hear about the cases where ANZ financial advisers sold moderate to higher risk funds to conservative investors? Remember that these people had fairly easy access to compensation via the banking obudsman scheme. Whereas investors advised by other firms that have since gone or are in financial difficulty, and aren’t members of the banking ombudsman scheme, have had trouble getting any compensation. With a registered bank, the chances of them going broke are quite slim, leaving you well protected.
So, all things considered, there is not a good basis for further regulation of financial advice business, in fact the new regulations are not necessary or desirable. Much of the regulation of the financial sector that is being introduced in the last few years is regulating because other countries do, not because the regulation is desirable. I wrote about this last year here http://davidhillary.blogspot.com/2008/10/regulating-because-other-countries-do.html
November 6th, 2009 at 1:40 pm
David
I wouldn’t agree with you about banks being deserving of our trust, neither would the consumers institute in their recent covert survey.
I have found banks are like all other financial advisors – biased towards their products, with their staff incented to sell them. ANZ and ING funds ring a bell?
MIW
November 6th, 2009 at 1:42 pm
So, all things considered, there is not a good basis for further regulation of financial advice business, in fact the new regulations are not necessary or desirable. Much of the regulation of the financial sector that is being introduced in the last few years is regulating because other countries do, not because the regulation is desirable.
Very good point David. I’m sick of whenever there is a perceived problem, ‘interested parties’ all run to Nanny State’s regulatory gun. A free society, that’s what I want, and the moribund regulation in every sphere of activity in NZ (and the West) is the opposite to that.
Buyer beware: that’s how a free society works. And as David states, there are plenty of reliable sources for investors to pursue.
But putting that aside, I will put two more relevant facts into the debate on this, which point to conflict of interest:
1) Per The Press today, on the consumer panel judging the 17 portfolios was a one Jonathan Glass, advisor at Gareth Morgan Investments. I proffer that given Morgan Investments if effectively using this Consumer study as advertising for its own fund, Mr Glass had a conflict of interest on this judging panel. Was this disclosed fully with the studies findings (I’ve not read it so I don’t know, but it’s certainly not evident in this release).
2) The last tax task force had from memory one fund manager on the report team, that being Morgan Investments. That taskforce came out with a resounding condemnation of Kiwis investment in property, and now English looks to be moving on property investors. This again seems a conflict of interest to me: it might be assumed that much of the money coming out of the property sector will end up in the funds management sector. In some ways, given balanced portfolios will be held in big part overseas, I fail to see how money out of housing (with the deleterious effect this will have on NZ’s building industry) and into diversified investment portfolios actually helps our productive sector. The problem that sector has, as much as perhaps lack of funding, is high levels of taxation, and over-regulation, which brings me full circle to where I started this post. The huge size of our State and bureaucracy, that’s the productive sectors problem, but of course it is in the best (conflicted) interests of all those in government and her legions of bureaucrats that could do something about this, to not do anything about this.
Seen from the point of view of the particular group interests of the bureaucrats, every measure that makes the governments payroll swell is progress. – Ludwig von Mises.
I have to say, from following interest.co.nz I’ve fallen out of love with Infometrics, who always seem to push the Nanny State line. And I have a lot of respect for Mr Morgan personally, but that is being chipped away over time.
/rant over.
Disclosure: even though on principle I don’t believe in the State promoted Kiwisaver regime, I shamefacedly joined Kiwisaver to at least get some tiny bit of my tax back. On a philosophical level, I have since regretted that decision, and it speaks bucket loads about the State that there is now no way I can leave the damned scheme. Stupid me, I put a hand out toward Nanny State, and she’s now got me in the predicable half-nelson for the rest of my life. However, one thing I am not regretful of is that I joined Gareth Morgan’s Kiwisaver: I have been more than happy with their performance.
November 6th, 2009 at 1:54 pm
At the heart of the problem is the industry treating investments as a product. This solution only helps incumbents. Large banks brokers and other firms model there business as a distribution channel for financial products. Getting rid of overt commissions to brokers wont eliminate the many incentives to sell products that may not be in the best interest of the investor.
It is a tricky world out there. The best bet is to set up a low cost account and have someone competent give advice and pay for the advice. People need to really evaluate on who they do business with on more than a trust basis. Even the good guys can be incompetent or sometimes just charge too much.
November 6th, 2009 at 2:04 pm
I agree Gareth, but I also agree with Lew it is the product selling model that is at fault.
But we also need to educate our Directors – just attended the Nuplex AGM and the Directors could not tell me what are the criteria for describing “a habitual investor”.
Perhaps anyone investing for retirement is in that category.
The whole bloody shooting box needs an overhaul and we need to switch from the US model….
November 6th, 2009 at 2:14 pm
Mark, I’d have thought inability to exit the scheme is a function of most managed funds retirement schemes, as opposed to Kiwisaver specifically. We’ve had money locked in various fund portfolios since the 70s. An unbelievable waste of time (well waste of money actually). They made lower gains than we did personally in the good times and bigger losses in the bad.
November 6th, 2009 at 2:16 pm
David
” Didn’t you hear about the cases where ANZ financial advisers sold moderate to higher risk funds to conservative investors? Remember that these people had fairly easy access to compensation via the banking obudsman scheme.”
If that was “fairly easy” then I think Gareth’s point is correct because those people had to fight “tooth and nail’ to get compensation. The banks would have walked away from that at the blink of an eye if they could have.
November 6th, 2009 at 2:17 pm
Mike in Welly: thanks for your comments, sorry I haven’t seen the report. I’m not saying that banks give the best financial advice, although I would hope there are at least some good bank financial advisers out there.
Another interesting point I’ve heard from Australia is that labour union run/appointed managed funds perform better than those of independent financial institutions. I would suggest that people who need financial advice should also consider building societies and credit unions, and I believe that the mutual nature of these financial organisations can help avoid conflicts of interest. This applies to banking and deposit acceptance — note that practically no credit union or building society has got into trouble during the recent financial crisis — as well as managed funds.
And, it should also be pointed out, with the likes of Consumer Institute around, even clueless people needing financial advice can get a steer towards a good adviser.
Ross: there will always be a process to get compensation, and just because someone wants more compensation than they were awarded doesn’t make their claim good. The banking obudsman scheme is an easier path than the court, and no lawyers and fees to pay to access it.
November 6th, 2009 at 2:23 pm
Kate, interesting point, but I wouldn’t say that applies here. Ie I can switch from scheme to scheme between providers, so there’s no lock-in to an individual scheme, it’s just once I entered Kiwisave, pursuant to the enacting legislation, there is now no way to get back out.
November 6th, 2009 at 2:26 pm
Mark:
Though it isn’t ideal to have kiwisaver, I’d rather have a savings (and insurance) based private scheme than the welfare state. If kiwisaver was mandatory, and the funds could be used for insurance as well as savings, and were accessible in lieu of the unemployment benefit, sickness benefit and invalids benefit, and NZ super, I’d rather have that than paying such high taxes.
November 6th, 2009 at 2:58 pm
David Hillary – that’s a great idea to pay any needed benefits to individuals from of their own insurance and savings.
Is that a feature of the Aussie compulsory system?
November 6th, 2009 at 3:18 pm
Kate,
The aussies have compulsory super, and it is common and allowed for the funds to include life and total and permanent disability insurance, but I think the idea could and should be taken a lot further. I think Singapore has quite wide use of the funds in their compulsory super schemes, e.g. for health costs (and insurance — not sure though), and education or a deposit on a house (they’re REALLY into home ownership in Singapore).
There are a lot of opportunities for:
1. Making people contribute and save for short term loss of income,
2. Making government welfare benefits available only after using said savings contributions,
3. Limiting long term claims and long term dependency on government benefits, for non-insurable causes, and
4. Encouraging or requiring adequate insurance to cover insurable causes of loss of income leading to personal/family hardship.
However, it appears that few people are pushing for these opportunities to be investigated, trialed or exploited.
November 6th, 2009 at 4:39 pm
We have looked into income protection insurance many a time and always found the premiums combined with all the fine print (exclusions) a deterrant to acting in a socially responsible manner. Insurance companies rank right up there with banks in terms of their corporate ethics/behaviour.
Hence, as long as the State owned the insurer, as it does ACC, then I think the above ideas are the best I’ve heard in a long time with respect to bringing our welfare expenditure under control into the future.
November 6th, 2009 at 4:45 pm
Conversely to Kate I have professional indemnity insurance, health insurance, and loss of earnings insurance (that covers nervous breakdown): touch wood, I’ve not had to claim on any of them (for over twenty years now), though I find the premiums very reasonable for the cover.
Whereas I pay exorbitant fees to ACC, way out of whack with my private insurances, yet it doesn’t cover anything other than accident, and going by the way my self employed clients seem to most often have been shafted by that fraudster when trying to make claims, I think it an appalling government department and can’t wait to see competition ‘again’.
November 6th, 2009 at 5:17 pm
Kate, I’ve had Income Protection Insurance before and found the premiums very affordable, and the coverage adequate. Insurance is a competitive market, and while most of the insurance business targets people without special risks (i.e. excludes those with special risks), there are other policies for people with special risks, and generally higher premiums. For example, those with modified cars are normally declined car insurance from regular mass market insurance, but other companies (or policy products from the same companies), target those with modified cars.
In the context of the key insurance products that are substitutes for the welfare state:
1. Life insurance is available pretty much to all comers, and is the most logical insurance for anyone with dependants to be encouraged or required to have. No need for widows (or widowers) benefits, for example, since the breadwinner could have, in almost 100% of cases, had taken life insurance.
2. Accident and trauma insurance. As with life insurance, very much available, and a good substitute for government health care, ACC and invalids benefits in most cases.
3. Income protection insurance. This is a part substitute for the unemployment benefit, i.e. in cases of redundancies. In other cases, enough savings for 6 months living expenses is a more appropriate recourse for other periods of unemployment.
4. Health insurance. Most people will find this available through traditional policies and providers, some will have difficulty, but for those to whom it is available, isn’t this better than relying on the state health system? And some special health needs could be covered if the person did not have the condition at the time the policy was written.
And of course I can’t agree with you that the government should be running insurance businesses. Managing and pricing risk isn’t something that governments do well.
November 6th, 2009 at 5:43 pm
Mmm. Here’s a potentially interesting article, in the context of my first conflict of interest post above. Unfortunately it’s subscriber content: anyone with a subscription want to give a bullet point summary:
Gareth Morgan denies disclosure failure:
http://www.nbr.co.nz/article/gareth-morgan-denies-disclosure-failure-114618
November 6th, 2009 at 5:56 pm
Hmmm … not sure why I found it (Income Protection) pricey then? Perhaps I was talking to the wrong providers, or perhaps I was a high earner and a high risk? Not sure.
Re ACC, a friend of ours from the States was the chief policy advisor to Ronald Reagan’s administration on insurance matters. He came down to NZ to evaluate our framework. He recommended against it – and in hindsight about 5 years ago, told me it was the biggest misjudgment of his career. That says how out-of-control the accident industry has become in the US.
Couple that with the more recent demonstration of incompetance at AIG – and it is very hard to argue the private sector insurers have any kind of social morals.
Actuaries manage and price risk, not governments. All the government needs to do is hire good actuaries – and quit treating the business like a political football.
The Pharmac model of non-government, non-lobbyist interference is a great model of government getting it right (until of course, John Key stepped in on Herceptin).
November 6th, 2009 at 6:08 pm
Kate, it is a difficult combination: government ownership without government/political interference.
November 6th, 2009 at 6:12 pm
@Kate, for what it’s worth, a more cost effective and simpler way of doing things (IF you have a mortgage) can be to get Mortgage Protection Insurance again. That way, you’re insuring an entity as opposed to your income so there are no offsets. You just prove your mortgage repayments at the outset and insure that amount instead. At claim time, it’s paid to you, not the bank, tax free. You still choose your stand down period, based on what savings you have, sick leave etc. It’s paid out for injury AND illness, provided you can’t work (similar to Income Protection in that respect). Not for everyone, but an alternative worth investigating perhaps.
November 6th, 2009 at 6:20 pm
Sorry, the last word of my first sentence should read INSTEAD, not again
November 6th, 2009 at 6:58 pm
veedub – yes we had that when we had a mortgage – happily now we’re mortgage free.
Yes, true David, but that is the fault of the representatives we choose – and provided we have an active and educated civil society, our democratic institutions can be improved. And government business/entities are subject to our public disclosure laws – which cannot be said for the private sector.
November 6th, 2009 at 7:33 pm
Kate, I’m sure you are a lovely, talented and well meaning lady. New Zealand’s democratic institutions are much better than most other countries, but all the problems you hope could be cured are still here and unlikely to go away. I suggest you consider that democracy in NZ is working about as good as it has in the past or will in the future.
As for the disclosure laws, there are two different ways of looking at this. From a principal-agent relationship perspective, business law (common law and equity) provide a system of accountability of agents and fiduciaries to principals and beneficiaries, and a system of remedies, upholding stewardship, accountability and duties of loyalty. With competitive supply of agents and fiduciaries, and free market for organising entities and their relationships, principals and beneficiaries can obtain the best performance of suppliers and agents. Note that this kind of accountability may, but may not, require public disclosure, depending on the constitution of the entity and how widespread its owners or principals are dispersed.
Mandated public disclosure can go beyond true accountability, disclosing other people’s affairs to those who have no proper right or interest in it.
November 6th, 2009 at 7:37 pm
Geez dude : How do you know that ” Kate ” isn’t a 7 foot mongrel mobber , with a zillion tatoos , and a penchant for smashing little white guys in the goolies ? ……….. I’ve always come off second best , and reeling , after a blogging stoush with ” her “.
November 6th, 2009 at 8:25 pm
Thanks, Roger. And David, you can cut the patronising crap. As for NZ’s democratic institutions, I totally disagree with you. Have you worked on the inside, particularly at a senior level (although frankly you don’t probably need to be that senior an official to understand the point of my question).
There is massive room for democratic improvement in this country – despite our disclosure laws (which by the way are often fought tooth and nail by our ‘minders’). Much of what goes on in government is clandestine; consultation with the public is generally tokenistic. Social justice as a concept hardly gets a mention. You need only look at the leaky homes debacle here.
I refuse to believe this is as good as it gets.
As for With competitive supply of agents and fiduciaries, and free market for organising entities and their relationships, principals and beneficiaries can obtain the best performance of suppliers and agents.
Okay… so what went wrong with NZ’s finance sector recently?
November 6th, 2009 at 9:05 pm
Kate, I was meaning to pay you a compliment and say something kind about you, sorry if it sounded patronising. I haven’t worked inside the government and probably would shy away from working inside what I would view as ‘leviathan’, though I don’t doubt that it is filled with the kind of people and activities you have mentioned.
Your position appears to be that if we could find more well meaning people concerned about social justice to replace the sleazy, careerist (I’m sure you have more words to go here) people, that we could experience a lot better social results. If only the people with the power were more ethical and good, then we would have more justice and less suffering and more care and niceness.
But I’m sure you would not support the socially conservative religious people who want to put their own ‘godly’ and ‘wise’ people into positions of power to improve the moral tone and wisdom in government. When it is those who you don’t feel a sense of identity with putting the same kind of argument you appear to make, I think you’d probably feel threatened rather than as if you’ve found some fellow travellers to improve social justice with.
My approach is to consider the institutions and the incentives and dynamics they create, rather than to consider the intentions or performance of those who happen to hold office or power or be running things. Although it helps to have people with integrity and good intentions, the help I feel is only marginal, and well meaning people can be a good mask for bad policies and institutions.
What when wrong with NZ finance sector? I think less went wrong than many realise, especially when compared to overseas experience where the major financial institutions have been insolvent and asset markets have crashed a lot worse than here. To have large scale losses requires common mistakes i.e. A common mistake is where both parties hold the same mistaken belief of the facts. When enough people believe the same mistake, they can make serious losses. So, there was a common mistaken belief that there would be ongoing strong demand for developed properties. On the basis of this belief investors invested in finance company debentures to fund property developments, and finance companies funded property developments and developers organised them. Perceptions were that risk was only moderate, and that demand would continue to be strong. This was not the case, and investors, finance companies and developers made big losses. The auditors and corporate trustees were satisfied, largely on the basis of the market situation at the time, which situation was caused by the investors and finance companies and developers. Given that it is the developers and financiers and investors that are responsible for making decisions about the risk and return, they are the ones who have caused the errors and suffered the losses (or until the government started offering investors guarantees). Now I’m not saying that irregularities didn’t happen, and many directors are facing charges and lawsuits as a result of their alleged failures, I’m saying that those irregularities are not really responsible for much of the losses incurred due to other factors. It should be noted that when common mistakes are exposed, it does not require government to point it out to market participants or to correct the situation, since the exposure of the mistakes is sufficient to get the attention of market participants.
It should also be noted that finance company debenture investors aren’t really principals or beneficiaries, rather they are creditors, and it is not good debtors they seek but debtors who offer a good deal on risk and return on funds lent, so the analysis is somewhat different.
November 6th, 2009 at 10:27 pm
It should be noted that when common mistakes are exposed, it does not require government to point it out to market participants or to correct the situation, since the exposure of the mistakes is sufficient to get the attention of market participants.
Lovely clinical explanation, David, but the so-called ‘market participants’ – i.e. the working class – who have seen their 401K accounts, retirement savings, and realestate assets virtually dissolved as a result of the immoral behaviour of their ‘agents’ in these ‘free market’ enterprises – would, I suspect view the whole situation a bit differently.
The soon-to-be (if not already) impoverished middle classes in America, Britain, Iceland and New Zealand et al. do not necessarily measure their losses against “irregularities” and “other factors” of a “free market”. Rather, the perpetrators of the situation in many of these failed institutions actually have names. They are real individuals, not an imaginary all-encompassing “free market” that no one is in charge, or in control of.
I’m with you on the importance of a system of accountability – and from where I sit the ‘free market’ has out-maneuvered democratically elected governments, and hence the citizens they serve. For goodness sake, the US Government can’t even manage to audit its own Federal Reserve. Lack of disclosure in the corporate finance sector the world over is a crisis of social justice unseen in my lifetime anyway.
Until elected governments are seen to take back control from the corporate sector – I’d rather be doing my business with an agency of government – given there does exist some system of accountability and transparancy through our disclosure laws under democractic (as opposed to corporate) governance.
November 6th, 2009 at 11:02 pm
David Hillary says ” Managing and pricing risk isn’t something that governments do well.”
At this moment in history I hope that comment was made with a deep sense of irony.
The credit crunch, the sub-prime crisis, the CDS and CDOs, the current crisis in commercial real-estate mortgages in the US: these all come from mis-pricing of risk in the wholesale interest and credit markets, mostly by non-bank financial organisations.
And of course the finance companies in NZ that went under taking many people’s live savings with them, were not run by the govt. You want to say that the market works: if you wish to repeat that as blind dogma then there’s little I can say to persuade you, but empirical evidence is that the market does not price financial risks well at all.
November 6th, 2009 at 11:11 pm
“Perceptions were that risk was only moderate… This was not the case, and investors, finance companies and developers made big losses.”
Well yes: that’s how financial bubbles work. You are describing how a market mis-prices risks.
Oddly, you seem to think that describing that amounts to defending the risk-assessing abilities of the market…
November 7th, 2009 at 7:21 am
Kate, The real estate assets that virtually dissolved was not the result of market mis-pricing or crooked agents, but the result of restrictive land use policies, resulting in artificial scarcities of residential land, and our own Hugh Pavletich is an expert and advocate for change in that area.
The mis-pricing of risk by financial institutions is also linked to government regulation of financial institutions, for example AIG went broke by writing policies for European banks to do regulatory capital artibrage.
Although it is easy to point the finger at the market, the hand of government is also there behind the incentives market participants have.
November 7th, 2009 at 7:54 am
Well that’s just nonsense, David. Hugh holds up Houston as the place without restrictive land use policies, and it has suffered similar housing asset devaluation largely due to the finance/credit fiasco (or the mispricing of risk, as sean says) and the resultant foreclosures, just like most other US cities;
Foreclosure property sales continued to slow in September, making up 18.6 percent of all single-family home sales in the Houston area compared to 19.3 percent in September 2008 and the 12-month peak of 34.0 percent in January of this year. The median price of September foreclosure sales reported in the Multiple Listing Service (MLS) declined 1.0 percent from $88,950 to $88,000 on a year-over-year basis.
And the point is – it is not only those people foreclosed on who have suffered. The assets across the entire population have followed the foreclosures down and large chunks of the average working class went ‘underwater’. And then the local economy collapses as well, and average people lose jobs. The, this ‘invisible market’ of yours denies them the opportunity to re-finance the housing asset, and they turn to another ‘player’ in this ‘invisible market’: the credit card. They then max that one out, get behind on payments, and the ‘invisible market’ ups the interest rate on that borrowed money – and they eventually find themselves and their families on the streets as well.
Hugh’s housing paradise, Houston, I read somewhere is virtually bankrupt.
November 7th, 2009 at 8:09 am
Kate, very selective quoting you’re doing there. the context of the above quote is:
At $156,200, the September single-family home median price—the figure at which half of the homes sold for more and half sold for less—edged up 0.2 percent from one year earlier, representing the fifth straight monthly increase in median price. The average price of a single-family home in Houston dipped 1.6 percent last month to $205,925 compared to September 2008.
This indicates that the housing market is Houston is exceptionally stable, just like Hugh claims. Texas has its share of foreclosures — it is just its share is substantially lower than California, and the losses of lenders is very substantially more. In LA, lenders lent $600k for a $650k house that is now worth $400k. In Houston lenders lent $150k for a $160k house that is now worth $140k, so in LA the lenders are losing hundreds of thousands of dollars per house, in Houston they are losing maybe $20k in unpaid principal and interest and costs etc.
November 7th, 2009 at 8:12 am
Mr Gareth Morgan,
Your Fees are 1% per fund plus $ 50 per annum. The Kiwisaver fund that pays the most trail is Asteron that pays $ 50 bucks up front commission plus 0.3% per annum to advisers as their sales force. Asteron Fees are $ 24 per annum plus 0.82 to 1.15% depending on the fund. So Mr Gareth Morgan is more expensive than the Kiwisaver fund that pays the most to advisers.
I am a new adviser to the industry and didnt charge out the 5% entry and 5% trail fees I am seeing in old ’super’ schemes that I am cancelling in favour of Kiwisaver such as the last one from AMP.
So Mr Gareth Morgan is one of the panel of experts who marked the advisers in the consumer test. Did he have a vested interest to rubbish all the independent advisers and then shout out in the media to come and invest with me direct?
Lets look at your fees Mr Morgan, you have 44,000 Kiwisaver who if they are contributing at the 2% at $65k per annum, they will have $ 250k each in their Kiwisavers in 25 years. That will mean that your fund will have a total of 11 Billion in it.
Wow that means Mr Morgan that you will have fees of 1% of that or 110 million per annum.
Wow Mr Morgan, way to go, that is quite a nest egg for your retirement.
I am new to this game but know that past performance is not an indicator of future performance but Gareth Morgan Funds have done terribly in the last little while, the only provider to lose money in all balanced, conservative and growth funds so I believe.
I am currently recommending Fidelity Kiwisaver that was voted top fund for all of balanced, Conservative and growth funds in the Morningstar awards.
For my recommendation to get thoseClients away from that horrible 5% per annum fee AMP policy, I get $ 30 bucks up front, yes folks I am going to get rich on that and 0.0025 of the fund as a trail or 2.5 bucks for the 1000 in the fund. Is that appropriate?
I am pretty sure that if I charged a $ 2000 advser fee the Clients would have run a mile and kept in their old scheme.
So in summary I think Mr Morgan is playing a very clever game, rubbishing the independant advisers, then shouting to everyone to go direct to his terribly perfoming fund with higher fees than the funds paying tiny commission, and guess what he is building a $ 110 million PER ANNUM super scheme for himself.
November 7th, 2009 at 8:22 am
David, still your focus is on “losses of lenders” and “lenders are losing hundreds of thousands of dollars per house”… etc.
I put it to you – it is the HOMEOWNERS and their FAMILIES on the street – NOT the lenders!
Houston is bankrupt;
http://globaleconomicanalysis.blogspot.com/2009/10/city-of-houston-is-bankrupt-so-are.html
November 7th, 2009 at 8:29 am
I thought it was the entire state of califonia going for broke?
November 7th, 2009 at 8:40 am
Yep, them too. Hugh’s house-price-bubble-theory kinda burst when the credit bubble burst. Coincidence? Hardly. The land scarcity argument was another ruse contrived by the bubble beneficiaries during the ‘good times’. In my opinion, totally irrelevent – if not down right dangerous, now. Hugh’s ‘formula’ for low house prices includes getting rid of development levies for needed infrastructure to service the greenfields developments – something our already over-indebted local authorities cannot burden ratepayers with in future.
November 7th, 2009 at 9:27 am
Kate, earlier I found you to be quite open minded with respect to replacing much of the welfare state (a mass collective scheme) with individual/family insurance (a more taylored and risk and needs based approach). The same thing could happen with local government services and assets. I.e. these could be fiscally controlled at the small community level, in which case greenfields development areas would be considered fiscally autonomous, and responsible for financing its own build of streets, footpaths, streelights, water, wastewater, stormwater etc.
November 7th, 2009 at 10:01 am
Kate, I had a look at that article on the City of Houston, and some points to note:
1. This is a city of 4 million people, with substantially higher GDP than NZ. A couple of billion dollars in fiscal problems is smaller than NZ’s current central government deficit.
2. The problems are common to a lot of US local/city/state/federal government fiscal problems and accounting, and it is here NZ is obviously in a much better situation — government finances are generally fairly strong, and accounting is following GAAP.
3. It proves nothing about how severly Houston has been impacted by the recession, and if you compare it with the Califonia situation, Houston is little affected.
November 7th, 2009 at 10:05 am
James S, one of the benefits of investing with GM investments, is that he’s a real person, which I could track and hunt down if the need arose on the occasion that he headed west with my few silver coins. Try and identify the guy at the the top of the heap at a faceless institution like Asteron. Least his fees are clear and simple. If he makes a few zillion dollars in the future, good on him. Chop that poppy! Think he gives most of it away anyway. How much does the management team of Westpac, Fidelity and the likes donate? Not that they have too mind you, but in some way, it’s part of the total package I guess. I invested with Sovereign for 10 years, over the a period where apparently we had some excellent economic growth. When I pulled out 2 years ago, just before the sh*t hit the fan, managed to get out just under what I’d contributed, as fees and such sucked the rest off. I’d never go there again. I have to agree that Fidelity is doing quite well at the moment, wish you luck in selling that, hope it stays that way. Wouldn’t put any weight in Morningstar recommendations though.
November 7th, 2009 at 10:49 am
David, in point 1. you note NZ government debt is worse than Houston city debt (and if we are to accept the article summary, Houston is bankrupt) – then in point 2. you suggest NZ government finances are “fairly strong”. My analysis instead is that both Houston and New Zealand are bankrupt, insolvent, broke, up-to-their-eyeballs in debt; thinking they can continue to borrow and inflate their way out of it – provided of course, their citizenry continue to borrow their way out of it, so as to keep the crony capitalist party going.
It’s futile to compare Houston with California with NZ or anywhere – who is ‘more broke’ is merely a spreadsheeting matter, hardly worthy of concern/consideration. The lot of them, and most of the West has been, or will soon be, dispossessed by the ‘invisible hand’ of these ‘markets’.
But the market isn’t actually “invisible” at all – there are real people and real institutions engineering/carrying out the dispossessions and subsequently taking physical hold (i.e. title/ownership) of the ‘average workers’ possessions.
Yes, I am in support of reducing the size of the welfare state in NZ, and for NZers to become more responsible for their own destiny – but not because I dislike paying taxes to support it. Rather because those individuals and families reliant on welfare are disillusioned, disheartened and becoming increasingly desperate. I bear them no grudges as ‘the invisible hand’ of the ‘market’ has failed them. Big States have been very bad for society, but Big Business has been worse.
November 7th, 2009 at 10:59 am
Kate, so what is your prescription?
November 7th, 2009 at 11:14 am
Well, we’ve got to keep New Zealanders working – and so I’m all for what the MEA (and the PEC) are saying/promoting: apolitical, common sense transformative policy. It may work, it might not work, but we’ve gotta start somewhere on the economic front.
On the social side, I’d have rather seen any economic stimulus by the government poured into education, (preventative) health/family well being and public transport – as opposed to roading and broadband (communications). Indeed roading and broadband are probably the two stupidist spend ups I can think of. I read a statistic, for every 1 additional car on our roads, the accident rate increases by a factor of 1.8 – imagine what that’s doing to ACC/health cost increases.
Anyway, I could go on about more and more of the just plain stupid actions of this latest government in response to the crisis we face. But, I gotta get to work!
November 7th, 2009 at 12:06 pm
Kate, David…all very interesting but a loonng way off topic, maybe you swap msn addresses or something …
Rdee…When do you think you might start tracking Gareth down? Now’s probably not a bad time considering how terrible his performance is and given their comments in the Herald that they were very surprised to learn how bad they were in comparison to their peers.
Gareth…Financial advice needs an overhaul…no question. If someone comes to an expert and asks them where they should be investing their hard earned savings within a myriad of investment options, then independent, experienced, knowledgeable advice without interference of a commission-being-paid based response should be expected. Keyword is advice…
KiwiSaver is nothing of the above. If someone is contributing to it then it’s a very minimal amount of what their total savings or investment should be and due to such generous incentives it is far more powerful than any other type of retirement savings plan that I’m aware of (although some large employers may have equal or even better).
Nobody seems to have an issue with Australias super policy (recently rated in the top 2 in the world) where it is compulsory to put in 9% compared to our voluntary 2%. So accepting that KiwiSaver is necessary for most Kiwis then people don’t need investment advice to do it. In which case it’s just a matter of choosing who to manage it for you. There is nothing wrong with a company promoting themselves to be the one to invest your KiwiSaver.
Companies like Asteron or Fidelity or whoever should be entitled to pay people to promote their version of KiwiSaver, in fact that seems like a far more useful contribution to society with unemployment figures at 6.5% than spending vast sums on tv or radio advertising campaigns such as you have done Gareth. And at only 40,000 members maybe you should look at something else to do to make a greater contribution to the success of KiwiSaver.
There is no reason why they should have to equally promote all of the schemes (although I’m sure not even the most independent financial advisor could even consider promoting your scheme in good conscience anyway given how bad you’ve done for your investors…especially given that you’ve taken away their ability to compare to other schemes through your crusade against the internationally accepted practise of unit pricing).
452,479 KiwiSaver members have been automatically enrolled by Law…how much investment advice did they get? Do you think it was independent advice? Do they even know who their KiwiSaver funds are with…probably not the majority of them. So what do you propose should happen with them…cancel their accounts because they haven’t been explained the “quality of the investment management or investor fit.”? The simple fact is almost everybody under 65 should be taking advantage of KiwiSaver and they don’t need independent financial advice to do it.
And that includes kids, even the kids whose parents can’t afford to contribute for them…probably especially for them because they’re likely to be finding a lot less in their inheritance than the other kids. $1,000 invested until they’re 18-20 when they start contributing themselves is a far greater headstart than nothing invested and no interest generated in retirement savings at a young age. I believe even your poorly performing funds could still increase the value of that $1,000 over 15-20 years and help educate a child about the value of starting long-term saving plans early Dr Morgan. Hopefully Tower’s cash-for-schools program and families signing their children up will double these statistics again next year.
I can’t believe how seriously wrong you’ve gotten everything…perhaps if you started concentrating on your own KiwiSaver funds instead of how the others are doing it you might have been able to increase your faithfuls wealth over the last 2 years without having to rely on Government and employer contributions to do so.
November 8th, 2009 at 9:23 pm
I read After the Panic recently. It occurs to me that these financial advisers are just like landscape gardeners: they all think they’re great even if they are not. I used to look at the Spicers logo with the fencer and think “jeeze they must be really clever”; but not anymore (now I smirk to myself)!
November 8th, 2009 at 10:44 pm
One thing you guys are missing is that the principal reason that cities like houston are in a mess is that they are saddled with union pensions which are way too generous and they lack the abiliity to print money like a country.
As an aside, the rationalle behind the bankrupcy was that the prior city govt had borrowed the pension money and replace the money with bonds – in effect the council sold the city to the workers, thereby making the rate payers the indentured serfs for the unions. The Mayor is going down the bankrupcy route to reclaim the city from the workers, and give it back to the residents.
Having lived in Boston from 2000 – 2006, I saw first hand the disaster that was local govt over there. It was not pretty.
November 8th, 2009 at 10:46 pm
As to NZ democracy – we have a disasterous political system called MMP which means that a high percentage of our politicians are exempt from ever being accountable to the constituants.
First past the post was not the best, but it at least gave you the option of voting out the worst ones if push came to shove.
November 8th, 2009 at 10:53 pm
Have you caught wind of the situation in Austraia, where the fund managers are actively lobbying for the contributions to the compulsary super to be increased to 12% – maybe even 15%. How would you like to be a fundmanager, and legislate yourself a 33-66% pay increase?
God help us if Kiwi saver ever becomes compulsary. The only people who win are the Govenment who tax you gains as income, and the fund managers who pocket the fees. Do the math on the return to the govt and you will see the attraction to them from a tax basis.
Its sad that people actually ask for higher tax rates – as a solution to fix problems created by government. Then again the majority of those who advocate the tax increases are most lilely those who directly benifit from govt hand outs. Such is the nature of socialism – one size fits all – except for those in leadership.
Sorry for the multi posts – easier to read if each one is focussed IMHO.
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