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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Herein we find the age old truth that savings are the engine room of investment in an economy.  There are no long term substitutes.
The currnet war being waged by western governments to debase all savings through inflation is a direct attack on future growth of their economies.
Everybody wants to get economic growth going but no one wants to walk the hard road to get there and the various short cuts being mooted will probably end up being counter productive.

Ralph - try looking through the telescope from the right end.
The fiat system allowed more 'wealth' numerically, that was ever undrrwriteable by the physical planet.
Sooner or later, the owners of the Negative Pigs had to be disillusioned. There aren't enough Positive Pigs to do the underwrite. (Frederick Soddy, 1926.
"Soddy wrote that financial debts grew exponentially at compound interest but the real economy was based on exhaustible stocks of fossil fuels. Energy obtained from the fossil fuels could not be used again. This criticism of economic growth is echoed by his intellectual heirs in the now emergent field of ecological economics"
But there are still those who think that electronic numbers in a bank computer, are 'wealth'. Go figure.

The fiat system allowed more 'wealth' numerically...
Ths statement can only be true if you assume fait money is a definition of "wealth".  If you defined "wealth" as the physical asset (say the house itself) and not the nominal valuation placed on it by fiat dollars then printing fiat dollars doesn't increase the "wealth" one jot.

Ralph - that's exactly why I said 'numerically'. The wealth is indeed the house. The problems now are twofold - one; the expectation of all the levered dollars won't be met, so they'll be worth a lot less. Or worthless.
And - the inability of the planet to grow the underwrite, kills the conventional understanding of investment (the expectation of a return).

Absolute rubbish, you don't know how anything about how investment works.

Plse stop.  Your cohesive arguments, patient explanations and consistent logic are more learning than any one man can cope with.

Since you have characterised my commentary so well I don't know if you need further explanation or if you think I didn't provide enough justification for why you don't know what you are talking about.

It's money for jam for the same companies (NZ subsidiaries most of them) of the same guys who caused GFC. Surely a small govt group can do the float. Even Treasury! Once the price has been determined the rest is pure administration. Shouldn't cost $100-120 million

I wonder if Nigel Tate predicted the financial crash of 2008? Did he ever advise any of his clients to invest in one the finance companies that went bust? A couple of questions that should be asked of all 2000 registered advisers before you take their advise.

The interesting thing about this for me is the discussion of bonus shares. When bonus shares are referred to, my impression was that it would be along the lines of 1 free for every 20 held kind-of-thing (if you hold for say 3 years).
In the interview with Amanda, Nigel Tate says that (however it works) they will need to be bought. Not what I was expecting. Will be interesting to see a it more detail about how this will work.

Bonus share - Just to clarify . Company listed on stock exchange , can offer two types of  share issues to its shareholders : 1) bonus issue  2) Right issue
1. Bonus issue is free share given to current shareholders. The company determines the proportion ( e.g. 1share per every 100 share held on a  given date ) . This is loyalty issue the P M was ( or should have been ) referring to . Hence all the cost calculation coming out from oppositions.
2. Rights issue is offering right to buy more shares from the company at a discounted price ,  usually at a much lower price than market price. Usually the current shareholders have an option to take up the offer, or decline it or renounce it ( i.e transfer that right to someone else , may be a friend or  a family menber  )
I guess we will need to wait to see what happens..