May 30, 2011
The Price of Good Advice
The calendars of financial advisers throughout the country have a big circle around 1 July, 2011. That is the date by which, with a few exceptions, any person giving advice on investment products must be an Authorised Financial Adviser (AFA). An adviser who works for a large company, such as a bank, which has been approved as a Qualifying Financial Entity (QFE) may give on advice on products issued or promoted by the QFE without having to be an AFA but is expected to show the same standard of professionalism. To become an AFA, an adviser must meet certain educational requirements, be of good character, join a Dispute Resolution Scheme and follow a Code of Conduct. All this requires time, effort and cost. Advisers have responded to the new regime in a variety of ways. Some have decided to retire, sell their businesses or work under the supervision of an AFA. Commissions are gradually being replaced by fees due to the higher costs of providing quality advice. Many insurance advisers have made the decision not to sell investment products and have sold any existing investment business they have. Product providers have made it clear they will not pay commission on investment products to advisers who are not AFAs. What does all this mean for clients? Firstly, some will find themselves being ‘sold’ by their existing adviser to an AFA. Others may find themselves with no adviser at all if the adviser has had commissions cut or sold their business to a product provider. There will be a shortage of AFAs initially and with higher standards of advice required, and an associated higher cost, clients with small amounts invested may find themselves unwanted by advisers or being charged fees for advice. The changes are good, but they come at a cost.
May 23, 2011
 Advice for KiwiSavers
KiwiSaver skeptics will no doubt be saying ‘I told you so’ after the recent changes announced in the budget. A minority of the population have refused to join KiwiSaver on the grounds that the Government will keep changing the rules or mismanage their money. Yes, the rules have changed, but joining KiwiSaver is still a great idea and the skeptics are missing out on an opportunity to increase their wealth.
Under the current rules, KiwiSavers are required to contribute a minimum of 2% of their gross pay and this is matched by an employer contribution of 2% from which no tax is deducted. There is a $1,000 ‘kickstart’ payment from the Government as well as a matched tax credit of up to $1,040 per annum, paid each July. The new rules leave the $1,000 kickstart unchanged. From 1 April next year, the employer contribution will have tax deducted, so less will be paid into your KiwiSaver fund. From 1 July this year, the Government tax credit will be cut in half to around $520 per annum (paid in July 2012) and from 1 April, 2013 the minimum employee and employer contributions will be 3% of gross pay. Whereas previously the average wage earner’s contribution was tripled with the employer and Government contributions, now it will be roughly doubled, but that is still a good deal! If you haven’t joined already, joining sooner rather than later will let you take advantage of the old rules before they change. Self employed KiwiSavers Self employed KiwiSavers will still have to contribute $1,040 per annum to get the maximum tax credit of $520 as the credit will be paid at the rate of 50c per $1 contributed. Existing KiwiSaver members should ensure that their chosen fund is appropriate for their needs by obtaining advice from an Authorised Financial Adviser.
May 16, 2011
 Happy Retirement!
Retirement is something to look forward but ensuring that the experience lives up to your expectations requires some forward planning. These days it is becoming more common for people to work less rather than retire and many pensioners have part time jobs. However, it is good to be working by choice. NZ Superannuation is generally enough to keep you alive from one day to the next but you probably won’t have fun if that’s all you have. Retirement savings will allow you to have some luxuries, replace your car, travel overseas and keep your house maintained. For every $5000 of income you need over and above NZ Superannuation, you will need to have around $100,000 invested if we assume a return of 2% after tax and inflation and that you will use up your savings over your lifetime. To make an easy transition into retirement, try and live on your planned retirement income for the last one or two years of your working life, and save the difference between that amount and what you earn. For example, if you have saved enough to produce an additional income of $10,000, then try and live on around $31,000 before you retire (you might want to add to this figure any work related expenses such as transport costs).
On your retirement, have a general tidy up of your affairs. Make sure your wills are up to date, take care of any other estate planning issues, and consider granting enduring powers of attorney to a relative or friend, so that they can sort out your affairs if you become mentally incapacitated. Your solicitor or trustee company will be able to assist with these matters. Once you’ve sorted out the paperwork and your budget, you’ll be free to enjoy the retirement you’ve been anticipating.
May 9, 2011
 Invest Offshore
Global influences in investment markets have become more powerful over the last decade, due to the effects of technology, globalization of businesses and economic union between countries. The Global Financial Crisis is a powerful example of how interconnected world investment markets are now. This is not necessarily something to be afraid of and in fact there are many opportunities as well as threats. There are five good reasons why it makes sense to invest offshore right now:
- New Zealand is a very small part of the global economy and investing in one, very tiny market makes little sense when you take a global view. Diversification is a good reason to invest offshore. The impacts of natural disasters and adverse economic events can be lessened by spreading investments far and wide across the globe.
- In the medium term, it is known that global growth will be driven by emerging economies such as China and India and not by the developed world. Leave these countries out of your investment portfolio and you will miss out on opportunities for good returns.
- The New Zealand economic outlook is uncertain following the Christchurch earthquake. In the short term at least, the earthquake is likely to have a negative impact. Economic growth will be dependent on exports and business investment.
- Our exchange rate is at a historic high point in relation to currencies of our major trading partners. Investors placing funds offshore now will not only get more for their money, but they will stand to gain again when the exchange rate drops as it inevitably will.
- It is easy to invest offshore through managed funds, using the expertise of fund managers who understand the markets they invest in.
Overall, investing offshore opens up opportunities for increased returns and reduced risk.
May 2, 2011
 Bank and Lose
Investors who retreated to bank deposits after the Global Financial Crisis now find themselves caught between a rock and a hard place. Do they stay in bank deposits for peace of mind but poor returns or do they venture back into investment markets? It is sensible to batten down the hatches when a storm blows over, but at some point, life has to return to normal. So how do you know when it is time to come out of your safe place?
People generally only change the way they do things to avoid an unpleasant situation or because they are attracted by something which is better. Over the last year, the consumer price index rose by 4.5%, thanks to GST and commodity price increases. Bank interest rates for 12 months are currently around 4.5%. However, after paying income tax of 17.5%, the net interest rate is around 3.7%. Invest $100,000 for a year at 3.7% after tax and at the end of the year, even after receiving interest, with 4.5% inflation your money will buy you the equivalent of only just over $99,000 worth of goods. This is not a pleasant situation! Rates, power, and petrol prices continue to rise and with low interest rates, bank investors will continue to lose wealth.
So what are the alternatives? In a nutshell, bonds, property and shares. That is not to say, however, that investors should move entirely out of bank deposits and invest elsewhere. Diversification is still the best investment strategy, but having at least a small part of a portfolio invested in shares will help protect against inflation. Over the last year, US, Australian and New Zealand share market indices have risen by around 13%, 14% and 7% respectively. These returns will surely entice bank investors out of their safe place.
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