November 13, 2011
 Commission or Fees?
It seems it is only a matter of time before the payment of commission to financial advisers will be banned, and advisers will instead charge fees. Commission will be banned in the UK from 1 January, 2013 and in Australia there is a proposal to ban most commission from 1 July 2012. In New Zealand, the Committee of Inquiry into Finance Company Failures has recommended that Government “investigate the possibility of conflicted remuneration structures in the provision of financial advice, including consultation with Australian authorities on the model proposed in that country”. Commission can vary between products and, whether true or not, there is a perception that advisers may place business where they receive the highest commission. Any adviser who receives commission cannot be considered to be independent. Unscrupulous advisers can increase their commission income by switching clients from one product to another. The payment of commission at the time of sale means there is no financial incentive for the adviser to follow up with their client to ensure the client is happy and that the recommended product is still appropriate. In effect, the client loses control of the relationship with the adviser. While clients may feel they are getting ‘free’ advice if the adviser takes only a commision, in effect, there is still a cost because commission is paid from product returns either directly or indirectly. On the other hand, fees are completely transparent, they are sometimes tax deductible for the client and can be negotiated. The payment of fees creates a relationship between adviser and client whereby the adviser has an ongoing obligation to service the client or the client may refuse to pay. A switch from commission to fees should result in an improvement of the quality of advice and the ability of clients to demand good service.
September 26, 2011
 Get a Life
Following recent financial crises, there is a growing realisation in society that friendships, family and hobbies are more important than money. People are slowing down; they are making less money but having more fun. There are lots of ways this can be achieved. Here are a few examples of strategies that work:
- Ask your employer to be more family friendly. Many companies now have a documented policy for being a “family friendly workplace”, so if yours doesn’t, ask for one!
- Set up your own business. Women in particular have chosen this option for increased flexibility in work hours and the ability to work from home.
- Manage your time better to reduce your work hours, for example by reading on the train and cutting back on non-work related activities (eg personal phone calls) during work hours.
- Change your work hours. Work the same hours but in fewer days so that you can have one day off a week or maybe just work fewer hours for less pay. Some couples have found that if they each work reduced hours they still have an adequate income but more leisure or family time.
- Review your priorities. Don’t try and achieve everything at once. Do you really need a bigger house, a new car and an overseas holiday all in the same year?
- Downsize your life. Buy a smaller house with a smaller mortgage, make do with your old car for a couple more years and send your children to a good public school rather than paying for a private education.
These are just a few of the ways in which people are succeeding to balance their lives. You can choose to work long hours and feel as though are going nowhere, or you can choose to get a life.
August 22, 2011
 Being Happy
What makes us happy? Research suggests that it isn’t extra money. In a recent survey in the UK, around half the people surveyed said that relationships are the biggest factor in making them feel happy. Rating second in importance is health. Other factors include friendships, freedom from stress, and being engaged in meaningful work or activities.
The happiest people surround themselves with family and friends, don’t care about keeping up with the Joneses next door, lose themselves in daily activities and, most importantly, forgive easily.
The Happiness Barometer, a recent study conducted in 16 countries, found that around 40 percent of those surveyed said catching up with their loved ones after work was the happiest time of their day, while more than 20 percent said they were happiest when eating with their families. By contrast, only 5 percent said they were happiest when connecting with friends online. Families and partners were, by far, the biggest source of happiness for almost 80 percent of those surveyed, with friends coming up next at 15 percent.
The results also show that, despite the global economic downturn, overall global happiness levels are high, with more than two thirds of people saying they are satisfied with their lives.
When they do need cheering up, around 40 percent have a night out with friends and round 20 percent give or receive a hug.
Commenting on the study, Dr. Richard Stevens, a social psychologist who specializes in happiness and wellbeing, noted: “While it is important to have enough money to live, income is a fairly irrelevant contributor to happiness. Without relationships, love, family or friendship, most people will not be content and no amount of money can fill this void.”
So there you have it. If you want happiness, don’t buy a lotto ticket; go hug somebody!
July 11, 2011
 The End of a Relationship
It has been said that if breakups never existed the music industry would go bankrupt! Unfortunately, they are a fact of life. Most people endure at least one in their lifetime; some lurch from one to the next, but no matter how often you experience a breakup it is still a very painful experience. Dealing with financial matters at such an emotional time can be very stressful, and it is better to reach an agreement with your partner while you are still a happy couple on how your property will be divided in the event you part. This should be done with the assistance of your solicitor. The key matters to consider are
- What property has each partner brought into the relationship?
- What is separate property that is to be preserved for each partner?
- What is relationship property that is to be divided?
- How is the relationship property to be divided?
In the absence of a property agreement, the Property (Relationships) Act sets out a default formula for how property is divided when a couple separates or one dies. In general, for couples who have been in a relationship for three years or more, the couple’s property will be divided equally.
It is important that you get legal advice before reaching any agreement with your partner so you know what your rights are. However, going into battle for every last cent of your entitlement may leave you worse off after paying your legal bills, so be flexible.
Debts need to be shared as well as assets and this can include credit cards and hire purchase. As soon as your relationship has ended, make sure you protect yourself by freezing or closing every joint account, credit or store card or other debt arrangement. Be safe, not sorry!
July 4, 2011
 Financial Literacy
International experts on financial literacy were beamed in from across the globe for the Retirement Commission’s recent summit on Financial Literacy. We know that financial illiteracy is a big problem in New Zealand, but we are by no means the only country in the world struggling to educate people on how to use their money more effectively. The major difference, however, between New Zealand and the rest of the world is that we lack the commitment and resources from our Government to tackle this problem in a way that will really make a difference. The Retirement Commission is internationally recognized for its efforts in financial literacy despite a limited budget. Diana Crossan, Retirement Commissioner, in her opening address reminded the Government that more money is required to support financial literacy in schools if we really want to see an improvement in the personal financial well-being of Kiwis. While financial education is now part of the school curriculum, budget cuts in the education sector have meant a drastic reduction in the funding available to support it. Money habits are formed early in life and changing the attitudes and behaviours of young people is an effective way to change the financial literacy of the population over time.
In the UK, a recent initiative is the Money Advice Service, which brings free, unbiased financial advice to people online, over the phone and face to face across the country. Our Retirement Commission is able to provide people with information and resources, but is not able to give advice. Free advice is available from the Federation of Family Budgeting Services, however the public perception of this service is that it is somewhere you go when you are on the verge of financial ruin. What New Zealand needs is low cost, highly accessible advice for all.
June 27, 2011
 Get Rid of Dumb Debt
The most common financial mistake people make is to borrow money at a high rate of interest in order to buy something they don’t really need or without considering whether they could borrow at a lower cost. This type of borrowing is what the Retirement Commission calls ‘dumb debt’ and they have launched a campaign aimed at encouraging people to get smarter with their debt. Examples of dumb debt are:
- Paying only the minimum repayment on your credit card
- Buying a large item such as a car without shopping around to find the best finance deal
- Buying on hire purchase without checking all the additional charges such as set up costs and insurance
- Being tempted by interest-free offers on hire purchase without being able to pay off the debt in the interest-free period
There is a very useful debt calculator on the Retirement Commission’s website, www.sorted.org.nz, which helps you work out the total amount of interest you pay over the period of your loan. For example, if you make a purchase of $2,000 on a credit card with an interest rate of 20% and monthly repayments of $100, you will take just over two years to pay it off and you will pay $453 in interest. If, on the other hand, you save $100 per month at 3% interest, you will be able to save the $2,000 you need within just over 19 months.
The best way to avoid dumb debt is:
- Never borrow money to buy things you don’t really need
- Always shop around for the cheapest deal on finance, taking into account the interest rate and additional charges
- Don’t borrow unless you know you can afford the repayments
- Save the equivalent of your debt repayments before you make your purchase
June 20, 2011
 New Era for Financial Advice
As we edge closer to 1 July, 2011, financial advisers are spending most of their waking moments preparing for the new regulatory regime which will clearly identify those advisers who are authorized to give financial advice on investment products and those who are not. Financial advisers who are not authorized have some significant decisions to make about what happens to their investment clients. Investment products generate ongoing commission or fees and this stream of revenue is an asset which can be sold. Some advisers have chosen to sell their clients to authorized advisers. Some have sold their investment business back to the product providers using a ‘buyer of last resort’ facility. Some advisers are hoping, rather foolishly, that no-one will notice they are collecting fees or commission from investment clients to whom they are not authorized to give advice. An even more disturbing response is that some advisers are planning to ask their investment clients to sign a waiver stating that they do not wish to receive personal advice, that they wish to make their own decisions and therefore that they are transactional clients only. This could be seen as a blatant attempt to sidestep the new regulations and any investor asked to sign such a waiver should seek expert advice before signing it. No doubt the Financial Markets Authority will be taking a keen interest in this practice. The additional costs for authorized financial advisers, including registration and authorization fees, levies, membership of a dispute resolution scheme along with the increased amount of time required to document advice mean that inevitably investors will have to pay more for advice and commissions are likely to be replaced with fees. Investors should regard this as a positive move as along with the increased cost will come improved service and quality of advice.
June 7, 2011
 Love and Money
Relationships are complex and adding financial stress into the mix complicates things even further. Arguments about money are the leading cause of relationship breakdown and it follows that if couples can find a way to reduce financial stress and avoid conflict over money, the chances of a successful relationship are greatly enhanced. When two people come together from different backgrounds, they usually have different attitudes towards money or different money personalities. That’s because your money personality is shaped by a number of factors that relate to your upbringing and your past experiences. These different money personalities show up as different attitudes towards spending and saving, debt, financial risk, and building wealth. It is important to remember that when it comes to personalities, there is no right and wrong; just different. The best way to deal with differences is to firstly identify what they are, then to acknowledge them with acceptance and discuss how they can be taken into account. Opposite personalities, such as spenders and savers or risk takers and risk avoiders require compromise and boundaries. For example, a spender can be given freedom to spend up to a certain limit, or a risk taker can be given an agreed amount of money with which to speculate. Problems occur when there is no compromise, when boundaries are not set and more importantly when people do not acknowledge or understand the consequences of their actions. For example, a spender may incur large debts without thinking about how the debts are going to be repaid. In a good relationship, each person acts in such a way as to cause minimal negative impact on the other. Agreeing financial goals is a great place to start so that you are both working towards the same outcomes with regard to your income and your assets.
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.
April 18, 2011
 Your Financial Goals
There’s one significant difference between people who succeed in life and those who struggle; their ability to set goals and achieve them. To have what you want in life, you can’t just sit back and expect it to happen. Success means different things to different people and when it comes to setting financial goals, success is much more than having a lot of money in the bank. A big bank balance is only a good thing if you set out amass a lot of wealth just for the sake of it. Ideally, if you want to enjoy life the aim is to have enough money on hand at the time you need to spend it.
The purpose of goals is to give you a long term vision and to increase your short term motivation. Having goals focuses your mind on what you need to know and do to be successful, so that you can make the most of your life. Goals should be precise, clear, and meaningful. Set your goals too high and you will quickly lose motivation if you don’t succeed. Make your goals too easy and won’t be motivated either. You are much more likely to achieve your goals if you write them down and if you break them down into small steps so you can measure your progress.
When it comes to setting financial goals, it is hard to contemplate achieving long term goals if you find yourself unable to save or burdened with short term debt. In that case, you need to set goals in two stages. In the first stage, plan to get rid of debt and start saving. Once you have achieved that milestone, you will be in a financially sound position that will enable you to move forward and set longer term goals.
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