moneyblog

Insurance You Can't Do Without

Well, this is what they think. But I happen to agree - for most people, if you have fewer assets than could comfortably support your family, then you should top up those resources with some insurance. Life, health, disability, and critical illness look like the package. Link.

At last!

Gee, I am glad someone has gone public on this. I thought I was the only one concerned about it. Link.

Drink Beats Cancer

You probably know that yours truly does not drink. However, I will be serving it to my guests on Christmas Day (with host responsibility, of course). I can do so with a slightly easier conscience as there has been some good news on the impact of beer drinking on cancer. Check it out.

Nothing Wrong With Excellence

In this recent piece on goodreturns we were told that Newpark and Share both support AFA status for their advisers. In the comments Ron Flood wrote about how it was essentially vital for risk advisers to be authorised because they will do a full fact find and needs analysis - anything less was to be a mere salesperson or 'bank teller'.

Although the definition of financial planning is not yet clear, I agree with Ron's comment that this has been the direction of recent comments. I do not think this is wise on the part of regulators and hope that they will revisit it because of the economic efficiency issues. But this is not because I think most risk advisers would be right to opt only for registered status. I think it's great that they should aim for the highest standards. I also think that unless category 2 / registered advisers do exist then there will be no room for differentiation for such a move - which would be a shame. Having said that - it might be wise to get all the proposed rules for AFAs on the table, plus the definition of financial planning before making a final choice. Meanwhile, hit the books, it won't be wasted!

Risk assessment in everyday life

This post from the recent cavalcade of risk reminds us of the need to practice some risk assessment in everyday life - and that some commonly taken risks have a catastrophic downside for a low current upside - so don't do them Okay? Link.

Driverush

I just did a level 1 stuntdriving course with Driverush and it was brilliant. I loved every minute - and plenty of them were scary, exhilirating, and yet it was all so straightforward. If you're looking for a good gift -- check out driverush. Link.

Well how about that...

NAB and AXA eh! Well, given the way regulation is going the link up with a bank is probably very, very, valuable as the risk is a tough time for intermediated models if the market adopts an "All-AFA-No-Commission" approach to regulation. Link.

The Brownlee and Parker Show

Enjoy. Link.

Aussie Claims Study Information

Go check out a new claims study. Link. Note the average payout - about $132,000. Low, low, low.

Spring

Proof that spring is here, my waterlillies are back - and there is a thrush nesting a yard from my back deck.

Great Play: Christ Almighty

Last night we enjoyed the hilarious "Christ Almighty" at the Basement Theatre. Having enjoyed last year's reindeer monologues so much we were sitters for the sequel. Effectively the same format - a series of monologues with a few instances of more than one cast member on stage.

Our cast included Sophie Henderson as the Angel Gabrielle, Keisha Castle-Hughes as Mary, and Danielle Cormack as all three wise men. Here's a link to a Herald review - which is pretty good, except, I reckon Christians can enjoy the play too, depending on your definition of blasphemy, rather than merely tolerate it. I bet plenty do.

You see, there is a difference between bawdy and blasphemous, and I feel that most of this play is hugely and delightfully bawdy. Even the poor buggered donkey introducing the idea that Mary's pregnancy was other than divine was merely echoing the obvious and understandable rumours of the day, and, fair to say, of sceptics ever since. It's said that doubt is a necessary component of faith - and you can have it with a laugh at Christ Almighty.

Definition of Financial Planning - What if?

If (and I underline that if) financial planning gets defined as meaning something very narrow - and can therefore be triggered by actions such as:

1. Performing a needs analysis (even if it is only for category 2 products)
2. Offering a range of companies products (even if they are only category 2)
3. Linking coveer amounts of category 2 products to amounts required for future goals (i.e. the amount required to pay off a loan, provide an income, and put children through school).

If this is what happens, then we have a very, very, different regime from the one that many product providers thought they were supporting. With such narrow definitions you may even capture every general insurance broker in the market that offers a selection of companies, and does a thorough job of developing the right sums insured.

If this is the outcome we have a situation where QFEs don't work - so much for the amendment Bill. No-one in a SovNet, AMP Adviser Business, One Network, or AXA Aligned Advisers, for example would be able to avoid being an AFA - so the whole QFE structure and the point of clarifying term life insurance as category 2 would have been a complete waste of time. We would also have one where these products get placed into a regime where commission may be banned.

Is this the intention? It would have the sad effect of removing a very great deal of consumer protection from the market - usually it's only a big company that has the resources to pay for large advice-based problems. You can say what you like about what happened over ING, for example, but a settlement was there. Other cases have more recently shown what it is like if only the adviser is the target of action - an usually, there is no money to be had. 

Is this market practice? I think Simon Hassan said "we know what financial planning is, and this is not it" and that sums up what the market thinks financial planning is. Put another way - if anyone tries charging you a plan fee for the process of selecting covers and products offered through popular life risk systems such as X-Plan they'd be laughed at. It's good practice, but it's not financial planning. That requires a view of budgeting, investment decisions, and broader recommendations and options for achieiving them.

However, we do not yet have a definition of financial planning, and there is still a chance to avoid overreach and ensure that we are capturing the generally accepted definition of financial planning, and not these sub-segments of it. That would preserve efficiency. It would also provide quality financial advisers with the opportunity to differentiate - allowing those that wish to adopt higher standards to do so on a voluntary basis. Those that do not can shrink behind the corporate skirt and consumers can at least enjoy the protection of the deeper pockets that stand behind the product and advice package they are sold.

Some people say this is too complicated to fix, but really is it? On a risk based approach if it's only a category 2 product that eventuates, then the process can't be financial planning. Because that must include category 1 products.

Editor Profile: David Chaplin

What’s your job at Tarawera?

I edit ASSET magazine as well as supplying news stories to Good Returns.

Tell us a couple of things about yourself?

I live in Hawke’s Bay. I grew up in Wellington. I once shared a hotel lift with Billy T James in Los Angeles. Like Jesus, I am a Capricorn.

Do you have any other writing roles you want to mention?

I blog for the New Zealand Herald twice a week as ‘Inside Money’. I also occasionally write for Australian publication ‘Investment & Technology’, a trade magazine and online newsletter covering institutional investment and superannuation.

Tell us about your approach as an editor?

There are two aspects to editing ASSET, one is largely technical – managing production, harassing columnists etc… The other, trickier, part is deciding what the magazine is supposed to be about.

Fundamentally, ASSET is a magazine for financial advisers so the aim is to present issues from their point of view. Its sympathies lie with the people who are either at the frontline providing financial advice or managing advisory businesses.

This doesn’t mean it can’t be critical of the industry but the main purpose of ASSET is to provide practical, pragmatic and positive information to readers. However, I do also like to encourage dissenting or contrasting ideas – there’s nothing quite as good as an argument to spice up a magazine.

You worked in Australia for quite a while – any comparisons you’d like to draw for us?

New Zealand is smaller, simpler, quieter.

Australia’s entire financial services industry has been puffed up by its compulsory superannuation system and every adviser there gives thanks to Paul Keating, the Labor PM who championed the scheme, every day. Complex super rules (despite numerous attempts to simplify them) and confusing tax law has handed Australian advisers a ready-made client base – Australian consumers are so mixed up, advice is almost a necessity.

In New Zealand, advisers have to work harder to justify their value – there is relatively little tax finessing to be done (although, that could change under PIE rules), KiwiSaver is a model of simplicity, and life insurance still has to be sold, not bought, as the cliché has it.

You’ve seen a lot of coverage about the new Financial Advisers Act – any particular issues you have with the approach taken by the law or regulations as you see them right now?

The law appears to be giving institutions greater power to control distribution rather than creating a vibrant, robust independent advisory – but maybe that was always the intention.

What’s cool about the NZ Financial Advisory industry?

While it’s seen as less sophisticated than Australia, for example, New Zealand’s advisory industry can learn from the mistakes made everywhere else and develop much faster. I also think it can be much more innovative, ‘consumer-focused’ and efficient than Australia if the government gets the regulations right.

It’s also much less pompous than Australia, which has delusions of grandeur.

The recent Rabo confidence survey shows us that consumers have pretty battered confidence in the financial services sector as a whole, and investment areas particularly – how do you think this can be turned around?

Resurgent markets will repair consumer confidence until next time but the industry can help itself by being more transparent about risk and fees and better at explaining what it is actually happening with the money.

What’s interesting and new?

That’s a good question and I’m glad you asked it.

We often ask people to write material for the blog – they find it tough, any tips for people that want to write?

Keep it short.

Plans for Christmas?

I plan to be incommunicado.

FAA Amendment Bill

Here are the links you need:

Beehive release

Parliament legislation page

Beehive release on disputes scheme

NZ DSL Users Fined $500,000

Here's one from the oddball news file. Link.

Phil Macalister on Life Insurance Commissions

As I blogged earlier, I thought Philiip Macalister had it exactly right in his recent blog (link) on the commissions issue. However, I have been challenged on this. In particular, Phil, reassuringly for many life companies and financial advisers tha only sell life products he said:

"I think the debate is only about investment products, however it seems that some commentary has included all financial products and services.

With life insurance I tend to agree that remunerating risk advisers on a commission basis is probably the default setting. If you take the argument insurance is sold, not bought, then a commission basis is fine; just disclose it."

The only problem is, as it was pointed out to me recently, because of the lack of clarity around the definition of financial planning, most life ocmpanies think life brokers will need to be AFAs. The Code Committee did not ask in its recent paper "Should commission be banned only for the sale of investment products only". They asked whether commission should be banned. You see if you step into the AFA regime, all it will apply, to everything you do. Unless someone helpfully changes the definition, then that is where this is heading. Now, how many life brokers currently operating are going to function under that model? Is this a scenario we should be pushing for?

Vesting of Renewal Commission - a problem in transition to the new rules

There are some marked differences between the difference parts of agency agreements with life ocmpanies that deal with the vesting of renewal commissions for life advisers - and they will all likely change with the transition to the new rules. A prize for the adviser that tells me who they think has the best, and the worst, vesting clause, which matches with my recent review of agency agreements - a copy of Stephen Levitt's SuperFreakonomics to them.

Phil Talks Sense on Commissions

Philip Macalister has done a great wrap up on the commissions debate. This is an excellent example of the kind of debate the Code is generating - there are risks with any debate, that the wrong decisions are made. The right decision here is for transparency. The client should know exactly what is going on. That will probably provide the kinds of conditions that will see a great deal more advisers shift to a fee-based approach in the investments are. That, I feel, would be the right kind of outcome.

At the other end of the spectrum, if you ban all commissions (on all products), you will suddenly make obtaining a wide range of products unaffordable for many many clients, because commission is a handy way to pay for the cost of sales through the product. Yet, this is a risk - if the merest nod towards a decent needs analysis categorises an adviser as a financial planner, and commissions are banned for AFAs, then that's exactly the sort of outcome you could have.

Sovereign's Compliance and Tax Website

As ever, Sovereign has produced a very well presented website focusing on regulation and tax for their advisers. You can view it iin all its glory here: link.

Strategic Planning

I don't have time right now to blog this issue properly but this is a great scenario for you corporate planner types that need to put something interesting into your "what-if" workshops which will inevitably feature in your January diary engagements. Link.