ASSET Spring 2022

How to make a big impact

with investing decisions

Contents | ASSET Spring

Impact Investing

Jenni McManus explains the latest, growing, responsible-investing trend.

Business Overhead insurance

Graeme Lindsay compares the various business overhead insurance policies in the market.

UP FRONT

EDITORIAL

A time of changing seasons.

NEWS

The lowdown on KiwiSaver fees.

Time for FMA to regulate responsible investing.

PEOPLE

The FMA reshuffle, Sam signs off, and more.

FEATURES

INSURANCE ADVISER PROFILE

IMPACT INVESTING

The next iteration of

investing.

INVESTMENT ADVISER PROFILE

Peter Lee

BUSINESS OVERHEAD INSURANCE

Comparing policies

REGULARS

26 PRACTICE MANAGEMENT

Russell Hutchinson: One heck of an opportunity in 2023.

INVESTMENT COMMENTARY

David van Schardenburg: Independent vs in-house, why are we still competing?

34 THE GOOD RETURNS TOP 10

Welcome to spring, a time of changing seasons

This issue, as promised, has a strong theme of responsible investing. It’s a theme we have had an interest in for literally decades. I recall attending RI conferences in Australia 20-plus years ago!

Back then when we wrote pieces around responsible investing they got little cut through. The biggest hurdle was the perception that investing “ethically” meant accepting lower returns.

This has demonstrably shown to be untrue – look at the performance of New Zealand’s leading responsible manager Pathfinder. There is now plenty of evidence to debunk this myth.

We now see a heightened interest in responsible investing articles and features.

To give you some insight into this area of investing we have profiled Peter Lee in this issue. Peter won the Mindful Money Ethical Financial Planner of the Year award a couple of months ago.

It’s an interesting read. Perhaps the thing that is most concerning is that there are not enough financial planners embracing responsible investing in their practices.

This seems a little odd as so many fund managers are promoting their offerings on how “good” their portfolios are. They do this because that is what investors are demanding.

Maybe it is time more financial advisers stepped up to the mark in this area?

One of the other things I wanted to highlight is our news story about Generate KiwiSaver’s research into fees. The simple synopsis of this is that New Zealand fees are competitive, and in many cases, lower than comparable fees in Australia and the United Kingdom.

We have heard the Financial Markets Authority bleating on, many times, about fees. Sure fees are important but it is

time the debate and discussion moved on to how advice is incorporated into KiwiSaver and contribution rates.

Getting these things right will be more important to KiwiSaver members than the current monologue from the regulator.

Interestingly, when we asked for an interview on Generate’s report they declined.

Recently I had the pleasure of attending a number of conferences; SiFA, Financial Advice NZ and Wealthpoint.

One of my observations is that despite all this change in financial advice, people seem pretty upbeat.

Also, advisers and others in the industry are happy to be out and mingling with one another after years of Covid inspired madness.

It’s also heartening to see a high level of support from providers.

By the time you get this issue the Financial Markets Authority’s “quasi” deadline for licensing applications will have passed.

It has said if applications are not in by the end of September, there is no guarantee they will be processed by the licensing deadline which comes towards the end of March next year.

Frankly, it’s hard to see how the regulator can make such a statement which simply implies it has brought the deadline forward when the law sets a date for March.

No doubt we have interesting times ahead.

Keep well.

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E+S+G Always part of our equation

At Milford, we undertake a detailed analysis of every business we invest in, including their Environmental, Social and Governance credentials. It’s something we’ve always done – the insights we gain play a fundamental role in making smarter decisions for our clients.

Those insights also help us engage with companies on ESG, sharing our own expertise and working together to initiate changes that can make a real, long-term difference.

We believe we can make a greater impact when we engage with companies – something our team is deeply committed to.

It’s an approach which saw us recognised with an A rating* by UNPRI for our strong engagement with policymakers and regulators.

Want to know more? Download our

to learn about our recent

and outcomes at milfordasset.com/sustainable

It’s a fact: KiwiSaver fees in NZ are low

New research shows that KiwiSaver fees in New Zealand are lower than fees on similar funds in other countries.

KiwiSaver provider Generate commissioned Deloitte Consulting Australia to compare fees KiwiSaver fees to similar funds in Australia and the United Kingdom.

It found that KiwiSaver fees are on average lower than fees charged on similar funds in Australia and KiwiSaver default fees are on average lower than the fees for default products in both Australia and the UK.

“It’s good news for KiwiSaver members that the fees they pay have been found to be globally competitive,” Generate chief executive Henry Tongue said.

He says KiwiSaver members can have confidence that the fees charged by managers are reasonable by international standards.

“The fact our fees are lower than Australia is quite phenomenal.”

The report compared fees on default funds in each country and also fees on

non-default funds which Deloitte called “choice”.

More advice is the key outcome to customers, now.

As could be expected there was a wider range of fees on Choice funds due to varying asset allocations, management style and relative scale.

Deloitte concluded; “fees charged to members of KiwiSaver default products are on average lower than fees charged to members in similar default funds in Australia and in the UK.”

Total Default and Choice Fees p.a. By System - $50,000 Balance

Source: Deloitte. This graph compares fees for default schemes in NZ, Australia and the UK for balances of $50,000.

The coloured bars are the second and third quartiles. A graph for $30,000 balances is further down the page.

2%

1.80%

1.60%

1.40%

1%

0%

Default New Zealand (KiwiSaver)

There are some common myths that KiwiSaver fees are higher than fees in Australia and this report demonstrates that is not true, he says.

Tongue says a single-minded focus on lowering fees will not do KiwiSaver members any good.

Choice New Zealand (KiwiSaver)

Default Australia Choice Australia Default United Kingdom

the Australian superannuation system which is more than $3,100 billion and the UK system at more than $5,000 billion.

"This shows KiwiSaver fees to be highly competitive in relation to their much larger scale Australian and UK peers."

“The pursuit of ever-lower fees also leads to more low-cost, vanilla KiwiSaver products, which ultimately reduces consumer choice of active KiwiSaver funds and has implications for the longterm health of the New Zealand economy and capital markets,” he says.

The research is also remarkable given the relatively small scale of the KiwiSaver market which sits at $90 billion versus

Tongue says it is time to focus the KiwiSaver discussion onto issues which will make a bigger impact on KiwiSaver members including fund selection and contribution rates.

“A single-minded focus on fees, especially when these are already highly competitive when compared to other markets, crowds-out the critical need to also focus members attention on fund selection and contribution levels.

HOW THE RESEARCH WAS DONE

Choice United Kingdom

We should be encouraging members to seek advice, think about fund choice and contribution rates, and encouraging more financial advisers to provide advice on KiwiSaver.

“More advice is the key outcome to customers, now.”

Other research by the Financial Services Council shows the majority of respondents contribute only 3%4% into their KiwiSaver, while 74% of respondents think that Kiwis should be contributing a bigger percentage of their earnings.

In addition, 80% of respondents considered that they were getting value for the fees they paid.

The methodology used for this research was to focus on the total fees charged to members with account balances of $30,000 (the current average KiwiSaver account balance) and $50,000 (a potential future state average account balance) across a representative peer group of funds from each system.

More responsible investing rules needed

Mindful Money boss calls for FMA to create responsible investing standards.

BY JENNI MCMANUS

Mindful Money, a charity that promotes ethical investment, now has a second awards season under its belt.

Chief executive Barry Coates says feedback from the financial services sector after the inaugural awards was “fantastic” and an extra category was added this year – the best ethical overseas fund, aimed primarily at products being actively marketed to New Zealand advisers.

The awards were set up to recognise and celebrate best practice, Coates says. “They honour the funds and the individuals who are leading the movement to make responsible investing the new norm and impact investing the progressive frontier.

“We saw a lot of activity in ethical and responsible investing and impact investing, but we didn’t see a lot of opportunities to highlight best practice.

“We were also trying to overcome some of the lack of regulatory standards around ethical investing and say, ‘what does good look like’?”

This lack of standards has long been an issue for Coates. While the Financial Markets Authority (FMA) warned recently it was turning up the heat on ‘ethical’ and ‘responsible’ funds – aimed specifically at KiwiSaver and other managed funds that are ignoring ESG investment guidance published by the

regulator in December 2020 – the FMA has made it clear it does not want to be a standard-setter.

The guidance does, however, provide a framework the FMA expects managers to use to substantiate on reasonable grounds the claims they are making about the credentials of their funds. It warns it will crack down on managers who claim their products are ethical and sustainable but fail to back up those assertions by clearly explaining to investors how and why there are made.

Not good enough, Coates says. In his view, the FMA should be setting and enforcing mandatory standards for ethical investing in the same way that the External Reporting Board (XRB) is doing for climate change. This would enable a clear comparison to be made between funds. The XRB is expected to turn its attention to sustainability standards once its climate change project is completed but it’s understood these standards will be only voluntary.

Coates thinks this is a mistake. These standards should be compulsory, he says, as the audience for financial information is potential investors who are not necessarily experts.

In addition to its awards, Mindful Money did a survey on ethical earlier this year in association with the RIAA (Responsible Investment Association of Australasia).

This found that despite concerns about greenwashing, nearly three-quarters of respondents (73%) wanted their funds to be invested responsibly and ethically, and 56% said they would consider switching KiwiSaver funds if they discovered their fund was investing in companies that were not consistent with their values.

The survey also points to what Mindful Money calls a “crucial” link between ethical investment and savings. If people knew their savings would make a positive difference, 53% said they would be motivated to save more.

About two-thirds of those who do not already have an ethical or responsible fund said they are looking to invest in such a fund in the future. Demand is particularly strong among women (80%) and younger generations (71%) compared with only 63% of men.

The researchers say this support comes from a range of income groups, including those on low incomes and with low KiwiSaver balances. “Investing ethically is an issue for all, not just those with high levels of discretionary investment.”

For many of those surveyed, it appears investors are not simply looking for funds that do well but investments that also do good. For 62%, it is important that their investments make a positive difference in the world. A

Barry Coates

SNAKES AND LADDERS

Newly-appointed Financial Markets Authority chief executive Samantha Barrass has started her reign with a reshuffle of the regulator’s toptier.

The new structure is a slimmed down version of the structure she inherited. It consists of six executive level roles reporting directly to Barrass. Previously there were 11 direct reports.

Long-serving employee Liam Mason has been appointed to the role of executive director (ED) evaluation and oversight, and will continue the role of General Counsel. He has been with the regulator when it was called the Securities Commission. This role is largely a legal function. Paul Gregory has been appointed ED response and enforcement while Clare Bolingford is the ED regulatory delivery, which will focus on licensing and other regulatory processes.

The FMA is recruiting for three EDs. One for strategy and design, another for transformation and operational delivery, and the sixth post will be an ED Te Ao Maori.

The FMA is undertaking an external recruitment process for the remaining roles.

Some senior managers will stay on in various roles. Four of the former senior leaders will resign of move down into new roles. Chief operating officer Brad Edley is leaving. A well-known FMA identity, John Botica, stays on in various capacities, including interim chief operating officer.

Botica would “continue to support the organisation through a transitional role to help the FMA prepare and implement the new structure”. HR leader Sarah Feehan will see her role largely unchanged but report to the new ED transformation and operational delivery.

James Greig is in a holding pattern, “his current team in the transition to the FMA’s new structure, while future senior leadership roles are considered to make best use of his knowledge and extensive experience”.

BENTLEY DRIVES INTO A NEW ROLE

Thom Bentley is the first New Zealand hire for a company looking to cross the Tasman.

Bentley has left Betashares and joined iPartners as Director - Head of Capital Markets New Zealand.

iPartners describes itself as Australia’s premier, digitally led gateway to private institutional grade alternative investments.

This is iPartners' first hire in New Zealand and reflects the strong growth in interest from New Zealand investors for private market and alternative investment strategies to complement more traditional asset classes.

Bentley will be based in Queenstown with a remit to grow the New Zealand business across wholesale and institutional investors.

Bentley has held roles with Betashares, Smartshares, Pie Funds and his own business, Remarkable Capital in recent years.

NEW DIRECTOR FOR FINANCIAL ADVICE

NEW ZEALAND

Highly regarded investment adviser Paul Sewell is the new Member Director at Financial Advice NZ with responsibility for financial planning and investment.

He replaces Stephen O’Connor, who is stepping down after four years.

Sewell, of Hawkes Bay, has been in the financial advice business for 25 years, with special focus on risk management, financial and investment planning.

He was a founding member of Financial Advice New Zealand. Capital in recent years.

For more on Sam’s thoughts on New Zealand go to goodreturns.co.nz and click on Insurance.

SAM SIGNS OFF

AIA chief partnership officer Sam Tremethick has decided to return home to Australia for family reasons.

The company has appointed Sharron Moana Botica as chief distribution officer, and Angela Busby as its chief customer officer.

Chief executive Nick Stanhope says, “Sam has been a valuable member of the AIA NZ whanau since joining us in 2019. In this time, he has worked tirelessly alongside our distribution team to help support our adviser and partner community.

Tremethick says the New Zealand adviser community has “been incredibly welcoming even to an outsider, an Australian, which is very kind of them.”

He has worked in several different countries and says in New Zealand, “undeniably you can't question the advisers’ passion for their clients.”

“I've genuinely enjoyed working here on the basis that advisers want to do the right thing and more importantly actually want to be there for their clients.

“And I think that's a really powerful thing. If I was to compare it to other markets, I think whilst we're going through a fair bit of change from a regulatory perspective, I think, and don't get me wrong, change is always difficult. I think if you look to other markets, whether it's Australia, whether it's the UK, even the US, I think you could argue that it's a light touch change, but it doesn't mean that it doesn't impact people. ” He says two of the biggest achievements in the role have been bringing AIA and Sovereign together as one company and the launch of Vitality. A

For full versions of these articles visit www.goodreturns.co.nz

David Fyfe – Portfolio Manager

Technology and the personal touch

Digital tools help Wellington-based adviser Samuel Rees-Thomas spend more time on things that matter.

BY DAWN PICKEN

Forget in-person box-ticking and long questionnaires: Samuel Rees-Thomas prefers more meaningful encounters.

The Wellington-based insurance adviser sees technology as a powerful pathway for forging human connection.

“I’m passionate about using technology to increase time spent on valuable conversations, and to decrease time on

administrative tasks which don’t require discussion.”

That’s why his business is 100% paperless. You won’t find massive reports or handwritten forms at Rees-Thomas Financial (RTF).

The firm relies on a few small devices and simple digital tools such as e-signature app DocuSign.

Meetings happen where it’s most

convenient for the client: in the office, cafe, video call or via phone. Naturally, they are scheduled via an app (ReesThomas likes Calendly)

Early foundations in finance

Rees-Thomas started his career straight out of Year 13 at Wellington College.

His first full-time job was as a teller at Westpac Lambton Quay, before moving

to Kiwibank’s head office as a customer service representative.

That’s when his father introduced him to two insurance industry professionals he grew to admire.

“The infectious passion of professionals like Peter Standish and Paul Kent inspired me to become an insurance adviser.

“I could see how much their clients benefited from expert advice.”

He says Peter Chote, his boss at another early job (Advice First), was instrumental in helping him learn the business.

In 2010, Rees-Taylor switched from banking to insurance at age 31, remaining with Kiwibank in an outbound sales role.

He says his time in the banking industry provided a foundation for understanding financial services as a whole.

“It also allowed for a healthy juxtaposition between general roles in financial services and specialised advice, which is the space I occupy on a day-today basis.”

He served as a financial adviser and director/manager of a tech advice firm before founding RTF in 2014.

Build trust and listen

Helping people, says Rees-Thomas, is the best thing about his job.

He says insurance advisers must take the time to build trust with clients, to ensure current and future needs are met.

The work requires patience, empathy and excellent listening skills. Insurance advising is not often a space where consultations happen in quarter-hour chunks.

Taking time to listen can lead to cost savings for clients.

Rees-Thomas recounts a time when a young client called to ask about a problem with a bank loan he didn’t understand.

The man visited RTF’s office and showed him a recent online banking transaction for a personal vehicle loan. Fifteen-hundred dollars had been drawn from the loan to cover insurance.

“This young fellow had been unwittingly sold personal loan insurance - but what’s worse, it had been paid for by increasing the loan value by $1500,” he says.

“I was horrified, especially given he had life, health, trauma, disability insurance and income protection through me for around $50 a week.”

Rees-Thomas had his client call the bank and give permission for the adviser to speak on his behalf.

“I went straight to a team leader, who, to his credit, was also horrified, and the young man was refunded instantly.

“It’s little moments like these that are often overlooked in our industry.”

Samuel says his only regret was not lodging a complaint about the bank’s actions to the Financial Markets Authority.

Mentors, mentees, friends & experts

Making connections with other advisers is another part of the job Samuel enjoys.

“I’ve always loved getting to know people.”

Colleagues across the professional service industry have become both mentors and mentees, sources of friendship and education.

Rees-Thomas says he has become increasingly passionate about the importance of good advice in all professions he works alongside, including investments, lending, fire and general insurance, law and accounting.

Seeking experts, and connecting clients to them, has grown his expertise and helped his own career to flourish.

“They say it takes a village to raise a child. Similarly, it takes a village of professionals to ensure the best overall professional services experience for clients.

“When we operate in silos, we miss out on some of the best aspects of our roles.”

Challenges and change

Rees-Thomas keeps current and connected by attending industry events, to learn and to network with other professionals.

He says being part of adviser association Plus4 has been invaluable, as members help inform each other about industry changes.

They also take part in an annual conference, where consultants and compliance advisers outline what’s on the horizon.

“We’re really open about sharing ideas and expertise. A cooperative mentality feeds into the vibe.

“There’s no justification for rivalry in our industry; there’s so few of us and so many potential clients given the state of underinsurance in New Zealand.”

Rees-Thomas wants to help new advisers gain experience, but says the introduction of the New Zealand Certificate in Financial Services Level 5 has been a barrier to entry for junior advisers.

In his view, education itself isn’t the challenge. He says the fact new entrants in the advice space are unable to provide guidance or sell products without the qualification means they cannot quickly generate income for their employers.

“Also, the NZFS Level 5 does not teach a junior adviser how to talk to people, network, market or source leads.”

Evolution of customer service

Remote working, which the pandemic has forced upon many of us, has become non-negotiable, says Rees-Thomas.

For him, it’s neither good nor bad, though it comes with challenges.

“How can you provide expert client experience remotely? For someone like me - a tech geek – it was a breeze. But I’m aware that for many in our industry, working remotely may have been tough.”

His observation, after years of experience, is that the financial services industry is poor at seeking tech advice to enhance its overall value proposition.

“There’s real opportunity in this space for some savvy tech entrepreneurs to help our industry evolve, especially with independent financial advice. Equally, there’s a real opportunity for advisers to seek that guidance.”

A peek at RTF’s website shows ReesThomas also invests time and thought into his own marketing efforts.

The home page features a top-heavy, muscle-bound man with chicken legs, along with the question, “Has your insurance plan skipped leg day?”

Arrows pointing at the skinny-legged man give examples of insurance gaffes, including still having heaps of life insurance when the kids have left home and you’re on two incomes, buying cover to see the GP when you never see a GP, and not having non-Pharmac drug cover.

The most important things

Business is cranking for Rees-Thomas these days – but when he isn’t working, he’s usually with his family: wife Julianne and their nearly two-year-old daughter. Another baby is due in March.

Otherwise, you’ll find him playing guitar and leading the worship band at Northern Hills Church in Tawa.

Life is busy, but he is combining his experience and love of technology to save time for the people and activities which matter most. A

‘I’m passionate about using technology to increase time spent on valuable conversations, and to decrease time on administrative tasks’

How to make a big impact with investing decisions

Impact investing is the next iteration of responsible investing. Jenni McManus finds out what some managers are doing.

BY JENNI MCMANUS

In New Zealand, most fund managers accept that an impact investment requires three things:

1 Intentionality: investing not just to make money but also with the intention of making a positive social or environmental impact.

2 Additionally: if you did not make the investment, that social good would not happen. For example, buying shares in a listed solar company would not qualify as the shares are already listed so no new capital is being added that could be used to expand the company’s operations.

3 Measurability: Metrics are available to demonstrate how much good an investment is doing.

John Berry, chief executive of Pathfinder Asset Management, says impact investing is very different from placing an ESG lens over companies and their operations, and it’s much harder to pull off.

“ESG is essentially data about companies. It helps you choose high quality companies and typically those companies will be lower risk and have higher quality management, but ESG doesn’t actually tell you whether they are necessarily changing or saving the world.

“You need to add an ethical layer on top of your investing. One approach is investing in sustainable themes, so we look at companies on an ESG basis, but we also say we want to be overweight in companies that are promoting energy efficiency or promoting renewable energy or water technology,” he says.

“In that way we’re looking for companies that are actually having a positive impact on the world.”

But impact investing goes a step further, Berry says. For purists, it is a creature of the private markets, not publicly listed companies where most ESG investing takes place.

To determine whether an investment can be properly described as “impact”, Berry suggests looking at its underlying assets. If they’re publicly listed securities, in his view they’re not impact assets.

And lobbying to move directors on and off boards is not true impact investing, Berry says. Shareholders who vote on those sorts of resolutions are simply ESG investors. Impact requires the sort of scenario devised by Engine No 1, a small and activist US hedge fund that attempted to change the board of Exxon Mobil by putting forward directors with renewable energy experience.

Though Exxon Mobil is publicly listed, Berry classifies Engine No 1 as an impact investor because it was trying to get a real-world outcome by changing the Exxon board.

Pathfinder offers investors access to impacting investing in the least risky way possible – via its KiwiSaver funds. For example, it has a stake in Wool+Aid, a business that has developed the world’s first merino-based biodegradable band-aid. “We know that every million band-aids they sell is a million bits of plastic that won’t be in the environment,” Berry says.

Through its KiwiSaver funds, Pathfinder also has an investment in Lodestone Energy which is developing solar farms in New Zealand, and Groov, Sir John

Kirwan’s business that provides a mental health phone app. In the debt markets, Pathfinder has done three transactions with the charity Community Finance and offers microfinance, via livelihood bonds, for tens of thousands of women in southeast Asia.

These investments are only a small part of Pathfinder’s KiwiSaver portfolios, Berry says. “Outside of that, it’s hard for retail investors in the same way as it’s hard for retail investors to get access to private equity or a true impact fund. The private equity space is where fantastic investing can be done but it’s really hard.”

Part of the difficulty for retail investors is the illiquidity of most impact investments. That’s why KiwiSaver is so appropriate for impact investing as, like private equity, it has a long-term horizon and matches the trajectory of a growth fund. “But you keep it as a small part, so liquidity doesn’t cause any problems,” Berry says.

The Godfather

Someone who is said to have cracked the impact market is Roy Thompson, the founder of New Ground Capital.

Viewed by many industry players as the Godfather of impact investing in New Zealand, Thompson’s business has set up three impact funds around enterprise and social housing. They’re restricted to wholesale investors though Thompson says “ideally” investors should be able to access impact investing indirectly through their KiwiSaver funds.

He rejects as elitist the notion that impact investing is unsuitable for retail investors, saying the capital markets have become more democratised over

the past 20 years and there is a huge appetite, particularly among the young, for this type of investment.

But it will require a huge amount of commitment and work by fund managers who’re still wrestling with the need to restructure their portfolios in line with modern ESG guidelines. Impact, Thompson says, is “the next evolution” where a positive screen is put over opportunities and fund managers are proactively looking to invest in things that generate a positive impact.

New Zealanders, he says, are exceptional givers but have never learned to build large pools of private capital that can fund much-needed social infrastructure in perpetuity. For example, more than half the $100 billion ploughed into KiwiSaver is going straight offshore.

In part, that’s caused by a design fault in KiwiSaver itself which Thompson views as a “very significant impediment” to impact investing. Because KiwiSaver accounts are easily transferable between providers, fund managers are reluctant to invest in anything long-term. “It’s more of a problem when KiwiSaver schemes are small. But these days most are getting sizeable and some of them are very large so it’s more of an excuse now,” he says.

Measuring impact

Chris Di Leva, a director at Harbour Asset Management, defines impact investing as investment that makes a real and measurable contribution towards the UN’s sustainable development goals.

“We measure it that way because the UN has set these goals to drive better environment and social outcomes in the world. That, in our view, has set up

Defining impact investing

In the financial media, one of the first to attempt a definition of impact investing was The Economist, which noted in its edition of January 1, 2017 that the sector was “inching from niche to mainstream”.

“The concept of investing in assets that offer measurable social or environment benefits as well as financial returns has come a long way from its modest roots in the early 2000s,” it said.

The Economist also noted that BlackRock – the world’s largest asset manager – had in the previous two years launched a fund called “impact” and investment bank Goldman Sachs had acquired an impact-investment firm.

It pointed out, despite definitional

a really good framework for when you’re investing, assessing companies through the lens of how they are benefitting the world and helping to fulfil some of those goals.”

Harbour offers a sustainable impact fund and earlier this year issued its first-ever sustainability report to inform investors about its progress and approach to investing sustainably (Pathfinder has produced a similar report).

Di Leva says measuring impact is the key. In his view, board scrutiny is “definitely” part of impact investing as it’s helping to make positive change. But Harbour also has investments in early-stage unlisted companies where it’s easier to prove the impact of the additional capital.

One such investment is UbCo, an electric utility bike manufacturer which is aiming to decarbonise the farm bike sector. Another is Calix, an Australian business that is trying to decarbonise the cement and lime industry by developing kilns that not only run on renewal energy but are also capable of carbon capture.

Most of Harbour’s funds meet the criteria of strong ESG practices, Di Leva says, and about 20% are also making a measurable impact. “We believe impact investing can be done across multiple asset classes - public and private equities, public debt and also private debt.”

He acknowledges the wide range of industry views about what constitutes impact investing. “But it would be beneficial if the industry could come to a landing point about the definition.”

Harbour subscribes to the more expansion GIIN definition, and Di Leva says it would be “a shame” to view impact investing narrowly, particularly if it excluded retail investors.

“First, if it’s purely in unlisted markets that are accessible only to investors with very large amounts of money, you’re shutting out a really large portion of the population that wants to do meaningful and impactful things with their money.

“Investment markets have come so far in democratising and giving access to investors…. I’d hate to see it take a backward step and for impact investing to be viewed so narrowly that it excludes most investors.

“Second, for meaningful change to occur in the world and for us to meet the UN’s sustainable development goals, we need tens of billions of dollars of capital. So, excluding the deepest capital markets in the world from impact investing isn’t going to be great for helping [reach] those goals.”

squabbles plaguing the impact sector, investor demand was driving the activity while the United Nations and a global taskforce under the aegis of the G8 was also promoting impact investing.

For sticklers, The Economist said, investments should be described as “impact” only if they delivered both near-market levels of return and strict measurement of the non-financial impact – for example, of the carbon emissions saved by a renewable energy project.

But no matter how it’s defined, virtuous investing attracts big money. An industry group, the Global Sustainable Investment Alliance, says sustainable investment funds in 2020 managed US$35 trillion of assets, up from US$23 trillion in 2016.

Another group, the Global Impact Investing Network (GIIN), regularly surveys its members, most recently in 2020 with responses from 294 of

the world’s leading impact investors. Collectively, these investors manage US$404 billion of impact investing assets.

In the foreword to the survey, GIIN founder and chief executive Amit Bouri notes that global crises are not scaring impact investors away. And in answer to its critics, he says the industry is showing signs of “slowly coalescing” around a consistent set of measurements and management frameworks.

The survey also reveals that 88% of respondents reported meeting or exceeding their financial expectations, which Bouri says might mean a shift from the “increasingly outdated perception of the inherent trade-off between impact and financial performance”.

In terms of definition, GIIN likes the phrase coined by the Rockefellers in 2007: “doing good by doing well”. A

‘For meaningful change to occur in the world and for us to meet the UN’s sustainable development goals, we need tens of billions of dollars of capital’

Chris Di Leva

Making impact investing accessible

BY CHRIS DI LEVA (DIRECTOR, PORTFOLIO MANAGER)

In a former life, before I was a fund manager, I used to research other fund managers. When the research meetings came down to talking about Environmental, Social and Governance (ESG) considerations, the conversations would vary. Some absolutely believed in it and actively integrated it into portfolio decisions, some believed in it but were scared that integrating it too widely would be a breach of their fiduciary duty and some believed generating outperformance was hard enough without adding further restrictions to portfolios. Few had internal ESG resources, subscribed to external research or had exclusions lists that exceeded what was required by law. Today paints a different picture and largely for the better, as ESG integration in portfolios has become more mainstream and a key part of the investment process. However, at times it has felt like the discussion around ESG has been more about what isn’t in portfolios as opposed to what is. The rise of impact investing threatens to flip that on its head.

What is Impact investing?

The roots of impact investing started in private markets where investors provided capital to companies, aiming to generate strong incremental environmental or social outcomes alongside a financial return. The test of whether the investment was an impact investment or not hinged on whether the impact made was a result of that investment (and therefore would not have been made had it not been for the investment). This gives rise to some issues though:

1 Private markets are a very small part of the capital structure.

2 Listed companies account for around 30% of total emissions and often hold dominant market positions, meaning that if investors can influence their behaviour through voting and engagement, often large changes can be made. Further, company disclosure has markedly improved in recent years making it easier to track and hold companies accountable for their impact goals and carbon intensity.

3 There is a wider range of debt instruments available now such as Sustainability-Linked Bonds (SLBs) that link the quantum of their coupon payment to the borrower’s achievement of an explicit sustainability target. These bonds therefore clearly incentivise sustainability outcomes.

The wider range of instruments available has led to broader definitions of impact investing, such as Global Impact Investing Network’s (GIIN) definition: “Investments made with the intention to generate positive, measurable social and/or environmental impact alongside a financial return”.  It has also led to organisations such as the Responsible Investing Association Australasia (RIAA), certifying several listed equity funds as impact investing funds including the T. Rowe Price Global Impact Fund (which features in the Harbour Sustainable Impact Fund).

What do we mean when we say “Impact”

Given definitions of impact can be wide and varied, Impact Funds themselves are not homogenous.

The Harbour Sustainable Impact Fund has an asset allocation which, at the surface, might not look to dissimilar to a traditional balanced fund. The key difference, however, is that each investment is evaluated and only viewed as making impact if it strongly contributes to at least one of the 17 UN Sustainable Development Goals (SDGs). The SDGs have been designed as a prioritisation of goals to achieve peace and prosperity for people and the planet, now and into the future. A key to qualifying as ‘impact’ means being able to establish a clear link to contributing to at least one SDG.

Many private market-focussed impact funds can narrow a fund’s focus on a set of impact objectives, targeting specific areas such as climate or social housing outcomes. Accessing listed equity and debt markets means we do not face resource constraints and are explicit in aiming to deliver a positive contribution across a broad range of SDGs, as opposed to limiting the Fund’s scope to a specific number of targeted SDGs.

One of the aspects of impact investing that most practitioners agree on is avoiding harm while creating impact. One of the greatest challenges we face as humans and investors is to reduce our carbon footprint in order to help reduce global warming. Today the technology exists to measure the carbon footprint of investment portfolios. In our view, a great way to avoid harm is to ensure the Harbour Sustainable Impact Fund has no carbon footprint at all, offsetting the carbon generated by the Fund’s investments by helping fund projects which prevent carbon entering the atmosphere.

Measuring Impact

Measurement of whether a company applies “good” or “bad” ESG is highly subjective, evidenced by the lack of consistency of ESG scores across providers. While measuring the impact a company can come with challenges such as data availability, the assessment of whether a company is making an impact needs to be supported by a metric demonstrating impact – the output- which importantly provides a proof-point to combat greenwashing.

The output measure will vary by company speciality. For example, Sunrun is a leading US residential rooftop solar and storage provider. It provides households a renewable energy alternative and its battery solution offers customers back-up power during power outages. The way we measure Sunrun’s impact is by measuring the emissions mitigated through use of its products.

Finding solutions

The oil & gas industry is a good example of where we have seen a huge amount of change. Investors have shied away from the industry, resulting in a much higher cost of capital for these companies. Data from Goldman Sachs suggests traditional and deep-water oil CAPEX peaked in 2006. Overall, upstream oil and gas capital expenditure peaked in 2014, according to the International Energy Agency.

This widespread avoidance of fossil fuels will be to no avail, if capital is not channelled towards replacing these sources of energy with cleaner options. In that regard, divestment has not contributed to the solutions required. That is one of the gaps that impact investing aims to fill.

History teaches us that the greatest financial rewards accrue to companies that deliver highly valued solutions to challenges. The SDGs outline some of the greatest challenges facing humanity and we believe the companies that aim to address these issues will not just deliver environmental or social value, but also generate significant financial value. A

This content is not intended as financial advice. Harbour Asset Management Ltd is the issuer or Harbour Investment Funds. The Product Disclosure Statement is available at www.harbourasset.co.nz/

Walking the talk

Investment adviser Peter Lee holds his whole firm to high standards when it comes to ethical investment.

BY JENNI MCMANUS

Nobody who knows Peter Lee, the founder of boutique financial planning and advisory firm Ethical Investing NZ, would be surprised to learn that his office is furnished largely from recycled products.

Nor that his carpet tiles are made from recycled plastic and his boardroom table and chairs are second-hand.

For Lee, the winner of the Best Ethical Financial Adviser gong at this year’s Mindful Money awards, it’s all about walking the talk.

His team can all commute by public transport to their offices in Auckland’s

CBD – and his clients are encouraged to leave their cars at home and do the same.

“Sustainability isn’t just about the investments we recommend,” he says on the company’s website. “It also includes how Ethical Investing NZ acts as a firm.

“To be truly authentic means we must commit to, and follow, the same principles we apply to investments –as individuals and as a firm.”

Evidence required

Walking the talk applies also to fund managers, he says. If they make ethical

or sustainable claims about a product or company, Lee will be looking for evidence.

“Are they committed to sustainability? Are they a member of one of the two main sustainability business network groups? Or have they just got a token fund sitting there and basically as a business they look like any other fund manager?

“Looking behind the scenes, and having clients do that, is the point. We find it hard at times to try to find information from the fund managers, so we know it’s going to be doubly difficult for potential investors to do it.”

Lee set up Ethical Investing NZ in 2014 after a career which ran the whole gamut of financial and corporate life. His CV includes Guardian Trust, OnePath, Fidelity Life, the Sustainable Business Network and, just before setting up shop on his own, a senior manager’s role at the ANZ bank.

Along the way, from 2010-2012, Lee was chief executive of the Institute of Financial Advisers – the body which later morphed into Financial Advice New Zealand.

He loved that job, he says.

“Of all my corporate roles, that would have been my favourite. You got to mix with a whole lot of really smart and professional people.

“I’d already known a lot of financial advisers from my Guardian Trust and Fidelity Life days, but this was taking it to a whole new level.

“When you’re working with the very best people, it’s very inspiring.”

Nevertheless, when he decided to strike out on his own, Lee says he had no clients and none of the sort of contacts one might need to set up a business.

“I’d been working at the bank and decided, at the age of 56, if I was ever going to be an adviser, now was the time.”

Making a difference

Lee says he was driven by the desire to make a difference – to make the world a better place by using the skills he’d built up over 25 years in the financial services sector.

At university he’d studied commerce but also trained as a scientist (initially he’d wanted to be meteorologist). For 30 years, his passion has been working as a volunteer on a community conservation project on Tiritiri Matangi, a small island in the Hauraki Gulf.

Lee has been chairperson of the group twice and is currently treasurer. It gives him a lot of satisfaction.

“I think it’s an innate human desire to do something that you lose yourself in, something that’s bigger than you. You can come back year after year and see the difference.”

Ethical Investing NZ now has a team of seven. It’s a fee-based, independent advisory firm which helps clients develop and build their portfolios.

That side of the business is bogstandard for the industry, Lee says.

The other side is the strong sustainability lens used to tailor portfolios to meet individual client needs.

“We call it ethical investing, because virtually every client out there calls it that. At heart, it’s all about your personal

sense of ethics that seems to drive all behaviour.”

Last year the firm tore down its investment portfolios and rebuilt them with an increased and more proactive focus on sustainability.

“We’d been doing a lot of work using index-type funds and the ethical ones screened things out, but we wanted to work with clients who said they actively wanted to invest in [particular] funds; so we put together some portfolios for that,” Lee says.

Willing to pay

Lee says he generally doesn’t find clients baulk at paying fees for financial advice.

“We’ve generally found that if you get professionals, they’re usually time poor, have conflict situations and they’re used to paying fees. In that respect, they’re outsourcing a problem and they’re wanting the problem to go away. They’re happy to pay fees.

“The other ones generally are those with a reasonable amount of money, particularly those who have got it through an inheritance, and for them wherever the money is invested, it’s about kaitiaki (stewardship). Who can it benefit along the way, and how they can make the money last? They are generally willing to pay [fees], because for them it’s important that the money be preserved for the right things.”

Impact investing

Over the past year, Lee has been looking at impact investing, after becoming aware of “two or three funds we might be comfortable doing”.

“As a business, we really want to investigate it, because a reasonable percentage of our clients want to do that sort of thing and have the money to do it in a way that doesn’t compromise the funding of their lifestyle.”

By his definition, impact investing is different from simply putting an ESG (Environmental, Social and Governance) screen across a fund or investment. If you’re doing ESG, he says, “Normally, getting a good return is as important as where your money is invested, whether you want to avoid things or favour things.

“Impact is generally focusing on one area - for example, social housing or climate change. It’s very narrowly focused and the people who’re looking for it probably have the primary driver of wanting to make a difference and hopefully make some money along the way.

“So, it gets inverted, from ‘we want to make some money and do good’ to ‘we

want to do good and hopefully get a good return but if we lose a bit, that’s fine, because ultimately we want to make an impact on some part of society’”.

Impact investing is very much in its infancy in New Zealand, however, and Lee says his firm would need to go through its normal due diligence processes before putting clients into any of these funds.

Lee cites as interesting a couple of impact funds developed by New Ground Capital, but says it was “a bit early” for his clients.

“Now they’re doing a second tranche focused on social housing which we’re going to look at for some clients.”

Illiquidity

Along with most other advisers, the other problem Lee raises with impact funds is their illiquidity - meaning they’re probably not suitable for retail investors.

“Our problem in New Zealand is that we like having products that retail investors can pull out of as well as invest into, but with impact investing, until recently, that’s been quite difficult. Lee says.

“But [impact] suits clients who have enough money to meet their lifestyle needs. Essentially, it’s a legacy investment. If they don’t need to touch it in their lifetime, how well or badly it does is not going to impact on their ability to achieve their own goals.”

And, Lee says, investor demand for sustainable investing is also changing.

“The big change I’ve noticed in the past two or three years is that the focus of clients has gone away from avoiding stuff.

“Investors now expect you to rule out tobacco and gambling and so on. They don’t even ask about it anymore. It’s a given. But what they’re increasingly saying is that they positively want to make a difference.

“So, we ask clients about whether there are areas where they want to make a positive difference and not just areas they want to screen.” A

‘Sustainability isn’t just about the investments we recommend. It also includes how [we] act as a firm’

Responsible investing is the bedrock of engaged philanthropy

As Aotearoa New Zealand’s largest non-Government philanthropy entity by volume, Perpetual Guardian’s responsible investment philosophy and strategy are informed by its stewardship of charitable trusts; it has $650 million in charitable and philanthropic funds under management. On behalf of its generous clients, Perpetual Guardian has stewarded the distribution of $288m in the last six years, or more than $41.2 million in philanthropic grants per year on average.

The Perpetual Guardian Group’s inaugural philanthropy report, ‘Engaged Philanthropy 2017-2022’, provides a detailed overview of giving in this period and indicates the importance of a strategic, responsible investment approach which takes a long-term view:

• $110 million was stewarded to the social services sector by Perpetual Guardian (representing 50 percent of all funds given).

• An average of $12.7 million p.a. went to the health and well-being sector, including medical research (30 percent).

• $10 million went to education scholarships (5 percent).

• The remaining 25 percent went (mainly) to the environment, animals, and the arts, heritage and culture sector.

• Between 3,000 and 5,000 grants are paid annually, with an average grant value of $9,000.

While the ultimate beneficiaries of Perpetual Guardian’s investment approach may be generally different than for other large-scale investors such as major financial institutions, its process is nonetheless aligned with global best practice and mindful of the demands and concerns of the investor base.

The rise of ESG as a cornerstone of responsible investing has been part of its response to these investor and broader consumer demands. Its ESG process incorporates environmental (carbon emissions, energy use, waste, environmental policies and risk management), social (health and safety, modern slavery, positive human and animal rights, stakeholder relations, and diversity), and governance principles (board composition, executive remuneration and incentives, ethics, anticompetitive practices, and promotion of fair and transparent workplaces).

Its commitment is that Perpetual Guardian, alongside investment partner Openly Investing Limited, makes and will adopt all reasonable endeavours to ensure its Conservative ESG Fund, Balanced ESG Fund, and Growth ESG Fund are compliant with ESG principles and considers these factors alongside financial factors in the investment decision-making process.

Tim Chesterfield, Chief Investment Officer of Openly Investing Limited (part of the Perpetual Guardian Group), says the focus of the approach to ESG was to provide easy access to national and global investment markets. “We do this by adopting a well-researched approach to local shares selection, with exposure to global shares provided through the use of geographic and sector specific Exchange Traded Funds (ETFs). Typically, large global markets are efficient and generally fairly priced, which leaves little room to consistently enhance returns through active management. However, the use of ETFs enables us to be nimble in the allocation of capital to opportunities in geographies and sectors without taking stock-specific risk.

“Our high-conviction approach to local markets is complemented by a big building block approach to global markets, where we can access global exposures through ETFs at highly competitive prices. We do not operate a high stock or fund turn-over approach, preferring instead to adopt a long-term outlook with a focus on quality. This means we can keep our trading costs down and concentrate on providing quality investments with consistent returns, rather than chasing the latest trend or fashion.

“We continue to see significant growth in this approach to investing, with demand for ESG considerations forming an integral part of the decisionmaking process. Business-to-business relationships are also demanding high ethical standards, and we are observing charitable trusts driving ESG mandates, with many regarding ‘investing with a conscience’ as a must-have when aligning corporate, trustee and personal values.

“Often the terms ESG and Socially Responsible Investing (SRI) are used interchangeably; however, there are important distinctions between the two. As part of our investment process, we overlay both strategies when narrowing down our investment universe into manageable opportunities. This will result in us removing any exposures to undesirable industries but also ensuring that the companies in which we invest have a clearly defined strategy that is demonstrably addressing their ESG credentials and footprint.

“This strategy is symbiotic in nature to our desire to invest in companies that we consider to be of the highest quality. This approach is embedded in our philosophy and belief that over any given cycle, companies that invest capital efficiently and in a responsible way will lower the risk of missteps whilst simultaneously lowering the risk of ownership. This is particularly important in times of economic and geopolitical stress in which we find ourselves in 2022. Our natural bias is to allocate capital in such a way as to preserve capital in periods where the investment outlook is uncertain, while continuing to provide long-term capital and income growth through investment in companies that enjoy favourable end market dynamics. This approach is of particular importance to those organisations engaged in philanthropic giving; their work does not stop simply because investment markets are volatile.

“Both ESG and SRI investment strategies are decades old but more relevant today than at any point in the past. Increasingly, investors are focused on the impact of the companies in which they invest on the environment as a whole. In part this has been a gradual genesis over the years; however, it has accelerated with the younger generations looking to have their money invested in a way that mitigates the harms of old and provides for their future. This is not a fad and we do not simply pay this lip service. It is embedded in our process.” A

BECAUSE GIVING BACK

justfeelsright

Take a look at our Engaged Philanthropy report to see how we’ve given back over the last 6 years.

DOWNLOAD OR VIEW THE REPORT ON OUR WEBSITE NOW.

WHEN YOU give

Ethical KiwiSaver leaves others in its wake

Ethical KiwiSaver provider

Pathfinder has marked its third anniversary by delivering threeyear financial returns that are number one across all funds; Growth, Balanced and Conservative (Morningstar data to 31 July 2022*).

The award-winning, boutique investment firm committed to building a better world has delivered returns of 11.39% per annum over the three-year period in its Growth fund, streaks ahead of the average of 5.01%. Its Balanced and Conservative funds returned two and two and a half times the New Zealand average, respectively.*

This stellar financial performance is a welcome piece of good news for Pathfinder investors considering the state of the financial markets recently. And it’s a huge achievement for the Pathfinder team, who are justifiably proud of the results. “This has been a really challenging period for investing,” says Pathfinder co-founder & CIO Paul Brownsey. “Our industry has battled the far-reaching effects of the pandemic, historically low interest rates, the worst six- month period for bonds in history, high inflation and technical recessions in some major economies, just for starters. To eclipse 11% per annum for three years for our Growth fund, three percent ahead of our nearest competitor, is phenomenal in these conditions.”

“Another benefit is that we take a long-term view, buying companies that perform over the long run, meaning we don’t get caught out with fads,” says Brownsey. “Most importantly, Pathfinder embraces a highly ethical approach to investment. We not only avoid companies and sectors harming society and the environment, but also invest

with the intention of generating as much positive benefit as possible. Examples include investments at the forefront of positive societal change, such as renewable energy, microfinance and a biodegradable replacement for plastics.”

It's a strategy that has met with both criticism and skepticism, says cofounder & CEO John Berry. “As anyone who’s followed this path knows, it can be challenging convincing people that ethical investments

There are a few key things that set Pathfinder which launched its KiwiSaver product in 2019 from others, Brownsey continues.

“One is that we’re truly active managers, allowing us to modify the risks apart we take on behalf of our investors. We don’t feel constrained to match a benchmark like a passive manager. For instance we have, for a long time, not invested in long-dated bonds. This approach helped us avoid a big sell-off in those securities this year.

are capable of generating great returns. But we’ve proven you can. In fact, we’ve generated number one returns.”

Berry says Pathfinder is experiencing growing demand from those looking to live more consciously – which includes how they invest. And Pathfinder has a track record of making better choices for the environment and for communities.

“We’ve been investing ethically since before it was cool,” Berry continues.

“We have strong roots in this space, having launched our first ethical fund –the Global Water Fund – back in 2010. A decade ago we were told ethical investing was for tree-hugging greenies.

A fund focusing on investing with the world’s water crisis in mind was seen as fringe.”

Walking the talk, Pathfinder’s KiwiSaver operates on a social enterprise model with the firm donating 20% of its KiwiSaver management fees annually to Kiwi charities. This has provided $396,950 worth of additional funding to charities over the last three years, rising from $15,000 in year one up to $280,000 in 2022.

Business is much more than short term profits, says Berry. “Businesses should embed ‘good’ into their DNA to help solve environmental and social issues. They should think long term and support wellbeing and prosperity in society.

“Pathfinder plans to keep proving that ethical investments, with strong financial returns, can help build a better future.” A

For full three-year comparative results please see https://bit.ly/3w8XnSz

For more information or to arrange an interview with John Berry and/or Paul Brownsey please contact:

Richards Creative Director – Pathfinder lily@pathfinder.kiwi 027 585 5541

*Based on Morningstar data https://bit.ly/3w8XnSz comparison for each KiwiSaver fund reported in the same Morningstar category, since inception (July 2019) till July 31st 2022. Find more about return data (annualised before tax and after fees) and benchmark for each fund on our website www.pathfinder.kiwi. Future performance is not guaranteed. Check out the risks of investing from our Product Disclosure Statement (PDS) available at www.pathfinder.kiwi. Pathfinder Asset Management Limited is the issuer of the Pathfinder KiwiSaver Plan.

Creating a brighter, more sustainable future

Social licence is key

Maintaining a social licence is one of the key elements for companies to be able to operate, and a strong risk management tool for investors. High-profile disasters, such as the destruction of the 40,000-year-old Aboriginal heritage site Juukan, can almost immediately erase a company’s social licence; smaller issues, such as abhorrent comments by executives, can have an impact too.

Losing social licence can, at its worst, lead to a company’s collapse and significant financial loss for its shareholders. Social media, mining, and chemical companies have all stumbled through the court of investor verdicts in the last couple of years.

To build social licence, companies must hold themselves accountable to society’s expectations of tomorrow. This means continuously re-evaluating supply chains, environmental impact, and labour practices with a critical eye. The reputational damage borne from problematic activities can negatively impact the investors’ value of the holding, while the misalignment of values reduces the tolerance of consumers.

Investors have awoken

Investors are waking up to competing crises negatively affecting both their investment performance and their everyday life. According to the FMA’s research, 68% of New Zealanders are interested in ethical investment.

These investors are letting companies and investment managers know this in two ways: taking a hands-on approach to investing directly into capital markets, and taking a keener interest in the decisions made by their provider of products including KiwiSaver.

Individual retail investors are also driving an increase in shareholder proposals that push for ethical change. They have been enabled through both financial innovation – such as shareholder activism platforms – as well as the ability in the US for any shareholder who has held $25,000 in stock for at least a year to raise a proposal. This has seen a rise in overall shareholder proposals. At Kiwi Wealth, we supported 33% more shareholder proposals aligned with socially responsibly investment principles than the same period of last year.

The outcomes of these individual proposals include simple majority voting, decarbonisation targets, the amendment of executive compensation principles and pay equity reports, and disclosures on political spending.

We’re taking action

At Kiwi Wealth, we are closing the distance between the day-to-day actions of our clients and their expectations of us. Each decision is sharply focused by customer feedback and a philosophy of guardianship – both of your wealth and also our children’s and grandchildren’s futures.

As kaitiaki (guardians) of wealth, we value the trust you place in our ability to make responsible investment decisions and duties that are not to be delegated. Our active approach means we assess company structure, the independence of boards, whether controlling owners are also executives, and whether the business operates in a way that has the potential to devalue the business.

Active investments have the power to shape a prosperous, sustainable future. We seek to engage with companies where harm is reversible and use exclusion as a last resort for companies that are resistant to change.

In the past year, through active ownership at more than 20 listed companies, and incremental improvements in the boardrooms of more than 1,200 companies, we believe we are driving positive structural change.

Our first Stewardship Report is available now on our website: www.kiwiwealth. co.nz/stewardship22 which details the depth of Kiwi Wealth’s engagement in responsible investment outcomes. A

At Kiwi Wealth, we believe that responsible investing and active engagement will deliver sustainable investment products that enable investors to have a brighter financial future. For more information on our responsible investment approach visit www.kiwiwealth.co.nz/ri

BE RESPONSIBLE

with Kiwi Wealth’s investment approach.

Business overheads insurance: a guide to the fine print

In a handy guide for advisers, Graeme Lindsay lays out exactly how different insurers define business overhead expenses.

Over the last two weeks, I’ve undertaken a review of the various Business Overhead Expenses (BOE) products on the market - and found some interesting differences.

The significant differences are in the total disablement definition: whether there’s an option for a partial disablement benefit, and, if so, what is the definition of partial disablement and what’s the basis for a claim.

To ensure I was comparing apples with apples, I have restricted the comparison

to business overheads covers and excluded business income protection products.

There are five insurers offering BOE products: Asteron, Cigna, Fidelity, Medical Assurance and Resolution.

The Resolution offers both the ex-AMP Lifetrack product and the exAXA product; both are available only to existing policyholders or people with direct connection to an existing policyholder.

Asteron

We consider the insured person to be totally disabled if they cannot perform either of:

• their usual occupation for more than 10 hours a week

• one or more of the important income-producing duties of their usual occupation

The insured person must not be working for more than 10 incomeproducing hours a week in any gainful occupation.

We will also consider the insured person to be totally disabled if they have suffered a sickness or injury while engaged full-time in normal domestic duties in their own home for more than 12 months, [or] they are continuously unable to perform at least three of the normal domestic duties solely because of the sickness or injury.

‘As with all products in the market, each product has its strengths and weaknesses’

Total disablement definitions

Let’s take a look at how the different insurers define total disablement.

INSURANCE

Cigna

The life assured is totally disabled if an illness or injury causes all the following to apply:

• The life assured is unable to continuously perform their pre-disability occupation

• The life assured isn’t working in their pre-disability occupation or any other gainful occupation

We will not consider the life assured as working in their pre-disability occupation if they’re doing minor duties for up to 5 hours a week that are necessary to continue the business. Examples of minor duties include signing documents and answering emails or phone calls.

The significant differences

Fidelity

The insured person is disabled if as a direct result of sickness or injury they are… unable to:

• perform at least one important income-producing duty, or

• engage in their own occupation for more than 10 hours per week; and not engaging in any occupation other than up to 10 hours per week in their own occupation Medical Assurance

To be considered totally disabled, the insured person must:

• be unable to work for more than seven hours a week in their insured occupation due solely to sickness or injury

• not be doing any other paid work

Resolution Life (Lifetrack)

The person insured is totally disabled if:

• they are so ill or injured that they can’t do their usual occupation; and

• they do not do any remunerative work

Resolution Life (Risk Protection Plan)

Total disability means that…

• The life insured is not engaged in his or her usual profession, business or occupation for more than 10 hours per week

• The life insured is not engaged in any other profession, business or occupation

The definitions for Cigna, Fidelity, Medical Insurance and both Resolution plans also stipulated that the insured person must be under the regular and ongoing care of a medical practitioner.

In terms of how total disablement is defined, the only significant differences are:

1 Asteron has the “normal domestic duties” extension which covers the situation of an insured ceasing to be employed in income-producing work.

2 Medical Assurance stipulates a person must not be working in their insured position more than seven hours a week, rather than the 10 hours defined by the others.

3 Cigna clearly states that they would allow “minor duties up to five hours per week” to not disallow the 10 hours limit.

4 Resolution (Lifetrack) uses the imprecise “they can’t do their usual occupation” rather than the more precise wordings of the other products.

My view is that the Asteron and Cigna differences are meaningful. The MAS’ seven hours limit is unlikely to be of consequence. And the Resolution (Lifetrack) wording has the potential to cause problems at claim time; I would not recommend it.

Maximum total disablement benefit

The length of time a total disablement benefit can be paid is as follows -

• Asteron: the monthly benefit can be paid a maximum of 12 times over two years

• Cigna: one- or two-year benefit periods

• Fidelity: 100% of the monthly benefit for the first 12 months of claim, 50% for the second 12 months

• Medical Assurance: 12 months

• Resolution Life (Lifetrack): maximum of 12 times the monthly benefit, but can be paid over 18 months

• Resolution Life (Risk Protection Plan): 26 or 52 weeks but if the maximum benefit has not been paid in the prescribed benefit

period, benefits can continue until the maximum benefit is reached.

Clearly, the Cigna benefit period of two years is the best offer. There’s not much difference between the others, but obviously premium could be an interesting factor here.

Partial Disablement

Cigna, Medical Assurance and Resolution (Lifetrack) do not provide optional cover for partial disablement. Other than stipulating that the insured must be under the continued care of a medical professional, the other insurers’ definitions are as follows:

Asteron

• the insured person is working or are able to work in their usual occupation for more than 10 hours per week

• the insured person is working (or are only able to work) in their usual occupation in a reduced capacity, or for fewer hours than they worked before becoming disabled

• their partial disability is solely due to the same injury or sickness which caused them to be previously totally disabled

• their share of the business income in the applicable month is less than their pre-disability business income.

Fidelity

The insured person is partially disabled, if as a direct result of sickness or injury, they are working (or could work), but because of continuing sickness or injury their share of business income is less than their share of pre-disability business income.

Resolution Life (Risk Protection Plan)

Partial disability means where, immediately following a period of at least two weeks of total disability, the life insured returns to work for more than 10 hours per week but, solely due to the continuation of the disability beyond the qualifying period, is not capable (based on medical evidence) of working more than the lesser of: 30 hours per week; or 75% of the average hours worked per week in the six months prior to suffering a total disability.

1 Asteron requires the insured to be working for fewer hours or in a reduced capacity and earning less than they were before the disability commenced.

2 Fidelity requires the insured’s medical adviser to advise that the insured needs to reduce

Key differences

The only significant differences for partial disability are:

their hours and they are earning less than they were before the disability commenced.

3 The Resolution (RPP) definition is strictly based on “hours worked” – that is, working more than 10 hours but less than 30 hours (or 75% of the hours worked prior).

Partial disablement calculation

My view of these differences is that the Asteron definition that has a “reduced capacity” option is the best. Fidelity doesn’t have the “capacity” leg but does have a “lost income” option. The Resolution (RPP) wording is the least attractive, being totally based on “hours worked”, and I would not recommend it.

When looking at how the benefits for partial disablement are calculated (see sidebar), the Asteron and Fidelity benefits are identical. Both base the benefit on the insured’s share of business ownership rather than productivity.

Resolution Life’s is deficient in that “hours worked” by the insured is not

necessarily related to the business’ income (ie turnover) and thus its ability to meet its overheads.

On balance, I prefer the Asteron and Fidelity approach over the Resolution (RPP) “hours worked” approach.

In summary, as with all products in the market, each product has its strengths and weaknesses. The adviser’s role

is to determine the best fit for each client considering both wordings and premiums. A

Graeme Lindsay is the owner of research house Strategy Financial .

‘The adviser’s role is to determine the best fit for each client considering both wordings and premiums’

One heck of an opportunity in

Russell Hutchison dishes out a dose of optimism: there’s room for the advice sector to double, if not triple, in size, so get out there and grab your share.

After three bruising years, the life insurance sector is not producing anything like the levels of new business it once was.

While some of that business may not have been the picture of excellent personalised advice that we want to see, there is plainly a huge gap in provisionand that gap has got bigger.

A return to growth is due. Let’s make that a priority for 2023.

There are some obstacles, and they are hard to work on, but, unlike many of the challenges of the last couple of years, these challenges are within our control. That should give us cause for optimism. Advisers are the bloodied champions of the channels: although production is down across the board, advisers have proven to be the most resilient of all channels.

Unlike the others, they are best positioned to grow rapidly. Provided the new conduct of financial institutions law does not clobber them further, advisers could lead the recovery in new business levels.

How big is that gap? There have been many attempts to estimate it.

The Financial Services Council’s work of 2011, in conjunction with academics at Massey University, was the leading example in terms of the robustness of method.

But set aside, even, the issue of those with some cover but not quite enough - in other words, underinsurance - and consider just those people who have no insurance whatsoever.

If they all had as much as just the market average, which is well below what is ‘ideal’, the protection gap costs New Zealanders more than $2.5 billion a year in claims that would have been paid.

The sum of claims foregone by the uninsured exceeds $600million annually for life cover, more than $695 million annually for trauma cover, and about $1.45 billion for income/mortgage cover.

One heck of a large opportunity

There are some significant measurement challenges with all surveys of the protection gap, but we are confident that this number represents a low end of the estimate range.

There is, in effect, room for the sector to be at least double, if not triple, its current size. That is one heck of a large opportunity for advisers. There is plenty of insurance business to be done!

So why aren’t we better at reaching these people? Sure, it is not just about advisers. About 10-15% of the market is probably group business - and about the same again is probably direct (depending a lot on how you define ‘direct’).

Take a dose of optimism

Assuming you have sorted your full licence, this little dose of optimism is for you.

If you haven’t got your full license application in yet, then please, stop reading and go do that! Having got your full licence, there are two big reasons why you should feel optimistic about the next few years:

1 There are lots of people that need your help

2 Reaching them is mainly a task within your control

The impact of the protection gap is loss: it is a story told in homes that have to be sold, kids moved from their schools and their friends, cramped accommodation (moving back in with Mum and Dad while a parent recovers from a disability) and the long tail of problems arising from that disruption.

Insurance sold, advised, or referred from banks may make up about 15% to 20% these days.

The rest is advised. That’s the biggest and most robust segment.

Although there should be growth in the other segments, too, as the sector returns to growth, I want to argue that you can go and get your share. And provided you have your full license, the sooner, the better.

In addition to the protection gap, there’s an advice gap. This is not your fault, but if you believe in advice, it is definitely an area that needs your attention.

The problem is that people aren’t very good at taking advice. Marketing commentator Seth Godin wrote recently about this problem: why advice is not taken.

He wonders why more people don’t take the advice that’s on offer – instead they ignore it, deny there’s a problem, or flail around with their own DIY efforts.

In essence, they try all the things that don’t work first, before finally giving up and doing the right thing.

Why people resist advice

To summarise Godin’s excellent post (and you should check it out yourself; simply google Seth Godin), the reasons people do not take advice are roughly:

1 They don’t really trust that it is valid or good

2 They think their case is ‘special’

3 They just want reassurance –not to actually change anything

On a personal note, I have learned –slowly, I admit – that there are plenty of things I am not very good at, and many things are more complicated than they first appear.

Even fairly humble home-maintenance tasks, such as plastering and painting, are usually best done by someone other than me. Even in the age of excellent YouTube tutorials.

Most people do not yet accept that they need financial advice; they think it can be obtained free online; they think they are doing as best they can right now.

This is the real problem: taking lots of people on a journey from denying the need for advice to accepting advice and taking action.

The roadblocks are usually procrastination, fear, self-deception, or just being a bit too cheap: penny-wise yet pound-foolish.

These must be the targets of our creativity, and marketing. Our job is to convince people that their lives would be better off if they spent a bit of time and money – often not very much – to work on improving their financial management generally and their insurance programmes specifically. A

Russell Hutchinson is director of Chatswood Consulting and Quality Product Research, which operates Quotemonster.

‘Two big reasons why you should feel optimistic about the next few years:

1) There are lots of people that need your help; 2) Reaching them is a task mainly within your control’

‘There is, in effect, room for the sector to be at least double, if not triple, its current size. That is one heck of a large opportunity for advisers’

Long-term value over price – striking the balance

Partners Life managing director Naomi Ballantyne discusses the important questions advisers need to be asking to get the right outcome at claim time.

BY NAOMI BALLANTYNE

Buying on first year premiums instead of on long-term insurer value can be fraught with danger” say Naomi Ballantyne, Managing Director of Partners Life.

And in current times, let’s be honest, almost every client is price sensitive. Kiwis are feeling the pinch in their back pockets from every which way, and there is no sign of this easing anytime soon”.

So how do you tackle the tricky conversation about striking the balance between weighing up long-term value against your client’s dwindling budget?

Unlike yearly renewable insurance policies, like car insurance, life and health insurance policies should be thought of as a long-term relationship between the client and insurer.

As you know, the application and medical underwriting process are important, and as soon as something happens to your client’s health it becomes difficult, sometimes impossible, to move from one insurer to another.

So it’s important to do this once and do it right for your client for the long-term!

Affordability is important, as the recommended insurance package needs to meet your client’s budget, however matching your client to an insurance company that is going to best meet your client’s needs over the long-term is arguably more crucial.

It’s a discussion that’s been on the top of some Advisers minds lately, so we took the time to do some research to understand how Advisers are approaching this discussion with their clients.

An Adviser we spoke to said, when recommending an insurance company, narrowing it down to focus on one important question makes it easier.

And that one question is – “Who do I trust the most to deliver the right outcome for my client at claim time? I want to feel assured that the insurer I recommend offers top quality products that fit to my client’s individual requirements, and that they have benefits that have been thoughtfully designed around claim-ability”.

After all, an insurers track record around paying claims is the very proof point of how good the insurers products are.

Knowing that at the time when your client is potentially navigating a life changing event, that their insurer will not only assess and process their claim promptly and thoroughly, but will also

apply a fair and reasonable approach, is a very important factor.

As mentioned earlier, a client’s budget needs to be taken into consideration. However, it’s just as important when discussing affordability to talk about pricing impacts over the long-term.

Insurers review and change their underlying pricing based on their emerging claims experience and because insurance is a competitive market, pricing trends tend to align across companies.

Looking back at research over the past 10 years shows us that insurers tend to adjust their pricing within months of each other. This indicates that pricing can move around a lot - and the cheapest insurer on any given day, has the potential to become the most expensive insurer on another day.

So buying on price competitiveness on day one instead of insurer value could well be a mistake when it comes to claim time.

When insurers review their pricing, increases are often a reflection of the share of the premium being paid out in claims.

Typically, this can be 50-60% of a premium. Some products can be even more than this, such as medical which can be higher than 60%.

The other components include commission payments, expenses such as business operating costs, and the smallest part – profitability for the insurer.

Making sure that insurers are charging a fair price to clients is of course important, but so is the insurers ability to maintain profitability and therefore be sustainable over the long-term.

Having certainty about an insurers approach to pricing should also play a part when considering who you recommend to your clients. Incorrect pricing means that undercharging for certain pockets – certain demographics or even certain products lines – can occur, and as an insurer starts to get more business through these product lines, the claim costs will start to increase creating a ‘claims spiral’ - which means overtime, pricing will have to be adjusted and can lead to unpredictable pricing over the long-term.

Other things that impact pricing, such as external environmental factors, will impact the whole industry and therefore all insurers.

Nonetheless, it’s the approach of the insurer around treating their clients fairly,

along with the insurers maturity to analyse and identify ‘pockets’ of claims where the experience is significantly higher and adjusting pricing where this occurs – rather than a ‘one size fits all’ approach - that plays an important part.

We’ve seen Australia experience a negative claims experience with their disability income book over the past ten years and no-one wants to see this happen in New Zealand.

Another factor to discuss is discounting.

Some insurers offer premium discounts for loyal clients – meaning their pricing competitiveness changes for the better the longer a client remains with them. This can help to offset premium increases that occur at the policy anniversary.

Other insurers discount first year premiums in an attempt to win new clients – this can lead to a temporary short term premium advantage at the time of issue, however in the long run, the client could end up experiencing substantial increases as the years go by.

Then there are some insurers who may offer discounts that are not guaranteed and can be removed at any time –meaning they cannot be relied upon into the future.

Flexibility is in your client’s policy is also important. As we get older premiums typically increase, however a client’s insurance requirements can also change over time – perhaps the mortgage has been paid off and the kids have left home.

As your client’s family and debt profile changes, it is common for their insurance needs to reduce. Therefore, it’s important that the insurer you recommend has great options for changing or converting your client’s policies over time to match their changing needs.

So, as you can see, first year premium comparisons are not a reflection of pricing competitiveness certainty in the long-term.

Which is why the proven value an insurer provides to its clients at claims time should be the most important criteria for you, as the Adviser, when talking to your client about the overall value proposition; it’s important your client doesn’t miss out on the long-term value of an insurer for price differences today. A

Naomi Ballantyne is the founder and managing director of Partners Life.

Independent vs in-house: why are we still competing?

David van Schaardenburg looks at vertical integration dead in other developed countries but alive and kicking in New Zealand –and what independent advisers can do about it.

This column may be old news to many independent financial advisers, but nevertheless it’s an issue worth reviewing to see what options or solutions exist to resolve it.

What am I talking about? Competition for clients.

In particular, competition for clients between 1) the increasing number of vertically-integrated funds-management firms and 2) independent financial advisers.

I’ve got many professional friends and former colleagues working at verticallyintegrated firms in so-called ‘advice’ roles.

None will appreciate a focus on the constraints on the investment recommendations they can give clientsbut it’s time we had a decent debate on the issue.

A uniquely Kiwi problem

This competition seems to be a uniquely New Zealand problem. Across the Tasman, and in other developed markets, regulations or market pressures have forced funds-management firms to be solely managers of portfolios - and for financial advisers to focus on providing individualised advice, client by client.

Hence, if you’re seeking personalised financial advice, say in Australia, should you call ABC Funds Management seeking financial advice they’ll steer you down the road to talk first with a local, licensed, financial-advice firm.

Do the same exercise in New Zealand and increasingly you’ll find yourself speaking to an in-house ‘adviser’.

I put speech marks around the word ‘adviser’ as while in-house advisers are licensed, and for the most part technically wellqualified, their advice is usually limited to investing in their own funds. Pretty limited!

More than ever, New Zealand fund managers are building their own ‘advice’ teams, either by way of acquisition, adding new advice offices, or simply continuing to add to the number of ‘advisers’ in their in-house private-wealth teams (numerous Auckland-based funds-management firms).

Sticky business

Having formerly managed the development of an in-house advice team, the business logic is pretty familiar to me.

Growth in in-house advice-team funds under administration (FUA) not only equates to growth in FUA for their fundsmanagement arm, most importantly it’s sticky business.

An independent adviser using a ‘best of breed’ approach will allocate a portion of a client’s portfolio to a well-performing fund manager, but this sum is always ‘on notice’ and may be redeemed if the fund manager doesn’t perform to expectation or undergoes a negative personnel or corporate event.

In contrast, the portfolio recommended by an in-house adviser employed at a funds-management firm is inevitably fully or substantially comprised of inhouse funds solutions.

At a future point in time, should a fund manager not be delivering, the independent adviser will be looking for potential replacement - and may effect termination of a fund manager in the best interests of the client.

In contrast, the in-house adviser is motivated to retain the client. Even if their investment arm is not doing a particularly good job.

Conflict of interest

This clear conflict of interest is why in-house advice functions in fundsmanagement firms have been competed or regulated out of existence in other developed market, but not yet in Aotearoa.

Many of the funds-management firms who have built in-house ‘advice’ teams owe their existence in their early

years - or at least a decent chunk of their revenues - to the support provided by independent financial advisers placing clients with them.

So it’s rather galling to see those same fund firms increasingly competing with their external adviser supporters.

In addition to the ‘client retention’ driver, the substantial and projected further growth in New Zealand household savings held via fund solutions, principally KiwiSaver (growth of 787%, or $72.4 billion in the 10 years to 2021), means an in-house ‘advice’ function can be potentially very profitable for a fund manager.

Growth in FUA for in-house advice teams can come through new client signings, client-base acquisitions from retiring independent advisers, higher client-retention rates, or the regular drift of the fund manager’s clients - possibly with a nudge - away from an external adviser to the cosy embrace of an inhouse one.

This latter, insidious trend seems to be fair game, often without compensation, in the relatively laissez-faire competition for clients between in-house and independent advisers.

Not in the clients’ best interests

Is this paradigm in the best interests of the investing public – interests our regulators appear keen to protect? No.

Unlike independent advisers, inhouse financial advisers are not free of investment-recommendation conflict. This means most clients of in-house advisers are likely to be receiving lessthan-top-quality investment solutions.

Not that fund managers with in-house advisers can’t do a good job, and not that that some independent advisers won’t have weaknesses, but on balance a ‘best of breed’ solution should win out.

This is increasingly relevant, as many New Zealand-based fund managers also manage global-securities portfolios in addition to the domestic-securities portfolios they’ve managed for a considerable period.

In doing so, they move from competing to be the best amongst the relatively small set of New Zealand-based asset managers to competing with a wide range of funds-management groups with far larger research resources and globalasset management experience.

Fair to say, I struggle to believe an Auckland-based firm with five to ten staff members allocated to global-portfolio

management can offer a superior investment solution relative to global giants such as Capital Management or Wellington Management. But their in-house private-wealth advisers will tell you otherwise.

Redraw the landscape

So if our regulators are reluctant to put up a ‘WARNING!’ sign – “Using an in-house adviser may not be best for your future returns” - how can the independent-adviser community start to redraw the landscape in the competition for advised clients?

First, ensure all adviser/fund-manager agreements have protective/punitive clauses with respect to the marketing to, and possible transfer of, mutual clients.

Second, avoid working with firms which compete with you. There are plenty of quality funds-management firms out there which focus on what they do best, especially in the global arena.

Third, make it clear to current and prospective clients that independence is important - as is a lack of.

Fourth, it’s time the advisers industry body (FANZ) picked this issue up, both in an educative sense and by lobbying regulators for a distinction for consumers between in-house (tied) advisers and independent ones. I didn’t see any in-house private-wealth advisers at the recent FANZ conference. A

CEO of the Ignite adviser network, David van Schaadenburg is independent of any funds-management firm

‘I struggle to believe an Aucklandbased firm with five to 10 staff members allocated to global-portfolio management can offer a superior investment solution relative to global giants’.

‘While in-house advisers are licensed, and for the most part well-qualified, their advice is usually limited to investing in their own funds.’

Time for another look at non-bank deposit takers

Goldband chief executive Martin Brennan says it is time investors and advisers took a new look at non-bank deposit takers.

BY MARTIN BRENNAN

In the 15 years since the Global Financial Crisis, New Zealand’s non-bank deposit taker (NBDT) sector has been transformed, with new levels of oversight, a tightening of rules and consolidation of participants.

Many of these changes have gone largely unnoticed in the wider sector, as new products and technology compete for investors’ attention. But with increased pressure on capital, Gold Band Finance (GBF) chief executive Martin Brennan says it might be a good time to pay attention to the opportunities the sector offers as part of a diversified portfolio.

When inflation hit 7.3% in July this year, it marked the largest annual rise in the cost of living since 1990. With one year term deposits across the major banks having just reached 4%, after the latest 50 basis point increase in the OCR, and five-year rates barely adding another half a percent, for many Kiwi investors that represents a significant erosion in capital.

As readers will be all-too aware, investment propositions across the board in 2022 have been increasingly fraught. The share market closed the first half of the year down 18% – following overseas trends, which saw Wall Street have its worst half since 1970. The high-profile collapse of crypto investments, with marquee currency Bitcoin losing half of its value over the last six months, have also shaved millions from the local market. Even our ‘forever increasing’ property market has come off the boil quickly, with local house prices seeing the largest drop in over a decade.

While the establishment of KiwiSaver has greatly increased the investor

savvy of New Zealanders, it has also made fluctuations in those investments much more obvious, and the impacts of a falling market more widespread. By their nature, Mum and Dad Kiwi investors tend to be conservative. In this environment – confronted by bad news at seemingly every turn – they will be seeking advice on how to protect their assets.

A well-governed sector

For anyone who experienced the GFC, it might seem counterintuitive to be recommending the non-bank sector as the sensible option for diversification in a market where negative sentiment dominates. But that would ignore the enormous changes that have taken place across the industry and the regulation and oversight which now controls the sector.

Chief among those is the Non-bank Deposit Takers Act of 2013. This legislation governs a small number of organisations that, like registered banks, offer debt securities and borrow and lend money. It's a small group of local businesses – around 15 in total – and includes building societies like the Nelson Building Society, credit unions, such as those operated for the Police and the NZ Firefighters, and established businesses like GBF.

The Act was introduced with the aim of raising standards and improving the sector’s overall resilience to adverse market conditions. With benefits of the lessons learned from the GFC, this level of oversight has been established in recognition that, as the Reserve Bank itself states, “The NBDT sector is an

important component of the broader financial system because it assists with providing funding to wider sectors of the economy, and provides alternative investment options for individuals and organisations.”

As further outlined by the Reserve Bank, the sector is subject to the Financial Markets Conduct Act 2013 (the FMC Act), which requires them to have a trust deed (and therefore be supervised by a trustee) and a product disclosure statement. They are also required to comply with prudential requirements outlined in the relevant Act and associated regulations, which include twice-yearly independent audits in almost all cases.

In reality, this means regular contact with their supervisors, and clear and transparent processes for investors to see how the business is acting and operating. It also means strict penalties for businesses, and their Boards and management, if they fail to comply with the requirements of the Act.

Protecting investment value

In a market like the current one, having an alternative option that provides higher interest rates than the banks (in the case of GBF, between 4.90% for one year fixed and 6.15% over five years) can make a major difference. This is particularly true for those on fixed incomes – still a major class of local investor – for whom the rise in inflation has put real pressure on their supplementary earnings.

Of course, like any investment, the sector is not without risk. However, with careful oversight by a prudential regulator (RBNZ) and conduct

Gold Band Finance

regulator (FMA) these risks have been substantially reduced over the last decade, and the sector should now be viewed in this context.

If we look at GBF as an example, we have a track record of prudent operation over more than 35 years. During that time, we have never failed to pay back the full value of an investment on maturity. In fact, we have consistently provided good returns for every month over the past three and a half decades.

Perhaps as a measure of how much things have changed in the sector, my latest update to investors was a discussion on why – in comparison to the more ‘exciting’ investments in cryptocurrency, app-driven share trading or even NFTs – an investment in our company was so boring. And why in the current market, boring was good, if it meant investors still had the full value of their capital, while receiving a fair market return through robust, licensed non-bank funders meeting requirements set by the Reserve Bank.

Even our own investment portfolio is one that would hardly stir the heart rate. The vast majority of our loan book is focused on investments in residential property – something the average Kiwi investor understands very well. But that

conservative approach is one that has continued to serve our local investors well – allowing them to achieve higher interest than offered by the banks, without erosion of their capital.

At a time when there are growing concerns about the use of wholesale investment schemes to secure investment funding for property development, the option of a prudent and well-regulated option that still pays higher than bank interest may well be a good path for local investors.

A changing market

With the lingering impacts of the COVID-19 pandemic, a disrupted supply chain and uncertainty in the world’s major economies, it is unlikely that markets will become any less volatile in the near future. At the same time inflation is proving a particularly intractable problem. New Zealand is certainly not getting the worst of it, with the UK predicted to see inflation top 18% this year off the back of high energy prices. But our increasingly connected world will continue to see those impacts spread around the globe.

In this kind of market, finding the right balance between risk and return is extremely important. The NBDT sector has a role to play in that as part of a diversified portfolio, especially as they offer returns which can reduce the impact of inflation on local Mums’ and Dads’ investment principal.

The fact that the Government has chosen to create a framework of legislation for the sector reinforces that they see value in the role it plays. There is even discussion at present about including NBDTs within the deposit compensation scheme, offering stillfurther protection to local investors, and potentially completing the transformation of the sector.

With all this in mind, it would be prudent for investment advisors and local investors to take another look at the options available within the Nonbank Deposit Takers sector, especially established local organisations with a considerable track record, like GBF. A

For further information on NBDTs and the role of the Reserve Bank, visit their website Or if you’d like to further discuss the sector, please feel free to contact me at: martin@goldbandfinance.co.nz

TOP 10

As usual it has been a busy month on Good Returns Here is a list of the top 10 most read stories over recent weeks.

01 Partners Life sold: Price $1 billion

Partners Life has been bought by a global life insurance specialist for $1 billion.

02 New pie like fund being baked

Two former Pie Funds portfolio managers are setting up a new boutique funds manager management business.

03 Partners Life tells advisers more about the ‘claims squeeze’

Six months after telling the market it was raising premiums by 6%-7% because it had paid out “materially more” than expected in claims, Partners Life had shed more light on why and how this was done.

04 [The Wrap] One good deal; One dud deal

In the space of a couple of days two big deals were done in financial services; one was good the other not so good.

05 Jarden to build online investing platform

Sharebroker Jarden and Co is merging its direct business with Hatch.

06 Fishers tipped to catch Kiwi Wealth

Fisher Funds is reported to be the successful purchaser of KiwiWealth.

07 Dodgy financial adviser in more trouble with FMA

The Financial Markets Authority (FMA) has made an interim stop order on a financial adviser who had his transitional FAP licence cancelled last year.

08 A cluster of ‘modest’ accounts: what KiwiSaver balances really look like

In what’s believed to be an industry first, the NZ Society of Actuaries has produced a report that analyses account-level data for a large segment of the KiwiSaver market.

09 It’s a fact: KiwiSaver fees in NZ are low

New research shows that KiwiSaver fees in New Zealand are lower than fees on similar funds in other countries.

10 $6.3 billion wiped off KiwiSaver

Morningstar reveals another bad quarter for KiwiSaver funds.

Keep up with the news at

The 2022 Mindful Money Awards Winners

awards aim to celebrate excellence and raise standards across the sector.

Best Ethical KiwiSaver Fund Provider 2022

Asset Management

Best New Ethical Fund 2022 Devon’s Global Sustainability Fund

Best Media Reporting on Ethical Investing 2022 John Berry & Stuff

Best Net Zero and Climate Action Investor 2022 New Zealand Superannuation Fund

Best Impact Investment Fund 2022 Purpose Capital Highly Commended: Climate Venture Capital Fund

Best Ethical Overseas fund 2022 Pengana WHEB Sustainable Impact Fund

Best Ethical Financial Adviser 2022 Ethical Investing NZ Highly Commended: Money Matters

Best Ethical Retail Investment Fund Provider 2022 Pathfinder Asset Management Highly Commended: Harbour Asset Management

The judges called for more entrants to the Financial Adviser category, recognising the strong public demand for ethical and responsible investment.

In addition to certification and member services provided by RIAA, Mindful Money offers support for financial advisers in transparency around ethical/responsible investments through:

analysis of retail funds and wholesale funds that are marketed in NZ presentation of financial and portfolio data in easy to use formats review of ethical/responsible standards for portfolios monitoring of ethical/responsible performance for portfolios bespoke reports and analysis of specific ethical/responsible investment issues

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