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Dealer groups tackle regulation
Your guide to the FSLAA
How to overhaul your marketing
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MILLENNIAL CUSTOMERS Winning over the millennial market. What makes this client-group tick?
04 EDITORIAL Which group should you belong to?
06 PEPPER Q&A
08 NEWS ANZ FAP stance; Pepper’s arrival.
What you need to know as Pepper Money hits the NZ market.
10 PEOPLE Who has moved where in the industry?
Do dealer groups have a post-new regime role?
16 PROPERTY NEWS
Run-down of latest market developments.
18 HOUSING COMMENTARY The market shows signs of improving.
26 MY BUSINESS
Anthea Livingstone of Mortgage Link Christchurch has finance in her blood.
COLUMNS 28 LEGAL
A breakdown of the FSLAA.
30 SALES AND MARKETING
How to give your marketing an overhaul.
Steve Wright on ‘Scope of Service’ agreements.
Michael Lang on weathering the currency war.
From the Publisher
Advising the millennial client
It’s great to see another nonbank lender, Pepper Money, come into the New Zealand market. I went along to their launch in Auckland recently. If they walk the talk then the non-bank sector here is going to be in for a significant shake up. The messages were onpoint and feedback from invited guests was overwhelmingly positive. My guess is that Pepper New Zealand boss Aaron Milburn will become a key figure in the industry here. You can find out more about Pepper Money on Page 6. With the arrival of Prospa earlier this year mortgage advisers in New Zealand have access to two interesting new players. But it’s not just Australians who are interested in using advisers to distribute their products.. A couple of new names on the local scene have emerged including Funding Partners Ltd, which is an offering very similar to FMT, and Norfolk Mortgage Management. Delegates at this year’s TMM Better Business conference will hear from both Pepper and Conrad. It seems no editorial this year can ignore regulatory changes! Since the previous issue two banks, ANZ and BNZ have clarified their thinking on who can be a financial advice provider (FAP). Their view is that they expect
the existing dealer groups to be what I would call Master-FAPs and it is possible for a firm to have their own FAP under the Master-FAP. I think of this as one of those McDonald’s hamburgers with two meat patties in it! It’s also clear that banks don’t want firms to leave dealer groups and become their own FAP with separate accreditation to the lenders. The thinking is that it’s more work for the banks and they want to streamline processes as much as possible. In some ways they are shaping the industry, (probably not what was intended by the regulators) and potentially driving more consolidation in the advice industry. This is probably far more of an issue in the life insurance sector than mortgages. This will no doubt be a hot topic at this year’s Better Business Conference. In this issue we have taken a look at the millennials. Our thinking is that the first-home-buyer market is very active presently. This demographic is dominated by the younger generations and their approach to investment and finance is quite different to older generations such as the Baby Boomers. It’s important for advisers to think about how they deliver advice to this demographic. This is amplified as the millennials like digital tools and this could open the door for more players to come and compete against advisers. Food for thought.
PUBLISHER: Philip Macalister SUBEDITOR: Dawn Adams SENIOR WRITERS: Miriam Bell, Susan Edmunds, Daniel Dunkley CONTRIBUTORS: Paul Watkins, Steve Wright, Michael Lang, Jonathan Flaws GRAPHIC DESIGN: Amy Bennie ADVERTISING SALES: Amanda Ellery 027 420 2083 firstname.lastname@example.org
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TMM is published by Tarawera Publishing Ltd (TPL). TPL also publishes online money management magazine Good Returns www. goodreturns.co.nz and ASSET magazine. All contents of TMM are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited. TMM welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in TMM, or on other issues, please send your comments to: firstname.lastname@example.org
Interview with Aaron Milburn, Pepper Money NZ Country Head The non-bank lender has arrived in NZ and can provide an indicative lending offer in under two minutes.
PEPPER MONEY HAS JUST RECENTLY LAUNCHED IN NEW ZEALAND. WHAT LED TO YOUR DECISION TO START LENDING HERE? Our journey started after a conversation with my youngest brother. He had recently moved home to New Zealand and was having troubles getting finance for a home loan because he hadnâ€™t lived in the country long enough for mainstream lenders. They were wanting to apply a higher interest rate not necessarily appropriate for the risk involved with the loan. Around the same time I was hearing similar things from friends finding it challenging
to get a home loan, and I thought that just wasnâ€™t good enough. So over about an 18 month period we started to look at the New Zealand market, and we had numerous conversations to guide our thinking. We spoke to advisers, industry stakeholders, lawyers, government representatives and everyday Kiwis. The overwhelming consensus pointed towards a gap between the solutions being offered by the big banks and existing non-bank lenders, with a notable pricing differential. Given the lack of true near-prime lending, we believed we could make a positive impact. Right around the time of this research, we also started to receive inbound enquiries from New Zealand advisers and industry stakeholders, telling us they were seeing opportunities where Pepper lending solutions may be able to help. And so we made the informed decision to bring real life home loan solutions to Kiwi families and new options for advisers.
THERE ARE ALREADY A SERIES OF NON-BANK LENDERS IN NEW ZEALAND, WHAT MAKES YOU DIFFERENT FROM THOSE LENDERS, AND WHY DO YOU THINK YOU WILL BE SUCCESSFUL? 06 WWW.TMMONLINE.NZ
Earlier this year we undertook a piece of customer research* and uncovered that nearly 40% of Kiwis turned down for a home loan don’t know there’s an alternative type of lender. Firstly, we saw that as a huge opportunity to work with advisers to provide that alternative. But most importantly, we just want everyday Kiwis to be aware there is an alternative solution available to them. As a non-bank lender with a broad range of alternative home loan solutions, we want to work with advisers to change this statistic. We will be focussed on educating advisers and the market on the important role non-banks can play in the competitive home loan landscape.
WHAT VALUE IS PEPPER MONEY BRINGING TO ADVISERS?
It’s all about more options. More options for you as advisers and for your customers. We want to work closely with New Zealand advisers to put these options in front of more Kiwi customers. We know the need to educate consumers through advisers is growing, and we’re here to provide you with the tools and materials to assist in that. We want to listen and learn, and we want to grow with our advisers. Not because of them. That’s why you’ll see us doing things a little bit differently than you may expect of another lender. We are introducing an exciting tool called Pepper Product Selector (PPS) that will give your customers an indicative offer in under two minutes. This is a New Zealand first, and a game changer when it comes to efficiency in your adviser business. Shortly we will also be launching into the New Zealand market our unique marketing tool kit inclusive of social media tools that you can utilise to help educate your customer base.
CAN YOU COMMENT ON HOW BUSINESS IS TRACKING SINCE YOU LAUNCHED, WHAT SORT OF APPLICATIONS ARE YOU SEEING?
In the few short months since we have been in pilot in New Zealand, hundreds of Kiwis have already been assisted where many would have simply been declined. We also now have a fully integrated online submission platform that will make the application process more efficient for both advisers and customers. This will only continue to contribute to assisting more advisers and customers. With a successful pilot programme now finalised, we are very excited for what 2020 has to bring.
THE THREE TYPES OF LOAN OPTIONS WE HAVE ARE:
A standard home loan range for people with no credit history issues but may have less documentation than banks need. Features: • Fixed and floating rate options available • Alt doc available • Redraw facility • Gifted deposits and other “non-genuine” savings considered • Consolidate up to four debts and cashout for acceptable personal purposes • Paid defaults up to $500 are considered
A home loan range that can include old credit history issues if things have been clean for two years or more.
Our home loan range to help when there have been credit issues in the last two years.
Features: • Fixed and floating rate options available • Alt doc available • Redraw facility • Gifted deposits and other “non-genuine” savings considered • Debt consolidation and cash-out for personal or business purposes up to an 80% LVR • Defaults and judgments registered > 24 months considered (includes discharged bankruptcy)
HOW WOULD YOU SUM UP THE PEPPER OFFERING?
Here at Pepper Money we can offer your customers a different, more personal approach to home loan applications. We were set up specifically to help people with loans when the banks said “no”. Our home loans are more flexible, because we believe everyone’s circumstances are different. We have a unique lending model across three sets of home loans. If one set of home loan options doesn’t fit a client’s situation, we’ll step their application into the next option and assess it there and so on,
Features: • Fixed and floating rate options available • Alt doc available • Redraw facility • Gifted deposits and other “non-genuine” savings considered • Debt consolidation and cash-out for personal or business purposes up to an 80% LVR • Defaults and judgments registered < 24 months considered (includes discharged bankruptcy) • Mortgage arrears considered • Newly self-employed accepted (six month NZBN)
against our whole range of options. That’s three opportunities for a family to get a loan with a single application. So, if there is a way we can help, we’ll find it. If you’d like more information on offering an alternative to your clients, talk to Pepper Money today. www.adviser.peppermoney.co.nz email@example.com 0800 945 658 * Pepper Money (2019). Taking the local pulse: Understanding New Zealand home loan applicants. A research report. String Theory Research. New Zealand. 2019.
MySolutions wants independence for advisers MySolutions Group has decided not to transfer mortgage advisers' aggregation from The Mortgage Supply Company to Astute Financial following a disagreement over the new regulatory regime. MySolutions' mortgage adviser network will not move across from Mortgage Supply to Astute, after Astute asked members to operate under its FAP licence. The network wants its adviser businesses to operate with their own FAP licence, rather than underneath an aggregator's. The Auckland business is recommending advisers choose a group where they can take their own FAP and "retain their independence". Astute Financial declined to comment. MySolutions argues adviser businesses with their own FAP will have greater control over their CRM and compliance under the new regime. Nicola Smee, director of brand and communications at mySolutions, said: "We had to look around the NZ mortgage market, as we were wanting advisers to retain their independent choice and unfortunately Astute were insisting that mortgage advisers had to belong to their FAP going forward, which didnâ€™t suit our culture." Kevin Smee, CEO of mySolutions, wants advisers to "steer their own ship and be in control of their own destinyâ€?. From November 4, mySolutions will ask members to self-licence under their own business name. It will host bi-weekly training and webinars around the country to help advisers.
Ex-Mortgage Link team branches out
Mortgage Connect team
A former Mortgage Link team in Palmerston North has spun out to form their own business, joining NZFSG. The former Mortgage Link franchise in Manawatu has branched out to form Mortgage Connect, a new adviser business based in the same part of the city. Mortgage Connect is owned by Craig Seton and Brent Jaslarz, with experienced advisers including Phil Christmas and Gail Jensen. Seton and Christmas were instrumental in founding Mortgage Link Manawatu. The new business has joined NZFSG and will operate as its own branded business. Mortgage Connect began operating last
month, and has relaunched to its existing client base. Seton told TMM Online he formed Mortgage Connect to "go in our own direction with our own brand that we could promote". He added: "It gives us more freedom. It's about having our own identity, controlling our own destiny and what we do with our business." Mortgage Link will continue to operate in Palmerston North after the departure of the old Manawatu team. Mortgage Link said in a statement: "Karen Blair who has been operating from the Feilding Mortgage Link office since February 2019, is now looking after the Palmerston North area as well. We will be looking at adding additional mortgage advisers to the area in due course."
ANZ reveals stance on FAPs ANZ has laid out its position on the new regulatory regime, stating it will work with adviser businesses and groups that hold a financial advice provider licence. The country's biggest lender wrote to advisers on October 17 to state it would "only deal with intermediaries who are lawfully able to provide regulated financial advice to retail clients either under their own FAP licence, or under another entityâ€™s FAP licence". The bank's position will come as a boost to adviser businesses keen on holding their own FAP licence, rather than working underneath an aggregator group's. It is understood the lender is happy for
dealer groups to have no legal or civil liability for member businesses that hold their own FAP licence. The system will allow adviser FAPs to operate underneath a group FAP, with the group holding an agreement with the lender. In the letter to advisers, ANZ said it expected FAP licence holders to "meet industry standards" and show "robust advice and governance processes". The lender wants "appropriate digital security measures and quality assurance controls" to ensure the needs of its customers will be met. As ANZ prepares for the new regime, it will also review its current mortgage adviser agreement, to ensure it is "fit for FSLAA's purposes", the letter said. An ANZ spokesman confirmed the details of the letter to TMM Online.
Mortgage Lab and Kepa plan for new regime The Mortgage Lab will be an authorised body underneath Kepa's financial advice provider licence under the new regulatory regime. The Mortgage Lab, which has 18 advisers across the country, has confirmed plans to work under Kepa's FAP licence. As part of that decision, it has begun a "compliance review" of its advice services, with the help of the group. The business said working under Kepa's licence allows it "to maintain the independence of its brand and proposition to market, whilst leveraging the corporate capability and resources" of Kepa. Mortgage Lab mortgage advisers have begun to submit files for review to help Kepa "identify any gaps and provide assurance that best practice standards are being adhered to", the adviser businesses said in a statement. Rupert Gough, CEO of The Mortgage Lab and head of Kepa Home Loans, said the adviser business and group were working hard to transition to the new advisers' regime. Gough told TMM Online he was working to make it "as smooth as possible for advisers", and would give other Kepa members the option of having their own FAP. "Above all, we want to make sure we don't have any gaps in our process and are providing the best service and outcomes for our clients," he said. Kepa CEO Brendon Neal, said:
"Kepa has been preparing to become a licensed FAP under the new regime for over a year and the move to complete compliance reviews is one of the critical steps in providing assurance to business owners and the directors of the future licensed entity that processes are fit for purpose and being adhered to."
Lifetime puts all advisers into salaries
Adviser group Lifetime changed its remuneration structure, moving advisers onto an annual salary following its merger with Camelot NZ last year. TMM Online revealed that Lifetime advisers have agreed to move to a salary structure with share bonuses. The new structure sees Lifetime adopt a model used by Camelot advisers for several years. Peter Cave, managing director of Lifetime, said the move was part of the integration process between the two groups, which announced a merger in April last year. Cave believes the pay structure is more "client-centric", and will be better suited to the new regulatory environment, placing more focus on customer outcomes, and less on salesdriven targets. He said: "The driver was putting the two models together and working out the right one going forward. With a close watch on what's going on globally with the Royal Commission, and saying where do we add value? In the client service model. It was a natural fit for us." Cave added: "We sat down and looked at how we manage advice relationships on behalf of clients. It's far easier with this structure than with commissionsharing arrangements. We are giving our board comfort that clients are going to be best looked after." "We wanted a more corporate model in this new regulatory framework. We thought, instead of working silos, let's put them into a team environment with group performance and remuneration," Cave said. Lifetime will be a FAP under the new regime with advisers working underneath their licence.
Pepper salts up New Zealand market
Australian non-bank lender Pepper Money has officially launched in the New Zealand market and says it offers a point of difference from its competitors. Pepper officially kicked off its longawaited arrival in New Zealand with a launch in Auckland. A key message the lender had to advisers was that Pepper would be providing a New Zealand solution to local lending issues. "Our solutions have been designed by New Zealand focus groups," Pepper country manager Aaron Milburn said at the launch. Milburn, who is a born-and-bred Kiwi, said 40% of potential borrowers were unaware
that there were other lending options if they had been declined by the banks. He says that is an "unacceptable" figure and Pepper was determined to show New Zealanders there were genuine options to the banks. Pepper already operates in 11 countries, and its approach is to put in the right management and then build its team in each country. Milburn says there are lots of opportunities in New Zealand. "In the blink of an eye we will have 100-plus people," he said. Pepper sees a significant gap in the nearprime space in New Zealand, where families
are potentially paying too much or have been in the wrong products due to a lack of choice. The lender brings to the market the Pepper Product Selector (PPS) tool, which will enable brokers to â€œget indicative offers for their customers in under two minutesâ€?, as well as a fully-integrated online submission platform for brokers." Jeff Royle, one of the biggest writers of non-bank loans said: "It was a great launch, one of the best I've seen and speaking to their senior people they have done their homework and see New Zealand as a golden opportunity."
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Non-bank Pepper has unveiled the lineup for its New Zealand business after its official launch in October. Aaron Milburn will be country head for New Zealand, responsible for “developing, and overseeing the strategic execution of all in-country activities”, the lender said. Milburn has previously worked for Westpac, St. George, Citibank, BankWest and HBOS, and has more than 20 years’ experience in the financial services sector. Michelle Sargeant will take the role of national sales manager Michelle Sargeant for Pepper in New Zealand. She is responsible for sales and promotional initiatives, and will oversee a team of sales representatives. Sargeant has worked across both the bank and nonbank lending sector for the past 20 years, starting at ASB Bank in Henderson, before moving to Australia working at Commonwealth Bank, St. George Bank and Pepper. Mel Scott, meanwhile, is Pepper’s BDM for New Zealand, and is tasked with building out the white label presence. Pepper said: “With over 10 years’ experience in banking and finance, Mel has a deep understanding of the lending ecosystem in both Australia and New Zealand, having held positions in both sales and lending.” She has worked at Bank of Queensland and Bankwest in Australia, returning to New Zealand in 2018 to work for Bluestone, before joining Pepper in May.
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NEW FACES AT LOAN MARKET Six new advisers have joined Loan Market as the group expands its footprint across the country. Loan Market said Sue McKenzie, one of the new hires, “works for her clients with the aim of finding competitive bank products to meet their financial needs”. The company added: “She takes into consideration their personal lifestyle and aspirations in addition to future events which may impact them in the short to medium term. This allows her to arrange finance and a tailor-made loan structure. Her relationship with her clients does not stop on settlement day. Sue's commitment lasts for the life of the loan." New Loan Market adviser Simon Ward said: “As a proud Cantabrian, husband and father of three, I want you to feel comfortable that you can discuss your personal finance with me, so I can find the right solution for you. "I am very passionate about helping people from all walks of life into their own homes, arranging business loans and providing a personalised touch to help guide you through the maze of current lending requirements.”
Karen Raggett, a further new name, said she would offer “solutions with the best client outcomes”, adding: “I pride myself on my service levels, efficiency and making homeownership easier. I will become your trusted adviser.” Fellow new adviser Alan Lover added: “As an independent broker I can give you expert, unbiased advice on what the best mortgage is. My approach is to ‘do the right thing by my customers’. I still have clients from when I started advising 30 years ago. I’m the trusted adviser they call on whenever they need.” Cameron Knapp, another new adviser to the group, said: “I have a passion for helping my clients reach their homeownership and financial goals. Whether it's a first home, getting a better deal on your current home loan, building an investment portfolio or a construction project, I have the experience and expertise to help. I enjoy building long-term relationships with my clients and ensuring the process is always as easy and stress-free as possible.” Richard Craven, an additional new adviser, added: “With over 30 years in banking, the last 15 in senior management roles, I enjoy sharing my knowledge and client experiences to deliver the finance proposals my clients deserve.”
FIRST MORTGAGE TRUST BOLSTERS BDM PRESENCE First Mortgage Trust has expanded into the South Island, opening a permanent office in Christchurch. Jeremy Finch joins to run the new office after 15 years at ASB Bank, in its property finance team. FMT described Finch as “an experienced lender who has specialised in funding property development and commercial property throughout his career”. At ASB, Finch led a Christchurchbased team who completed transactions throughout the South Island, including subdivisions, commercial acquisitions, apartment, office and shopping centre projects. FMT said Finch is “particularly passionate about rebuilding the Christchurch CBD and has been involved in numerous flagship projects that have helped transform and bring more people into the CBD”.
KEPA MAKES KEY COMPLIANCE HIRE Leigh Hodgetts has joined Kepa to take held senior compliance roles with BNZ a newly-created role as adviser standards and ANZ. Before this, she ran a successful and compliance consultant. financial planning practice in Brisbane. The hire is designed to make Kepa a Kepa chief executive Brendon Neal said: New Zealand leader in the provision of “We are delighted Leigh is joining the team. financial adviser support services, the She brings to Kepa a deep understanding group said. of compliance frameworks and best Hodgetts joined Kepa on September 16 practice advice combined with on-thefrom Astute Financial Management where ground experience of what it takes to be a she held the role of head of operations successful financial adviser. and compliance. “This real-world experience is of She will work with Kepa chief executive immeasurable value as we roll-out our Brendon Neal on the Kepa Advice Hub Advice Hub service, which is helping proposition – a new service for financial financial advisers navigate the advisers seeking to licence themselves new regulatory regime while under the new Financial Services still maintaining the highest Legislation Amendment Act. standards of client care.” Hodgetts will also work closely Hodgetts added: “Kepa with Kepa members to implement has demonstrated a deep suitable compliance frameworks commitment to best-practice and professional business standards of regulatory practices. compliance and client Hodgetts is a qualified care. I am looking financial planner and forward to joining holds a National Kepa and working Certificate in Adult with Brendon Education and Training. and the broader She previously held roles with the Financial team to help the Markets Authority as organisation manager of retail build out their LEIGH HODGETTS operations and has programme.”
AVANTI HIRES SOUTH ISLAND BDM Mark Nolan has accepted the role of business development manager (property). The position was left vacant when Michael Harrison was appointed to regional manager South Island in June. Nolan joined the southern team on October 14 and will be the key point of contact for the South Island mortgage adviser network. Mark comes to Avanti with a varied BDM/sales history; including roles at Liberty, AMP, Mike Pero, Housing Corporation and Spark NZ. Harrison says Nolan “will be a great addition to the southern and wider Avanti team and will hit the ground running while being instrumental in continuing the strong growth and brand awareness in the South Island”.
MIKE PERO ADDS FIVE ADVISERS
Mike Pero has appointed five new mortgage advisers to bolster its nationwide team. Tracey Coxhead joins the Tauranga Mike Pero Mortgages team offering clients 18 years’ experience in home and business lending, insurance and general financial planning. Meanwhile, Wendi McGovern joins the Mike Pero Mortgages Tauranga team, bringing 15 years of experience in the finance industry to the group. Coxhead understands “the process of borrowing money and planning a financial future” and “looks forward to making this
process smoother for her clients”, the business said. Mike Pero Mortgages in Rotorua welcomes Stacey Stefadouros who has more than 20 years in the financial services sector. Stefadouros is “passionate about helping clients find the right path with good financial advice and tailoring a lending and insurance package that provides the best outcome”, Mike Pero said. McGovern “holds a strong passion for finance and prides herself with helping people achieve homeownership, including first home buyers, investment loans, refinancing, building and people needing a
fresh start”, the business said. Rachel Collett, based in Marlborough, also joins the Mike Pero Mortgage team. The business said Collett was keen to help customers buy homes and “consolidate debt, renovate, install solar, or maybe to land the property of their dreams”. Tammy Goddard has moved to Timaru after being part of the Tauranga Mike Pero Mortgages team for the past two years. Goddard, an experienced property investment adviser, is fluent in sign language, and is available to help the hearing-impaired community.
with banks Will there be a role for dealer groups in new licensed financial advice future?
A new era of financial advice begins next month when applications for transitional licences open under the Financial Services Legislation Amendment Act regime. By June next year, anyone who wants to continue to provide financial advice to clients will need to have their own financial advice provider (FAP) licence, or to be working under the licence of another FAP. For mortgage advisers, who have largely been registered, rather than authorised, financial advisers, this will mean significant changes. One of the changes looks set to be how dealer groups will fit in. Two of the main four banks have already signalled that they will only deal with FAPs –
but not every dealer group wants to take the responsibility and liability of being a FAP for multiple advisers. BNZ was the first to confirm in September that it would only continue to have relationships with dealer groups that held their own FAP licences. A BNZ spokesman told TMM the bank has taken the decision to provide the best outcomes for its customers and end users. "With the change of regulation effective from next year, anyone giving regulated financial advice to retail customers will need to be engaged by a licensed financial advice provider. We have decided to only hold contractual relationships with aggregators who have obtained a FAP licence because we believe this will deliver the best outcomes for our customers. "It means they can trust that the organisation they are dealing with has quality policies, processes and systems in place to help safeguard them as they work
through the home buying process," the spokesman said. The country’s biggest bank, ANZ, wrote to advisers in October to say it would only deal with intermediaries who were lawfully able to provide regulated financial advice to retail clients under their own FAP licence or another entity’s FAP licence. “We need to ensure that all intermediaries we deal with are on track to appropriately support our customers under the new regime. As a result, it has been necessary for ANZ mortgage adviser distribution to consider the best approach for it to take in order to operate under the new regime and comply with the new requirements.” David Thomas, acting general manager of specialist distribution said. “With licensing fundamental under the new regime for financial advice services, and a new licensing regime proposed for the conduct of financial institutions, new restrictions and obligations will apply to our
arrangements with intermediaries. “ANZ mortgage adviser distribution is reviewing its current ANZ mortgage adviser agreement with a view to replacing it with a new ANZ financial advice provider agreement that is fit for FSLAA’s purposes. We will be in contact again when the new ANZ financial advice provider agreement is finalised.” Both ANZ and BNZ said advice businesses could be a FAP under a group FAP and individual businesses could retain liability for their own operations that way. NZFSG has already stated its intention to apply for a FAP that its members can choose to operate within. But having a FAP licence brings increased compliance requirements that not all groups are happy about. Newpark chief executive Melanie Purdey said forcing groups to take a FAP licence shifted an unfair amount of responsibility on to groups. Purdey said, the way the legislation is currently written, her organisation could not apply for a licence anyway because it did not provide a regulated financial advice service to clients. Instead, it was offering services to improve processes and practice and support advisers with their education. It seemed that banks were cutting a valuable link out of the chain by refusing to deal with it as a result, she said. “Not only does this show a distinct lack of knowledge about the legislation and what head groups do, but it passes the buck to a link in the advice chain that neither gets paid by the banks nor can influence the conduct of nonaligned adviser businesses with
We need to ensure that all intermediaries we deal with are on track to appropriately support our customers under the new regime. David Thomas whom they have no intimate knowledge of their governance. “The cost of this monitoring should be borne by the people who will gain most – advisers who are paid by the lenders and the lenders themselves. These latter two entities are also the only ones able to control the cost to clients, which will have to reflect the cost of governance. Head groups have no influence in that part of the chain but are being expected to wear the cost if the lender’s position is upheld. "Why is liability channelled to intermediary dealer groups? We are a link in the chain we provide a service to our members, not advice to clients. I struggle with the rationale," she said. "We are not being paid by the banks, but are being asked to assume the liability. It's an untenable position." She said advisers passing
responsibility for their businesses to dealer groups would miss the point of the new rules. “BNZ is fostering that abrogation and ultimate failure to hold advice providers accountable. New Zealand has already demonstrated that making individual advisers responsible for the quality of their advice process was successful in morphing the conduct of AFAs. Why would RFAs be any different or less culpable in this new regime? “We believe that moves such as BNZ’s exposes the market to considerable attrition as advisers lose control over their own businesses, practice and costs to proposed ‘super FAPs’ if the hand of head groups is forced by the banks. That contraction will drive advice back in-house to the lenders removing any competitive element in the market that would serve good client outcomes by ensuring the benefit of choice and suitability.” NZFSG head of growth Bruce Patten said he was not concerned by a requirement for groups to be licensed. “I know some groups and individuals have issues and I can understand where they are coming from as there is a considerable amount of potential liability that comes with it, but I dont see why with the correct systems and auditing procedures in place there would be any concerns.”
Why is liability channelled to intermediary dealer groups? We are a link in the chain we provide a service to our members, not advice to clients. Melanie Purdey ASB and Westpac said they had not yet made a decision. “We’re currently reviewing our position and will provide an update to the market soon,” an ASB spokeswoman said. At Westpac, a spokesman said: “Westpac NZ is currently considering the implications of the financial adviser law reform across its business areas, including the potential effect of these changes on our relationship with mortgage advisers and mortgage adviser aggregator groups. “We are considering this issue independently and will be in touch directly with any mortgage adviser aggregator groups we have a relationship with once we have completed our assessment of the changes.” ✚
By Miriam Bell
Time of change
It’s rarely quiet in the property market, and recent weeks have seen a host of actual and proposed developments. Here’s our run-down on some of the significant ones and what they could mean. Reforms to the Building Act will make it easier to carry out a prefab build – but it will be large-scale projects that benefit rather than smaller-scale investor projects. Building and Construction Minister Jenny Salesa recently announced a suite of changes to the Building Act which are intended to cut through red tape and allow more dwellings to be built more quickly. Salesa says that inefficiencies in the Building Act make building slow and expensive, and one of the ways the Government is tackling this is by making highquality, large-scale manufacturing of prefab houses a reality. “Prefabrication and off-site manufacturing are the future of construction as they help produce high-quality buildings more quickly than traditional building approaches. In some countries, nearly 80% of newly built homes are prefabricated offsite, but in New Zealand it’s about 10%.” To that end, for manufacturers who prove their systems and processes are compliant, there will be a new streamlined nationwide consenting process for prefab buildings. The new process will enable the mass factory production of high-quality buildings and slash the likely number of building inspections for factory produced buildings in half. It will ensure that only the location where a prefab house is installed requires a building consent, removing the possible need for two separate consents. Minimum requirements for information about building products and clarification of the roles and responsibilities for manufacturers, suppliers and builders will also be introduced. The changes are part of a wider package of reform that aims to accelerate building, including reform of the Resource Management Act, and further announcements are expected in 2020. While the prefab sector welcomed the announcement, prominent Auckland investor David Whitburn says the changes will benefit larger-scale development projects more than smaller-scale investor projects. That’s because for smaller investors
interested in going down the prefab path, the big problem remains finance. “Many investors are worried about getting finance as most banks are resistant to lending on them as they are not a fixture on the land during the manufacturing process so there are perceived security issues.” The recently announced changes don’t address this issue, Whitburn says. “The Government is making moves in the right direction, but there’s lots more to do in this area.”
KIWISAVER FOR INVESTMENT PROPERTIES?
A notable proposal for change came from the Interim Retirement Commissioner who suggested that KiwiSaver rules should be relaxed so that first home withdrawals can include investment properties. Interim Retirement Commissioner Peter Cordtz says the cost of declining home ownership is a problem that affects everyone and a circuit breaker is needed. “If we can get more people on the property ladder earlier, there may be less liability to taxpayers later.” Currently, KiwiSavers have to live in the property they buy with a withdrawal for a deposit, but high house prices in cities like Auckland and Wellington mean it is difficult for many people to purchase in areas where they work. Cordtz says that if people were able to buy a property in a more affordable part of the country, they could use it as an investment to progress on the property ladder or simply to retire to one day. “We see this as an idea that could help lots of New Zealanders get on the property ladder and create a long-term investment to aid retirement.” The proposal has garnered a mixed response. Some say there’s already too much in retirement savings being withdrawn for property, while others say it could distort regional housing markets. Property investor Nick Gentle, who runs iFindProperty, says that, generally, the proposal is a good
idea as it would enable people who live in less affordable areas to buy a property that they don’t have to live in. “It is a positive thing to encourage property investment and to give people free control of what they spend their money on. It could cause some problems though. There could be a big uptake from people from big cities who then flood smaller regional markets, compete with first home buyers and push up prices.” In his view, for the proposal to go smoothly it would need to come in tandem with measures that would help to boost supply to balance out any increase in demand. “It could be confined to buying new builds, for example, as that would help to add to supply rather than making inroads into existing housing stock.”
CHANGING FACE OF PROPERTY INVESTMENT
Another recent development hints at the changing face of property investment. Residential property crowd funder, The Property Crowd, relaunched its trading platform after the Financial Markets Authority (FMA) approved its secondary market. This means that more New Zealanders will now have the opportunity to become property investors – and for as little as $100. The Property Crowd allows investors to buy a slice of a residential rental property or minor commercial building and benefit from the rental income and potential capital growth. A separate company is established for each investment property and what each investor reaps, after expenses, is his or her part of the net profit from rent. With the FMA’s approval of the crowdfunder’s secondary market, investors will now be able to offer their shares for resale on the trading platform if they want to sell out of their part of an individual property. The Property Crowd is the first residential property crowdfunder in New Zealand to be given the authority to offer a secondary market. But getting FMA approval was a lengthy process and came after the crowdfunder
unwittingly jumped the gun on its initial launch back in April. The Property Crowd CEO Jim Janse says the initial hiccup with the FMA proved to be a blessing because they have now been through a very comprehensive process to ensure they fully meet the requirements. “It took longer than we thought but we got there, with the FMA signing off on the secondary market last month, and it’s a huge achievement for us as the FMA hadn’t dealt with this particular model before.” Janse says they have also redesigned their platform and broadened their approach to include property sellers as well as buyers – although the emphasis will be on investors. “It gives investors a serious alternative to the traditional model of property investing, one which comes without the problems increasingly associated with the day-to-day operation of rental properties.” The Property Crowd aims to be ready to go for investors by late this year or the beginning of next year.
ABOLISHING 90-DAY NOTICES WILL CAUSE PROBLEMS
Meanwhile, there’s one proposed legislative change which is not popular with investors – and that’s the move to get rid of “no cause” terminations as part of the Government’s proposed tenancy law reforms. Landlords are warning that getting rid of their ability to give 90-day notices to end tenancies will cause more problems than it solves – and a new survey by the NZ Property Investors Federation provides support for this. The NZPIF survey, which had around 1,400 member and non-member respondents, found that 90-day notices are not often used with only 3.1% of tenants issued such a notice each year. It also found that when they are used it tends to be when proof of a tenant’s poor behaviour, which is necessary at the Tenancy Tribunal, is difficult or impossible to obtain. The survey shows that 77% of 90-day notices were given for poor tenant behaviour, while the other 23% were for selling the property or undertaking significant repairs or renovations to the property. Further, it shows the main reasons for issuing 90-day notices were antisocial behaviour and disturbing neighbours. These reasons accounted for 42% of all notices. According to survey respondents, it’s difficult to prove antisocial behaviour because either it occurs randomly or because other affected tenants and neighbours are unwilling to put their concerns in writing. NZPIF executive officer Andrew King says the reality is that there is no such thing as a “no cause” termination, rather there is always a crucial reason. “Rather than providing tenants with security of tenure, removing the 90-day notice provisions would prevent landlords from effectively managing the 3% of poorly behaving tenants to the detriment of other tenants and neighbours.” ✚
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WHAT’S DRIVING HOUSE PRICES?
UPFRONT – YOUR HOUSE
By Miriam Bell
REINZ HOUSE SALES: DOWN
Sales volumes nationwide were down yearon-year in August. The month also saw the lowest number of sales in seven months. In Auckland, sales were down annually and at their lowest in four months.
INTEREST RATES: DOWN
The Reserve Bank’s shock OCR move has poured further fuel on to the mortgage rate fire and banks are cutting rates again. Commentators say a long-term low rate environment is firmly in place.
The Reserve Bank kept the OCR unchanged at its record low of 1.0% in September. But economists believe that at least one more cut is likely to come in this cycle and it could be later this year.
Migration data remains volatile and, although high annual net migration remains high, commentators says it appears to be trending lower.
BUILDING CONSENTS: UP
Consents nationwide were up in August, as compared to July. They remain at levels not seen since the 1970s and demand is high. Auckland consents also remain at all-time highs.
MORTGAGE APPROVALS: DOWN
Reserve Bank data shows mortgage lending overall was down in August. Lending to investors was down on July as well as on August last year and their share of new lending remains much reduced.
Cliff Carr RENTS: UP
The average national rent remained static on a record high in August. Auckland’s average rent dropped slightly in August but from a record high and Wellington rents remain at WWW.TMMONLINE.NZ 018 historic highs.
Positive signs Along with the change of season have come signals that the housing market is strenghtening again and it looks like the resurgence could have legs, finds Miriam Bell. It seems that the way forward for New Zealand’s property market is not down, but up – although on a slow, steady trajectory rather than a giddy, skyrocketing one. Commentators have long been saying they don’t expect the market to crash, that they think the odds are an orderly rebalance.
And now there are increasing signs of a market resurgence, with the latest data turning in decidedly positive results. So, in this month’s commentary, we take a look at five of these promising signs and what it could all mean for the market going forward.
PRICES ON FORM
All those who have been waiting for major price falls are out of luck. Overall, prices are trucking along solidly. The September data from both REINZ and Realestate.co.nz revealed decent price growth nationally and in markets around the country. REINZ had median house prices nationwide up by 6.6% year-on-year and by 2.9% month-onmonth in September to a record high of $597,000. Median prices rose in 13 out of 16 regions and four regions turned in record median prices in September. They were Manawatu/ Whanganui, Southland, Taranaki and Hawke’s Bay. Additionally, Waikato’s median price hit a record equal high. Realestate.co.nz’s data also had provincial regions performing strongly. Gisborne, Bay of Plenty, Nelson & Bays, Manawatu/Whanganui, and Northland all hit record average asking prices. They helped lift the national average asking price by 1.2% to $685,746, from August. In both data sets, price growth in the major cities remained flat or subdued, with Wellington being the strongest among them. QV’s September data tells a similar story, with it putting the average national value up by just 0.6% over the past quarter to $691,460. While it has limited value growth in many markets, 15 of the 18 main urban areas did see a lift in September. And the national rate of annual growth has picked up pace of late.
Providing support to the strong price growth,
the REINZ data shows that sales volumes across the country increased by 3.3% in September (to 5,896 sales), as compared to September last year (when there were 5,708 sales). REINZ chief executive Bindi Norwell says that after a quiet few months over the winter, the number of properties sold for the month of September was the highest in three years. “This suggests that more confidence is starting to creep back into the market. Looking around the country, the Bay of Plenty, Hawke’s Bay, Tasman, Canterbury, West Coast and Otago all saw the highest sales volumes for the month of September in three years.” However, some regions didn’t fare so well in the sales stakes which means the results have been quite varied depending on where you look around the country, she adds.
Of particular note is a bit of a resurgence in the Auckland market. The REINZ data has median house prices in Auckland up by 0.2% to $848,000 in September, as compared to $846,000 at the same time last year. This is the first annual increase in median prices for the Auckland region in 11 months. Additionally, after many months of struggling sales activity, REINZ has the number of properties sold in September up by 6.3% year-onyear (to 1,823). Likewise, Barfoot & Thompson’ September data also suggests improvement in the Auckland market. It records an increase in activity with both new listings and sales up on August, by 14.4% and 3.4% respectively. The agency sold the highest number of homes (771) they have sold in September for three years. In line with this, their median sale price was up by 2.4% from August and by 3% year-on-year, which left it at $830,000. While QV’s data was not as positive, CoreLogic head of research Nick Goodall says it does shows signs of new life for Auckland values, with the quarterly percentage change moving out of negatives for the first time in 2019. But CoreLogic’s mapping does highlight pronounced geographic trends across the Auckland region, he says. “The weakness was greater in the North Shore and some of the more expensive suburbs closer to the CBD, while, at the other end of the scale, there are parts of the city, particularly down south, where values have actually increased over the last year.”
Affordability – or a lack of – has long been an issue. But the latest Massey University Home Affordability Report records further improvement in national affordability, due to declining house prices in many areas and falls in mortgage interest rates. Report author Arshad Javed says that, at the national aggregate level, affordability improved by 2.6% in the most recent quarter (June to August 31), after two previous quarters of modest improvements. However, there were mixed results on a regional level, with half of the 16 regions showing improved affordability and the other half showing declines. “Most of this is being driven by house price fluctuations, including in Auckland where the median house price declined by $40,000, resulting in an 8% improvement in affordability for the region.” Gisborne also saw a particularly significant improvement in affordability with a 12.2% improvement and, again, this was largely due to a decline in house prices. Despite improving, Auckland remains the country’s least affordable region. Similarly, despite a 16.2% increase in median house price, West Coast is still the country’s most affordable region.
Meanwhile, CoreLogic has reported that the third quarter of the year has seen an increase in the number of investors taking out mortgages.
Mortgaged investors’ share of property purchases came in at 25%, which is the highest level since late 2016. Further, the number of investor purchases has increased too. CoreLogic senior property economist Kelvin Davidson says the rise in mortgaged investors’ market share has been seen across the country and in Dunedin cash investment has also bounced back. “It’s an appreciable rise for investors and is likely to reflect higher yields (4.0%), worsening returns on other assets – and in Dunedin’s case, still-strong capital gains. Another breakdown of the data shows, again, that it’s the smaller players that have boosted the investor market share in Dunedin – ie: the two property, ‘mum and dad’ investors.” This means the purple patch for first home buyers may now be ending, with investors returning to the market and more competition for purchases likely, he says.
So what do commentators make of the current market conditions? Overall, they take a pretty positive view, with many pointing to the ongoing lack of listings as a contributor to price pressures. Kiwibank senior economist Jeremy Crouchman sees real signs of strength in the housing market in September, with the REINZ data showing house prices growing in most regions. “What’s more, strength was seen in Auckland’s market, a market that has been dragging headline indicators down.” They are optimistic about the outlook for the
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housing market heading into 2020, he says. “New Zealand still faces a severe shortage of affordable homes, and population growth remains well above average. Moreover, policy uncertainty has abated, and mortgage rates are heading lower. “We think the housing market will continue to strengthen heading into next year, and we expect aggregated price gains to pick up towards 5-6% year-on-year in 2020.” This will be driven by modest rises in Auckland, after over three years of either flat or falling prices. “But the regions that have experienced significant house price appreciation in recent years are likely to see gains slow as the current rally in prices runs out of steam.” Westpac chief economist Dominick Stephens goes further. In his view, the last two months’ worth of data strongly suggest the housing market is picking up and that’s a game changer. A third month of similar data will seal the case and will be important for the Reserve Bank, he says. “On monetary policy, the Reserve Bank would be more likely to conclude that it has lowered interest rates far enough – that’s why we are forecasting one further OCR reduction and no more. It is unlikely that the Reserve Bank’s policy of loosening the LVR restrictions will be eliminated, but a stronger housing market might slow the pace of loosening.” Westpac’s expectation remains that low interest rates will help to lift house price inflation to 7% per annum over 2020, Stephens adds. ✚
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By Dan Dunkley
Moving with the
millennial market Millennials are a growing segment in the property market, so how can advisers win them over?
Millennials, people born between 1981 and 1996, represent roughly one-quarter of the world’s population. The demographic has already overtaken Generation X and Baby Boomers to become the largest generation in the US, representing a significant and powerful voting bloc, and an increasing source of influence on the global marketplace. In the New Zealand property market, millennials have also grown in influence, bolstering a growing first home buyer market. FHBs have taken an increasing proportion of home sales over the past two years, as investor figures remain subdued. According to Reserve Bank data from August, FHBs represented 17.13% of the market, up from 14.4% in August 2017. As millennials are enticed into the property market by record-low borrowing rates and flattening prices across the country, advisers may have to adjust the way they do business. Millennials do things differently; from the way they interact with their broker, the type of advice they want, and the type of service they demand.
Clients buying their first home will eventually look to upgrade. So these clients have a lot of longevity. Elyce Maxwell Many millennials remain frozen out of the property market by the need for huge deposits and the high prices in our biggest cities. Yet advisers should think about the next generation of homeowners and their future client base. How should mortgage advisers approach the millennial market? How is this market different from Baby Boomers and Generation X?
HOW CAN ADVISERS WIN OVER YOUNGER CUSTOMERS?
Elyce Maxwell, head mortgage and insurance adviser at The Mortgage Girls, based in Christchurch, says millennial
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WHAT ARE THE MAIN THREE REASONS WHY YOU HAVE FINANCIAL INVESTMENTS? It's the best way to make money long-term
To earn higher returns than savings accounts
To plan for retirement
To reduce taxable income
To qualify for employer matching programmes/ contributions
To be part of a new venture
To support others (eg investing in someone's business)
I like the thrill
None of the above
Source: Calastone customers have different needs and expectations to other customers. Maxwell estimates between 40% and 65% of her customers fit into the millennial age bracket. Maxwell says most millennial customers dip into their KiwiSaver and use the HomeStart grant, due to significant deposit costs required for first home buyers. She says millennials are online-savvy, and her business uses online advertising to target the demographic: “We do a lot of [online] advertising, and it tends to be a good way of picking
customers up.” Once a customer is on board, Maxwell says millennials don’t “want to sit down and chat” face-to-face in many cases: “We use Skype, FaceTime, Facebook Messenger, so we can do calls and see the person, but they’re not physically in front of us.” Maxwell says millennials need a different type of advice: “You need to be patient, a lot don’t know what they are doing, so they need you to go through the different steps with them.” She adds millennial clients also have different expectations: “Society as a whole is moving to 24/7, and you need to be able to manage client expectations and give them realistic timeframes. Make sure the client understands how long it takes to do things.”
ARE YOUNGER CUSTOMERS RECEPTIVE TO WORKING WITH ADVISERS?
Maxwell believes online-savvy millennials like to seek specialist mortgage advice and information: “This generation is probably more adept to using a broker than the older market because they are talking about it online, the advice market is growing, and the younger age group are aware of the different options out there.” Advisers can also show their worth by providing links to other professional services. Maxwell says advisers can help by referring “a good network of professionals”, including lawyers, to FHBs: “Obviously that’s not compulsory, but it’s good to have someone you know who will do a good job and look after clients,” she adds. Maxwell sees “endless opportunities” for the millennial market, and views it as a key source of business for the future: “Clients buying their first home will eventually look to upgrade. Those people are going to upgrade to a second home, so these clients have a lot of longevity. They’re only starting their journey into homeownership. If you provide a good service, you will have a client for life.” Look after millennial clients, and there’s a strong chance they will refer you to others, Maxwell says: “They will tell others, and your customer base will increase. It’s all about doing the right thing by your client, as long as you’re doing that, the rest falls into place. A lot of our client base comes from word of mouth. If you do a good job, the client will tell others. We make sure advisers prompt the client, ‘if you know anyone that needs help, please let me know’.” Squirrel’s John Bolton says younger clients are generally “much more Craig Pope
digital-savvy” and “less tolerant of friction inside processes”. Bolton says younger customers want an “easy and fast” service, but “still want a personal relationship”. He says younger clients can find it difficult to work out whether they want to buy or rent, what type of home to buy, and where to buy. Craig Pope, of Wellington-based Pope & Co Mortgages, has seen “a lot of activity” in the millennial age bracket over the past year. He says the age group, which represents roughly 40% of his client base, demands more from their adviser, and advisers need to be prepared to go the extra mile. “They tend to be green to the whole process, in a good way, as they see the value in good service. They tend to need handholding, tend to be very social-media savvy, and technically proficient,” Pope adds.
EASIER INFO GATHERING
Pope says it is “easy to get info” and documentation from millennial clients, “as they know how to download and email stuff to us”. He adds: “That really helps. But it can be a struggle to get them to really read the information they are given. They’re labour intensive.” Pope adds millennials can be challenging, “as they seem to gather a lot of information before they come to us”. He adds: “Sometimes that’s a good thing, but everyone thinks they’re an expert, but they may not be prepared for the complexities facing low-deposit borrowers.” He says millennials often face a challenge finding cash for a deposit, leading them to seek funds from the “bank of mum and dad”. This, he says, requires further specialist advice from the broker: “A lot get help from
mum and dad, so we tend to deal with that through an acknowledgement of debt, to protect parents’ money in the event of a relationship breakup.” Pope’s business also helps millennials think about affordability: “Sometimes, we turn the lights on in terms of what their limitations are.” Pope guides millennial customers through the home-buying process with factsheets. “We give them factsheets to explain the different steps, and what happens in different stages. They seem to respond well to that ... We try to get away from selling on rate. We provide advice to help them through the complex world of buying a house, and help them every step of the way that we can.” Some advisers have made millennials the cornerstone of their business. Ryan Amoore, an adviser at Loan Market in Auckland, has been in the industry for three years, but has targeted the millennial homebuyer as the central part of his client base. “I’ve gone heavily into it and done a lot of social media marketing,” Amoore says. “Marketing has to be pretty planned out. A social media presence is a must. Millennials search you online, so you have to be visible across all platforms,” he adds. Amoore believes millennials are a great market to capture, as they “don’t want to sit down with four different banks for four hours”. He adds: “They can come to you with one
Ignoring the millennial market is ignoring your own business. They represent the future of the country’s mortgage market.
WHAT ARE THE MAIN THREE REASONS WHY YOU DON’T SAVE/INVEST? I cannot afford to
Ryan Amoore appointment and look at all their options.” Amoore says the “longevity is brilliant” with millennial customers. “A lot of them are in their 20s, and they will move. It’s better for me to be involved with them, as they will be on the market for years and I’ll be involved.” Aside from dipping into KiwiSaver or looking to mum and dad for help with their deposit, Amoore says millennials are exploring other creative ways to get on the housing ladder. “A lot of the time, clients don’t think they have an option, even if they have a good singular income. But we tell them to consider a Ryan Amoore close friend they
For all your non-bank lending.
I enjoy spending on other things
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None of the above
Source: Calastone can trust to buy a home with. Two mates buying together is no different from a couple buying. I’m seeing that quite a bit now, and mates are buying some nice properties.” As millennials become a bigger part of the property picture, how can advisers reach out to the market and win over the next generation? Marketing specialist Paul Watkins says advisers should seek out customers early in their home-buying journey. Watkins says: “I’d be looking to court that group early on, one or two years before they are in a position to buy. I’d lock them in by helping them with how much they
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need to save, budgeting, looking at different solutions, and keeping in touch.” Watkins says advisers should avoid “sales” language with millennials, and put out more “educational” information instead: “I don’t think this market appreciates being sold to. They consume millions of podcasts, webinars, and like to be educated.” “They live online, so that is how to get to them. I’d launch a series of educational things, about how to use KiwiSaver, or the Welcome Home Loan, as you can safely assume the market is mainly first home buyers. You could offer tips and advice on how to get that deposit,” he adds. “Social media can be very targeted, and you can target specific age groups. You should be realistic with them with the message, and tell them how they can get that first foot on the ladder.”
that might be ready in a year’s time, I’d be spending time with them. Brokers must have a bit of patience before they’re ready to buy, but if you spend the time, and secure the client, they could tell ten friends.” What are the risks of not engaging with millennials? Amoore says advisers can’t afford to ignore the next generation, and warns against overlooking people trying to get on to the property ladder. “Ignoring the millennial market is ignoring your own business,” Amoore says. “They represent the future of the country’s mortgage market and will be such a big proportion of buyers. If you’re not working with them and marketing towards them, your business could be deteriorating.” ✚
Watkins believes advisers should focus on their future millennial customer base: “Brokers tend to live for transactions, but if there are people
MILLENNIAL FACT BOX
33% – one third of
millennials own a property
48% of millennials rent a property
68% of millennials are interested in spending money on travelling and tourism 38% are interested in finance and investing 79% of millennials manage
a great deal of their life on their phone
20% of millennials do not save on a monthly basis
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By Miriam Bell
Anthea Livingstone, from Mortgage Link in Christchurch, has finance in her blood, so it’s no surprise that she is passionate about creating opportunities for mortgage seekers. WHAT PROMPTED YOU TO GO INTO THE MORTGAGE ADVICE BUSINESS?
I come from a family of bankers: my grandfather, my sister and brother, and now my niece as well. In fact, my first job after leaving school was for Trust Bank Canterbury. So I’ve always had an interest in banking and finance. But about five years back, I helped another mortgage adviser re-launch her business and did the admin and fixed rate renewals. At the end of 2015, she suggested that I train as an adviser and work with her: I took that opportunity and I thank her for that.
HOW DID YOU GO ABOUT LEARNING THE BUSINESS?
I asked lots of questions. I also found that the bank broker managers were super helpful. I studied lending guidelines and completed the level five lending paper.
HOW HAVE YOU FOUND THE BUSINESS SO FAR?
Challenging, ever moving and, most importantly, fun. It’s also super fulfilling. I love being part of the process of making dreams come true.
TELL US ABOUT YOUR BUSINESS?
We have a passion for working with people to make a plan and see them through the steps of that plan till it comes to fruition.
Anthea Livingstone, Mortgage Link It’s all about creating endless opportunities for everyone. We are a small team but a good one. I feel that I’m very lucky to have my own team around me – it makes it special.
WHY ARE YOU PASSIONATE ABOUT BEING AN ADVISER?
I opened my home ownership account at
15 because my big dream was to buy my first home. I achieved that at 21. I’ll never forget that feeling of walking in to my very first home. And I want to be part of creating that feeling for others. I also love to consolidate short-term debt and help people save money on the interest they pay, so that they can pay the debt off faster.
HOW DO YOU APPROACH BUSINESS DIFFERENTLY TO OTHER ADVISERS?
I think most advisers follow a similar process: compliance makes us do this. But, perhaps, one thing that makes us different is that we see every new client. Some other advisers tell me they will pre-qualify the call and make a decision whether to proceed to meet with the client. We see everyone as you never know where that meeting might lead. I have had first appointments with a client that didn’t lead to any lending but opened a door to a referral opportunity that was very beneficial. As far as my team is concerned, I think we might be the only financial advice business that has a concert clause in our contracts. “Concert leave: Time will always be given to attend music concerts.”
IS THERE A PARTICULAR AREA THAT YOU SPECIALISE IN (EG: FIRST HOME BUYERS, INVESTORS, COMMERCIAL, ETC)?
I have an absolute passion for finance for new builds. I have some amazing relationships with quite a few building firms in Christchurch. One of my favourite things is going to visit clients in their brand-new home. The look of joy on their faces and the satisfaction of knowing I helped with part of that process is incredible.
DO YOU MAKE USE OF SOCIAL MEDIA AND/OR NEW TECHNOLOGY IN YOUR WORK?
Yes, we use social media – Facebook, LinkedIn and the like. But this is definitely one area we are looking to do better in. In terms of technology, the new CRM at Mortgage Link (AdviceLink) is amazing. I was lucky enough to be one of the early testers and I have seen it grow to a super system that makes our life as an adviser much easier. It’s impossible not to be compliant using this system. I absolutely love it as it’s such a great tool for my business.
WHAT HAS BEEN THE HIGH POINT OF YOUR TIME IN THE BUSINESS? AND HOW ABOUT THE LOW POINT?
The high point has been launching my own business and moving to Mortgage Link as my aggregator. I’m so thrilled to be a part of such a supportive network of advisers. The low point is when you have to tell a client that they won’t get the house they so desperately wanted. It doesn’t happen often, but it is hard every time.
DO YOU HAVE A MENTOR? IF NOT, WHO HAS MOST INSPIRED YOU IN BUSINESS AND IN LIFE?
I am lucky enough to work with two amazing mentors. One is Sridhar Krishnamurti, who I have been working with for three years. He
challenges me to let go of limiting beliefs and see that there are limitless opportunities out there. The other is Barrie Rose, who has been coaching me more recently, especially in the insurance side of the business. Otherwise, my main inspiration is my family. That’s both my family of origin and my husband and children who give me the wings to fly.
WHAT ARE YOUR TOP TIPS FOR OTHER ADVISERS? Keep asking questions – never think that you are annoying. If you don’t know, then ask. That’s how we grow our knowledge. Always keep learning and challenging your brain. And see all the changes in our industry as a huge chance for new learning and opportunity. ✚
WHAT’S THE BEST ADVICE AND WORST ADVICE YOU’VE RECEIVED?
FROM: I’m Canterbury born
IS THERE A TYPICAL WORKING DAY FOR YOU? WHAT DOES IT LOOK LIKE?
FAMILY: I have my husband Glenn, five children and one stepdaughter. We also have two cats and a dog called Bagel.
The best advice I’ve been given is to stop being a people pleaser. And the worst advice was that I should worry about what other people think of me.
I generally do work and appointments between 9am and 3pm and then I’m Mum after school. I may do the odd appointment later in the afternoon. I love that I can run my business around family.
WHAT CHALLENGES – BOTH FOR YOURSELF AND FOR THE INDUSTRY – DO YOU SEE AHEAD?
For the industry, I think the changes to the financial advice legislation is one. It means a big increase in compliance – which is so necessary and protects us all – but it does present some challenges. Another challenge ahead could come from how the results of the Royal Commission in Australia affect New Zealand.
WHAT ARE YOUR BIGGEST LONG-TERM BUSINESS GOALS?
One of my biggest goals is to be a trusted mortgage and insurance name in Christchurch. Another is to build a team of amazing people who love what they do and who look forward to going to work each day.
and I live in Christchurch.
OUT OF WORK INTERESTS: Travelling,
singing, scrapbooking (when I have time), concerts and enjoying a nice glass of wine and antipasto with friends.
FAVOURITE FILM AND/ OR TV SHOW: Film –
Ghost (I love Patrick Swayze).
FAVOURITE BOOK: The
Tea Rose series.
FAVOURITE MUSIC: The Beatles, George Michael, Wet Wet Wet, Queen, Gary Barlow. MOTTO: Don’t Stop Me Now (I’m having such a good time). Credit: Freddie Mercury.
By Jonathan Flaws
Gumboot diplomacy Wading through the new Financial Services Legislation Amendment Act. It is easy to get bogged down wading through legislation and regulations – particularly if it is new and untested. The Financial Services Legislation Amendment Act 2019 (FSLAA) represents the Government’s attempt at regulation and professionalisation of financial advice through licensing. To avoid a “lost in translation” when approaching any legislation, it helps to start with the definition section. This tells you what terms used in the legislation really mean. Understanding how terms are defined can prevent wild goose chases. The FSLAA defines: “financial advice”; ”financial advice product”; “financial advice provider” “financial advice service”; “financial adviser”; and ”regulated financial advice”. A “financial advice product” includes a consumer credit contract, but not a non-consumer credit contract. Lining up the “financial advice” definitions and understanding the intricacies of each defined term is a confusing business. Perhaps the first step in overcoming the confusion is to spend some time looking at the FMA website. A good place to start is the jargon-busting page: https://www.fma.govt.nz/compliance/ role/fap-new-regime/understanding-thejargon/.
To be exempt an adviser has to be certain that in laying out the options for a prospective borrower it is not personalising the options. FINANCIAL ADVICE / REGULATED FINANCIAL ADVICE
“Financial advice” is said to be as defined in section 431(c) of the Financial Markets Conduct Act 2013 (the FMCA) which is the main Act that the amending legislation amends. In fact, “financial advice” is not defined but you are told you will be giving it if (among other things) you make a recommendation or give an opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product. “Regulated financial advice” is financial advice given in the ordinary course of business and not excluded under clauses 8 to 18 of Schedule 5. So the first important step (before considering the licensing issues) is to decide whether you are providing financial advice and if so whether that advice is regulated or exempt. Section 31(c)(2) provides that you do
not give financial advice “merely” by doing one or more of the things set out in clause 7 of Schedule 5 of the FMCA. The exclusions include: • providing factual information – eg about the costs or terms and conditions of a financial advice product or how to go about acquiring one • carrying out a person’s instructions to acquire a financial advice product • making a recommendation about a kind of financial advice product rather than another particular financial advice product • recommending that a person takes financial advice or passing on financial advice from another person • giving certain things like a disclosure document • carrying out a prescribed activity. The FSLAA and FMCA seem to have overlooked defining a “prescribed activity” but I assume it means the activities set out in clause 8-18 of Schedule 5 carried out by exempt persons. These exempt persons are persons such as lawyers and conveyancers, journalists, accountants, real estate agents, valuers, etc. which are giving financial advice
in the ordinary course of their business. Clause 10 of Schedule 5 exempts financial advice given by a lender to a borrower for the purpose of complying with lender responsibilities. But only if “the lender has taken reasonable steps to ensure the borrower understands that the advice is not regulated financial advice and the implications of that”. By this time, if you’re wearing gumboots, you may start to feel damp around the toes as the swamp water transfers to the inside. For example, if you take the definitions literally, giving factual advice about the options and products available without recommending any specific product is excluded from the definition of financial advice. It seems that if you give a generic opinion such as it is your view that it is better to fix an interest rate for a period so you have certainty rather than float, it is not giving financial advice. To be exempt an adviser has to be certain that in laying out the options for a prospective borrower it is not personalising the options so that what is hoped is generic advice is taken by the borrower as specific advice on a specific product. If all you do is lay out the options in front of a person, recommend that they get financial advice from another party (such as their accountant who they should go to for the purpose of making sure they can afford the loan) and then help them to acquire the loan, it is arguable that you are not providing financial advice. You may be forgiven for thinking it is not helpful if you can give financial advice but not be giving “regulated financial advice” in certain circumstances. For example, if you are a lender and giving information about your product in order to comply with your lender responsibilities you may not be providing regulated financial advice. Should you rely upon these exemptions in all cases? Will these exemptions keep your feet dry? Probably not so if you are in the business of giving advice on a consumer credit contract you will need to be registered.
RESPONSIBLE LENDING AND FINANCIAL ADVICE
Which raises the question, is a lender giving advice when it assists a consumer borrower to make an informed decision on the credit contract it proposes to offer the consumer? If the lender wishes to rely on the exemption it has to determine the reasonable steps that it will take to ensure the borrower understands that this is not regulated financial advice and the implications of that. Assisting a consumer to
Interestingly, if you are a financial service provider you cannot (by definition) be a financial adviser. make an informed decision is not necessarily giving financial advice if the lender has given the consumer sufficient information to enable a reasonable consumer to consider the proposed loan against other options. But how does a lender know the consumer is able to make an informed decision if it doesn’t get into the mind of the consumer and understand what other options are available to the consumer? Is the lender being responsible if it protects itself by refusing to give any advice and simply lays out its product fully and comprehensively in a clear and concise manner that is not confusing? If the lender exemption in clause 10 of schedule 2 is to be effective then the answer must be yes – but only if the lender explains that it is not giving financial advice and the effect on the borrower of it not giving financial advice. What this means is that lenders who do not have a direct distribution channel and who do not deal direct with retail clients may rely upon the exemption. But they are likely to need to include in their documentation a clear no advice clause recommending that the borrower take independent financial advice. If the loan has come via a licensed financial service provider then it appears that the lender can rely upon that FSP to have complied, either by providing direct financial advice to the consumer or by ensuring that financial advice has been provided through an authorised body (another FSP) noted on the FSP’s licence or by a financial adviser or a nominated representative of the FSP. If the lender has a direct distribution channel, it might rely on the exemption but is likely to require the lawyer acting for the consumer to certify that the borrower has taken or been advised to take financial advice. Alternatively, the lender may itself register as an FSP and have its own nominated
representatives. This is more likely if it has been registered as a QFE in the past.
FINANCIAL ADVICE PROVIDER / FINANCIAL ADVICE SERVICE / FINANCIAL ADVISER/ NOMINATED REPRESENTATIVE / PRODUCT PROVIDER
If you give regulated financial advice you will need to be licensed. Giving regulated financial advice is now referred to as a “financial advice service”. If you provide a financial advice service you are (by definition) a “financial service provider”. A “person” (ie an entity or an individual) can be a financial service provider. Interestingly, if you are a financial service provider you cannot (by definition) be a financial adviser. If you are a “financial adviser” you must be an individual. Being an individual and a financial service provider means you are not a financial adviser. This means that a retail borrower receiving a financial advice service must always have a contract with a financial services provider. More importantly, it also means that if you are an individual and give advice to your own clients direct (ie not under another party's licence) then you must be registered as an FSP. If you also wish to give advice under another party’s FSP licence as well, then you will need to register as an authorised body for that other FSP. ✚
Transitional licencing opens on November 4 for a period of six months. You need to be fully licensed from June 2020 after which time you will not be able to continue to provide advice if you are not licensed. If you have not yet obtained a pair of financial services gumboots, now is the time to start shopping. Jonathan Flaws is a partner at legal firm Sanderson Weir
SALES & MARKETING
By Paul Watkins
Why your marketing
Does your marketing need a bit of an overhaul? Paul Watkins can help with that. While last time I covered a check-list or a pick’n’mix of marketing options, it is apparent that some brokers are making some fundamental mistakes in their marketing activities. Here are some of the more noticeable (and easily remedied) ones. 1. A POOR ONLINE PRESENCE
Prospects are googling your name and brand and what shows up? Many brokers have websites, but they are not mobilefriendly. LinkedIn is still given just a passing glance by most good brokers and Facebook
is almost totally ignored. This is now critical, you need to have a very good presence on Facebook, LinkedIn and your website (linked through Google My Business). Ignore Instagram, Snapchat, YouTube and other platforms for now and focus on the big three outlined first. The main reason is a lack of knowledge as to how to do this. It’s not expensive to buy in the required expertise.
targeting no one. Prospects search for the specific service they require, such as: “How do I get a mortgage for my first home” or “Who can offer mortgage advice in Masterton?” or “What is the best type of rental house mortgage?”. Your brokerage should have web pages dedicated specifically to each service that you offer, so they can be found. Few brokerages do this.
2. A VAGUE, OR LACK OF, DEFINITION OF THE TARGET AUDIENCE
3. BELIEF THEY ARE GIVING AWAY THEIR INTELLECTUAL PROPERTY
“I offer mortgage services to first-home buyers, those wishing to move to a new home, investment property buyers and those with rough credit histories.” So, this broker is
This is a big one that many are fearful of. We live in a world of information. Almost any known question will have an answer posted about it on the internet. You only have to
6. NOT FOLLOWING UP WITH “DEAD” LEADS
search for it. Yet few brokers give good levels of information. The fear is that if they tell the client too much about how to find and secure a mortgage, their services won’t be needed. Wrong. The more you tell, the more you position yourself as an expert. If I google: “How do I get a mortgage if I have a bad credit history?” then if you do not have an article or blog post on that topic, that potential client won’t be contacting you. Note, you may not want such clients, this is just an example.
If a prospect decides not to take out the mortgage, doesn’t qualify or goes with someone else, all is not lost. Most brokers write them off as “dead” and even take them off their database. But it could simply be a matter of timing. A year or two down the track their circumstances could well have changed. So keep in touch. And if not them, and you treat them well, they can still be a referral source.
4. WORRIED ABOUT WHAT OTHERS MIGHT THINK OF YOU
7. NOT HAVING A CONSISTENT BRAND
This is a strange one, but I have found it to be more common than I originally thought. By definition, most brokers are extroverts as they are on sale, but many prefer to play down their expertise. Some tell me that phrases like: “We specialise in …” and “Your Whakatane first home mortgage expert” are arrogant and ego-driven and might annoy lenders or fellow brokers. Wrong. Shout about where you truly believe you offer amazing service and expertise. Be an industry leader to your chosen target market. If you say something often enough it must be true.
Basic stuff, but not always attended to. Some have business cards, signage, presentation folders, car signwriting, colours and brochures looking like they were all designed at different times by different graphic designers. I even met one with business cards that had an old office phone number on them, but still handed them out as “I still have about 200 of them, so will get new ones once they run out". For the sake of about $70 for new ones, he was happy to wreck the professional look. Lay all of your visual promotional items out on a table. Do they all have a common look, font and colour palette? If not, engage a good graphic designer.
5. NOT MEASURING YOUR PROMOTIONAL ACTIVITY’S EFFECTIVENESS
8. NOT KEEPING IN TOUCH AND TAKING TIME TO DEVELOP RELATIONSHIPS
Did your last promotion work? What leads did you get from that radio campaign? How many converted? What response did your latest newsletter get? For each campaign it is important to measure this. A mistake I see quite often is multiple campaigns being run concurrently and no method of working out which one is working best. “Brand awareness” can work, but only if it is tied to an actionable campaign.
Does every phone call or email lead directly to a sale? Does every message you send out through LinkedIn or Facebook lead to a sale? Unlikely. This is because we are far wearier of sales messages now. We need time to digest the message and work out how it fits into our lives. Or worse, we will take the time to compare your offer of service to others. So slow down. Take them down a path towards choosing you. Give them worthwhile
information that proves your expertise, rather than going straight for the jugular. The way we live our lives now, we move more often than we used to, change jobs FAR more often than ever before and even change partners more often – there are 20,000 marriages in New Zealand annually and 10,000 divorces. So the situation of your clients and prospects just 12 months ago has probably changed, and will most certainly have changed within three years. So, keep in touch with everyone you can. Never lose a contact. Keep them up to date by offering case studies, suggestions, changes to interest rates, new ways to finance unusual properties, how-to guides on mortgages, things to be conscious of when applying, why many loans are declined … you will not run out of interesting ideas if you devote some time to it.
9. NOT HAVING A VALUE PROPOSITION
The last big mistake looks to be the most obvious. Very few brokers can articulate the value they add to their client’s lives. Why should they use you? Surely going direct to the lender is easier, quicker and simpler? You and I both know that that is not true, but do your prospects? Unlikely. How do you work this out? What problem are you fixing for your clients? Why is your service perceived as valuable? What challenges does it help your clients overcome? What keeps them up at night? Your service is intangible, it’s a feeling, a promise, a value in their minds. Be very clear in how you write and speak about it. And remember that no one buys a mortgage, they buy their dream. This is a key in working out your value proposition. It’s not all doom and gloom, go through the nine mistakes and remedy them one by one. ✚ Paul Watkins writes blog content and newsletters for financial advisers.
What used to work is always the thing that is going to put you out of business - Gary Vaynerchuk
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By Steve Wright
How important is your Scope of Service? Getting your insurance ‘Scope of Service’ agreement right – worth worrying about?
How much time do you spend documenting Scope of Service agreements with clients and are you giving enough attention to a critical piece of documentary evidence? I think a Scope of Service document is very important. It is essentially the contract between you and the client and should cover all the things you agree to. (So yes, clients should sign it too.) It’s about creating certainty about each party’s obligations, what you will do for the client and what the client needs to do in return. Many Scope of Service documents I have seen for life, health and disability insurance advice are probably inadequate, either for protecting the adviser in any dispute or for complying with the new laws. If you are ever called on to explain your conduct, advice or service provided, can you prove what it was you agreed to do for the client? Besides this, Code Standard 4 of the new Code of Professional Conduct for Financial Services
(the Code), which applies to all financial advisers, demands that you “ensure that the client understands the financial advice” you give or don’t give. You must give the client enough information to enable them to make an informed decision about what they are engaging you to do and whether or not they should be engaging you. Although the Code does not specify where or how its requirements must be met, some aspects fit neatly into the Scope of Service agreement. Here are some matters you might want to consider covering off in a Scope of Service agreement, but, please note that this is not an exhaustive list and you really should think about what is appropriate for every client. • Who the client is: Who is engaging your services? This may not be so obvious and may not be the same person as those eventually insured. Is it the individual client alone or a family? Is the client both partners in a relationship or only one? Is your client acting personally or as a trustee? Is it a business (and who is the business, a natural person or group of persons or a corporate person)? It is entirely possible your individual human client is actually multiple different clients. I doubt the fact find is the right place
It is essentially the contract between you and the client and should cover all the things you agree to. to get this information because you need the real person identified to sign the Scope of Service – the right “person” needs to engage you and this happens with the Scope of Service. • The advice or service you agree to provide: What are you agreeing to do for the client? Is it broad, for example, all the different life and health risks and insurance solutions required or is it narrow, as in “we have all the insurance we need but want some advice on medical insurance only”? I think it is important for advisers and clients to both understand what the adviser will do for the client, including what
the adviser will not be doing (so if it does not include advice on travel insurance and fire and general insurance for instance, you should probably make this very clear). As mentioned above, the Code requires that clients understand the nature and scope of the advice being given, as well as any limitations (some of this may be appropriate to include in a Scope of Service agreement and some in the Statement of Advice). - Is advice on the suitability of existing insurance products required or not? -Is no advice required (execution services only)? • Some explanation of the advice process and likely implementation procedure: The process a client goes through for getting life insurance would typically include a fact find, Statement of Advice incorporating a recommendation, an insurance application and associated disclosure of personal medical history, possible blood and other medical tests, premiums to pay and so on. Many clients do not expect all of this and it may be useful to set the expectation early. Some advisers turn all of this into a “client’s obligation” section, to make sure clients are happy to do this and avoid any unpleasant surprises for the client down the track (which can sometimes stop the process completely and end up with the client taking no action at all). It’s usually better to get their buy-in to do this all up-front. • A declaration of important disclosure issues: Explaining the client’s duties of disclosure, both to you and to any insurer and possible consequences of nondisclosure, is very important. I’d consider adding this even if the disclosure issue will be revisited multiple times during the advice process. By dealing with it in the Scope of Service you can get the client’s undertaking to do it properly and when required, in particular: - during the fact find (you may want to make it clear that your advice is only as good as the information they disclose to you) - when filling out the application and thereafter during the application process. In particular (because they won’t realise the need to do this) disclosing changes to health and other new risk factors arising during the period between signing the application and cover being issued.
The more you specifically agree with the client the less opportunity exists for disputes. • Which product providers you can and will consider: Insurance provider selection makes a difference (and sometimes a very big difference). Advisers who select client solutions from a broad range of providers deliver a significantly better service than advisers who cannot, or will not, do this. If you cannot, or will not, consider a range of providers allowing you to offer the client the most appropriate options available in the market, then I suspect it would be wise to explain this disadvantage and the inevitable likely downside to the client. • Fees and charges: Confirmation of the fees or other costs payable by the client and any commissions you will be paid. It is likely some new obligations to disclose commissions will soon apply anyway. • Reviews: Agreement on how often reviews will be done and a recommendation that clients call you if they experience “lifestyle events” likely to need a review of their insurance, like marriage, birth of a child, buying a house, etc. This is important because, aside from an immediate increase in the cover needed, many providers allow cover to be increased regardless of health if these types of major life events happen, but there are time limits. • Termination: Details on who can terminate the agreement and in what circumstances. Some of this can be done later, on actual termination, but it may prove practically difficult to get agreement if you cannot contact the client. - I would consider confirming that if the agreement is terminated and no new agreement entered into, you will no longer have any obligation to the client, that no further services will be provided by you and that the client understands that they will become solely responsible for ensuring all their financial advice needs are catered for elsewhere. - If the agreement is terminated by you,
details of whether or not you will refer the client to another financial adviser and that the client authorises you to pass all client files, documents and information to such new adviser (on the client’s request). - If you will continue to be paid commission on policies owned by the client after they have terminated your services, as is currently common, you may want to get the client to confirm they have no objection to this. • Disputes and complaints: If not done elsewhere as required, details of what to do if the client has a dispute, details of your Dispute Resolution Scheme and how to submit a complaint. You may wish to ask the client to notify you as soon as they have any complaint so that you can take reasonable efforts to resolve any complaints in a fair, reasonable and timeous manner. • Claims: What will you do (or not do) for the client if they ever qualify for a claim? Does this include claims proof gathering and will you assist clients with making complaints? Are the costs of doing this covered by renewal commissions being earned? • Privacy: You might also want to make a statement about client privacy and security of information. • Other advice: Once you have established the client’s needs, you may suggest clients take advice you cannot give them, for example, on investments; fire and general insurance; wills and enduring powers of attorney. It might be worthwhile explaining that you are not responsible for the advice given by such other professionals or their fees. The more you specifically agree with the client the less opportunity exists for disputes. Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Professional Development at Partners Life. This article is for information purposes only, its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product.
By Michael Lang
Which KiwiSaver funds will weather the currency war? It’s important to understand how different KiwiSaver Schemes manage foreign currency within their international share exposure. Michael Lang explains. Foreign currency movements have again been in the news with the United States Treasury labelling China a currency manipulator. These movements can also have an impact on clients’ KiwiSaver returns. This is dependent on how a Scheme’s manager treats the foreign currency exposure they get when purchasing international assets. To understand how different KiwiSaver Schemes manage foreign currency within their international share exposure, we reviewed 77 KiwiSaver funds which have an international share exposure of greater than 40%. Information on these funds was sourced from their Fund Updates and their Statement of Investment Policy and Objectives (SIPO). KiwiSaver Scheme managers treat foreign currency exposure in one of four ways. First, they can do nothing and when they purchase international assets, just hold those assets in foreign currency until they are sold. This is what the industry refers to as unhedged international assets. The downside of this approach is evident. If the foreign currencies your KiwiSaver Scheme assets are denominated in collapse, so too will the value of your KiwiSaver investment. Eleven of the 77 KiwiSaver funds we reviewed followed an unhedged approach. Should the New Zealand Dollar recover, and trade at US$0.80 as it did from 2011 to 2014, these funds would underperform their peers by around 18%, all other things being equal. Second, a manager may choose to permanently hold your investment in New Zealand Dollars, even when investing abroad. This is done by hedging all foreign currency exposure back into New Zealand Dollars. Investors receive the return generated on the assets they hold, for example shares in Amazon or Nestle, and forego any gains or losses from currency movements. Third, your manager may decide there is
CURRENCY HEDGING APPROACHES
merit in a bit of both and establish a policy of hedging a fixed percentage of your foreign currency exposure. A common approach is to hedge 50% of the exposure. This is a “point of least regret” approach. The manager is never wrong, but then neither are they ever right. The fixed portion approach is currently used by eight of the 77 KiwiSaver funds reviewed. The fourth approach is for your KiwiSaver Scheme manager to actively manage your currency exposure. This is the most popular option with 53 of the 77 KiwiSaver funds reviewed saying they follow an active currency management approach. Whether managers are truly active or not is difficult to judge. A number of managers outline large ranges, for example 0 – 100%, within their SIPO, but when looking at Fund Updates they only seem to vary their currency exposure by 5 – 10%. Other managers outline large ranges and a target exposure, but do not disclose their foreign currency exposure in their Fund Updates, making analysis difficult. Some managers claim to be active but utilise external fund managers that have
both hedged and unhedged options and use this to manage their currency exposure. To change their exposure, they change the external fund they access. This is not the same as active currency management, as we define it. These managers are not able to take a view on a specific currency, for example, be unhedged against the British Pound but remain fully hedged against the United States Dollar. Few managers seem to have both the skills and will to implement their views in enough size to make a difference. If a manager is successful in adding value through active currency management, they provide their clients with another source of returns, and one that is independent from share market returns. Our analysis suggests Fisher Funds, QuayStreet Asset Management and NZ Funds all fall within this category. Being hedged, unhedged or partially hedged can have a big impact on the returns a KiwiSaver member receives from their international assets. Over the three years to 30 June 2019, the global share unhedged index returned around 13.9% p.a. compared to 11.9% p.a. from a hedged index. Active currency management can mitigate the difference between these two indices. For example, NZ Funds added around 1.2% p.a. to the return of its KiwiSaver Growth Strategy through active currency management over the same period. Which strategy suits you and your clients will depend on the circumstances. Demonstrating to clients your knowledge of the different styles of currency management is invaluable. Michael Lang is Chief Executive at NZ Funds and a member of the NZ Funds KiwiSaver Scheme. New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest Product Disclosure Statement for the scheme is available on request and at www.nzfunds.co.nz.
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