Interest rates could be hard work for advisers

Deposit rates look set to rise this year, and commentators say this will raise the bar for financial advisers looking to attract consumers.

Friday, January 24th 2014, 6:00AM

by Niko Kloeten

Deposit rates remain close to record lows while the Official Cash Rate stays at 2.5%.

One-year term deposits are currently sitting at around 4%, moving up to 5.5% for a five-year term.

In contrast, savers could get one-year deposits of 8.8% back in 2007 before the recession and global financial crisis hit.

BNZ chief economist Tony Alexander predicts the OCR will increase by 125 basis points to 3.75% by the end of the year, dragging short-term deposit rates up with it.

“Broadly, short-term deposit rates up to one year will go up by about 1%. However, there will be less upward movement for longer rates, as the yield curve which is positively sloping will slowly flatten.”

Industry commentator Clayton Coplestone says consumers use deposit rates as a benchmark when assessing their investment options, and the rise will have implications for financial advisers.

“From the consumer’s perspective the benchmark is always what else can I do with my money, and what risk premium would I require to justify investments such as property or shares?”

The required risk premium is generally thought to be 2-3% but some people say it’s as high as 6%, Coplestone says.

“So advisers need to return 7%-8% net of fees just to attract the attention of consumers. If term deposits go up by 1%, all that’s really doing is lifting the bar for the financial services industry.”

Financial Focus adviser Murray Weatherston also sees the predicted increase in deposit rates this year as a challenge for advisers looking to attract investment.

“Banks are going to be paying a little bit more in interest than they have previously. Many people may actually continue to keep their money in the bank. There isn’t going to be a huge flow of money out of there.”

Weatherston says another factor working against advisers is the hot property market, particularly in Auckland.

“The rising property market will continue to be make it a pretty attractive place for people to put their money."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

« 'Hard slog for solo advisers'

IFA working on pro-bono offering »

Special Offers