Savings Industry

The 2002 year was yet another learning experience for investors, fund managers and advisers.

The lessons of the 1987 downturn were quickly lost as long-term investors were suddenly faced with risk and capital loss after nearly a decade of upside. A number of long-term investors suddenly ran for the safe haven of cash and short-term deposits.

Many investors and possibly some advisers now realise that risk is more than volatility of returns and that it involves actual loss of capital.

As a result there are some seriously disenchanted investors who, having taken the loss and cashed in their units, may never return to managed funds. Fortunately, many investors have sat out this prolonged downturn and will be looking to their fund manager to commence the process of rebuilding their wealth.

The coming year will be a major test of the skills of the industry (both fund managers and advisers) which will require not only positive investment results but carefully planned communication to nurture and grow investor confidence.

Attention is focusing on the level of fees.. This scrutinising is likely to continue. Secondly, investors (those not in a passive fund) are becoming irritated by advice from their fund manger that they outperformed a particular index – if the return has a minus in front of the number then how they did against an index adds nothing. Investors are fixed on absolute returns.

This year will be significant for advisers, Government will release its plans for investment adviser disclosure legislation – change is certain and resistance will serve no purpose.

We need to recognise that investment adviser disclosure legislation covers a wider market than just the products of ISI members. The Securities Commission and officials have a responsibility to eradicate dodgy investment schemes and tidy up areas such as contributory mortgages.

Overall, the new legislation will not be too onerous and should be encouraged. Moves that improve investor confidence must be good for the industry in the long run.

The possible extension of GST on financial services has the potential to make life more difficult for managers and advisers unless the officials wake up to the distortions that they risk creating.

It makes little sense to introduce additional tax in the form of GST on some managed fund savings products at a time when Government should be seeking to increase personal saving.

We should be under no illusions. GST will flow through to the investor in the form of higher fees – there is no other option.

The ISI prepared a powerful submission spelling out the stupidity of even considering extending the GST regime that would make unit trusts and group investment funds subject to GST with life insurance, superannuation and bank deposits exempt.

It also makes no sense for commission remunerated advice to be subject to GST and salaried advice not.

These are distortions of the very worst kind.

It would be fundamentally wrong for selection of investment/savings products and the method of accessing those products to be driven by taxation.

The savings regime in New Zealand urgently needs to be improved to remove tax distortions that influence investment decisions, not considering moves for extending or increasing market distortions.

The IRD view is based on the premise that explicit fees should be subject to GST whereas margins cannot be identified and therefore would not be subject to GST. If the IRD view prevails then there is the very real risk that product providers will start looking for ways to move from charging fees to building in margins, destroying the transparency and disclosure that has taken a decade to create.

The industry and insurance advisers will need to pay closer attention to disability income claims. Income protection policies continue to be the fastest growing product sector. However, at ISI we are experiencing a rapid increase in the number of enquiries from concerned policyholders regarding possible claims. The Insurance and Savings Ombudsman is experiencing a rapid escalation in the number of disability income disputes. Clearly, a gap exists between the consumer and company expectations.

Vance Arkinstall is the chief executive of the Investment Savings & Insurance Association.

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