Lack of savings products contributed to finance sector collapse

A lack of plain-vanilla savings products helped contribute to the collapse of the finance sector over the past few years as investors were left with too few options.

Tuesday, August 10th 2010, 5:11AM 3 Comments

by Paul McBeth

Investment adviser Peter Hensley says the narrow range of savings products helped contribute to the "influx of funds into the non-bank sector" that ultimately led to the collapse of more than 50 finance companies.

"The investment advice industry needs to prepare itself for the pending retirement of the baby boomers," Hensley said in a discussion paper he wrote on retirement income streams. "Those advisers specialising in building cost effective diversified income biased portfolios realise that our limited investment market simply does not have enough suitable retail products to satisfy demand."

The country's ageing population has dominated headlines in recent weeks after former National Party leader and Reserve Bank Governor Don Brash raised the need for the country to address the cost of pension for the baby boomer generation.

The main challenges for both DIY investors and professional advisers are finding the right investment vehicles at the appropriate risk level, in the right quantity, Hensley said.

"Some patient investors recognise the need to start early and are prepared to build their portfolio over time. Experience has shown that it can take up to five years to select a range of suitable risk-related investments to generate a level of income expected," he said.

Hensley supports the use of a collective investment vehicle to promote retirement savings, though these should meet the minimum requirements set by the government-mandated KiwiSaver scheme.

Paul is a staff writer for Good Returns based in Wellington.

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Comments from our readers

On 10 August 2010 at 10:08 am Independent Observer said:

Whilst I’m a big fan of Peter, I’m unable to support his view on this occasion.

During the heady-days, NZ investors had plenty of investment options to select from (albeit a few less are available today) straddling both debt & equity.

Unfortunately for many, the combination of slick marketing, investor greed, and ignorance about risk (and in some cases – corrupt advice) meant that finance companies received a disproportionate level of support.

On 10 August 2010 at 11:34 am Barrington Smythe said:

I agree with Independent. There were plenty of options available for building income generating portfolios (particularly on the listed debt market, from the likes of Rabobank and Infratil) but these were ignored for a number of reasons:
1. Low commission (compared with many debentures).
2. Inability for advisers to 'ladder' portfolios to make sure they got commission every 6 months from each client.
3. Total misunderstanding of the risk of debentures, which unfortunately was in part perpetuated by websites like Good Returns (see Phil's Blog http://www.goodreturns.co.nz/blog/thinking-finance-companies from way back in Sept 2005).

What ultimately led to the collapse of finance companies was simply that (as was entirely predictable) as soon as one went under (Provincial), investors realised that there was a risk involved and stopped reinvesting. Almost all finance companies were reliant on reinvestment as they had next to no equity and were borrowing short and lending long.

On 10 August 2010 at 11:05 pm Disclosure said:

RBOHA now trading at $80 per $100 and IFTHA now trading at $62.50 per $100 was probably a good idea on issue to exclude these debt securities from income generating portfolios. Just as excluding Provincial, Babcock & Brown, Hanover, North & South, Strategic, St Laurence, Dorchester and Mascot was equally a good idea. Most of these securities at one time or another were listed on Hensley’s website and probably also appeared in his clients income producing portfolios.
There are still plenty of options available for building income generating portfolios, unfortunately a number of the options have become tired and dog eared around the edges.