Low interest rates likely to be a problem for some time
Advisers and clients will need a mindset shift to deal with many more years of low interest rates, it has been predicted.
Thursday, June 16th 2016, 6:00AM 
11 Comments
by Susan Edmunds
PwC has released a new report, examining the future direction of interest rates.
It says there is a 75% probability that the 10-year swap rate will be at 4% or below for the next two to five years.
Financial adviser Martin Hawes said that meant some advisers would have to change their investment strategies, particularly for clients who were worried about income.
“We need to move instead to think about total returns. A return which is a capital gain, which you can expect over long periods of time, is not quite as good but is valuable as well. You can access that to buy the groceries by selling units or shares.”
He said some clients could shortchange themselves by "scrambling around the place" looking for the highest interest rate they could find or the best dividend yield.
“If you say we won’t buy this Ryman share because it has a 2% dividend yield but instead buy something else with 7%, that’s the wrong way to think about it. Just because most of the return is in capital gains should not mean you don’t invest in it. The total returns should be about the same.
“It’s a mindset change for clients who are looking to use their investment portfolio to get the necessities to be able to live. They immediately think of income, how can I do better than the 3% I can get from the bank and thrash around and might end up taking more risk.”
He said some investors were foregoing international investment exposure because they could get better dividend yields in New Zealand.
Jeff Stangl, of Massey University, said the biggest problem for advisers was making sure clients remained in appropriate investments for their circumstances.
"Advisers need to be aware if they are moving their investors out of their stated risk profile into different asset categories. That's a real issue."
He said it was something that was becoming a big problem as people who had budgeted a set amount for retirement realised they were not going to get the interest rates they expected.
Hawes agreed it was also important to maintain asset allocations and not be enticed by past returns into becoming too overweight in a particular asset class. “It’s very tempting to become more heavily weighted into equities but when you do that you have to realise you are taking more risk.”
| « Ageing workforce an issue for advice | LVR restrictions to be reviewed » |
Special Offers
Comments from our readers
By the way, selling growth comes at a significant cost too and needs to be factored into the total return calculation and disclosed.
That won’t have worked out so well for his clients but it does raise the possibility that given his previous efforts in forecasting interest rates and the current change of heart, that Mr Hawes may have just called the bottom of the interest rate cycle.
Now to access the capital gains you have to sell. Which means costs.
It also means that you are "selling your principal"
There are better ways. . .
Interested to hear from Good Returns readers if there is a mistake in that analysis!
Also i believe brokerage costs in the UK are considerably higher that here so Brent why don't we use NZ data not some irrelevant market place on the other side of the world.
If an adviser was actively trading a portfolio to the extent you imply then the FMA should be having a very close look at why - oh and by the way turnover costs are only incurred when a broker is trading listed securities.
With due respect your comments suggest you don’t have a good grasp of the issues here. Having said that it is a very complex issue. The paper I refer to and indeed most others were written for institutional investors. There are three or four main costs involved in turnover including brokerage, which you have focused on, market impact and bid/offer spreads. Most papers on the subject calculate that the impact of spreads exceed the cost of brokerage by about 50%. A recent US study found that spreads average .47% of assets annually and commissions were about .3%. Gavin, note that these figures are per cent per annum not brokerage rates so they are calculated on the basis of turnover then expressed as a percentage of total assets.
As the papers were done for instos the figures just relate to trading within each fund by the fund manager and I am sure you know how high turnover can be as these are things AFA’s need to look at as part of putting client’s interests first. I am sure you also know the spreads are much wider for retail clients but market impact can be less. As I said these costs relate to turnover within each fund and to that must be added the cost of switching between funds.
To answer a few of your points:
• The 1% turnover cost doesn’t suggest the advisor is churning the portfolio as there is no advisor – it is the fund manager churning the portfolio.
• Brokerage costs for UK institutions are not higher, they are lower and the reason we quote offshore data is because NZ turnover data isn’t required by the FMA from fund managers and no its not irrelevant because as you know the average pension fund has 70% of its equity portfolio outside Australasia.
• Turnover costs in these papers are a decision made by the fund manager not the broker.
At my firm we don’t do the job properly but at least we are aware of the issues.
Hope this helps. Must say that there is a surprising lack of knowledge on this subject which is a worry considering all the valuable CPD everyone is apparently doing (LOL).
Regards
Brent
It's a shame you are only achieving 5% gross for your clients when there is so much to offer out there doing better.
Sign In to add your comment
|
|
Printable version |
|
Email to a friend |
