Issue

201403

Lessonsfrom

Australia

MEDIA MOVESTIPS FOR

COVERAGEGIVE THEIR

ADVICE

THREE WINNERS

LATEST BANK NUMBERS

MARKET SHARE

14 HOUSING COMMENTARY Murky market set for a rebound?

16 LEAD FEATURE Philip Macalister reports on what’s happening over the ditch and how mortgage advisers have 50% market share.

20 MY BUSINESS: DAVID WEUSTEN Christchurch-based mortgage adviser David Weusten reports on what’s happening with New Zealand’s newest city.

28 BANK MARKET SHARE We analyse the latest numbers from the Reserve Bank to find out which banks are doing well at the moment.

32 PERSONAL LENDING Would you like a credit card with your mortgage?

04 EDITORIAL Bloody Australians

06 NEWS ANZ says no to trails; Prosper joins Australian group, Roost finds a new home and more news.

12 PEOPLE ON THE MOVE The latest appointments

FEATURES

CONTENTS

COLUMNS

UPFRONT

12

22 PAA NEWS Three top brokers explain their reasons for success.

24 SALES AND MARKETING Paul Watkins says the media world is changing and people should rethink their marketing strategy.

26 INTEREST RATES Chris Tennent-Brown from ASB updates mortgage advisers on interest rates and where they maybe heading.

30 LEGAL Our resident legal expert Jonathan Flaws looks at what the new Credit Contracts Act means.

34 INSURANCE Steve Wrights says advice misconceptions can hit advisers in the pocket.

16Mortgage brokers, or credit advisers as they are now called, accounted for half of all the home loan business written in the latest quarterly figures released across the Tasman. TMM looks at what is happening at our neighbour’s place and how they do it.

Lessonsfrom

Australia

Anthony Healy

Grant McFlinn

" The question I was seeking an answer to is what lessons can New Zealand

advisers learn from their Australian counterparts?"

Roo hops over Kiwi

Bloody Australians. For this issue of TMM, I packed my bags and headed off to the Mortgage Finance Association of Australia (MFAA) annual convention

on the Gold Coast.As the Professional Advisers’ Association had

decided not to hold an event this year, going to the MFAA was a good opportunity to see what our neighbours are up to.

The first, and lasting impression, was the sheer scale and diversity of providers.

It’s easy to feel envious about the size of the industry there. But as I explain in this issue’s lead story, the success has come from a number of reasons, including some proactive work from the MFAA.

The question I was seeking an answer to is what lessons can New Zealand advisers learn from their Australian counterparts?

Interestingly enough, a number of people actually said it could well be the other way around. What can we teach the Aussies?

MFAA chief executive Phil Naylor, who regularly attends New Zealand conferences, made the point that a number of years ago New Zealand was probably ahead of Australia in this market.

Now Australia has leap-frogged New Zealand in many ways. At the convention Naylor announced advisers in the latest quarter were responsible for 50% of all home loan transactions. We have no hard numbers in New Zealand, but a good estimate is somewhere between 22%-25%.

At the level Australia is at the banks start to change their attitude to mortgage advisers.

It was no surprise that the two words which dominated discussions and answers about the differences between the two markets were ‘trial commission’.

The theme of the conference was “life changing conversations.” At first this seemed a bit naff, but when put into the perspective of advisers often that is the case.

It was a good theme. Some to the discussions advisers have with their clients are indeed life-changing.

And to round it all off the MFAA had snared major rock band INXS to play at its gala dinner. Not a bad gig to get everyone up and dancing together.

Philip MacalisterPublisher

MANAGING EDITOR AND PUBLISHER:Philip Macalister

SENIOR WRITER: Susan Edmunds

SUB EDITOR:Phil Campbell

CONTRIBUTORS:Paul WatkinsChris Tennent-BrownSteve WrightJonathan Flaws

GRAPHIC DESIGN:Jonathan Harding

ADVERTISING SALES:Sarah Smith Freephone: 0800 345 675sales@goodreturns.co.nz

SUBSCRIPTIONS:Dianne Gordon Phone 0800 345 675

HEAD OFFICE:1448A Hinemoa St, RotoruaPO Box 2011, RotoruaPhone: 07-349 1920 Fax: 07-349 1926editor@mortgagerates.co.nz

The NZ Mortgage Mag is published by Tarawera Publishing Ltd (TPL) in conjunction with the Professional Advisers Association. TPL also publishes online money management magazine Good Returns www.goodreturns.co.nz and ASSET magazine. All contents of The NZ Mortgage Mag are copyright Tarawera Publishing Ltd. Any reproduction without prior written permission is strictly prohibited.

The NZ Mortgage Mag welcomes opinions from all readers on its editorial. If you would like to comment on articles, columns, or regularly appearing pieces in The NZ Mortgage Mag, or on other issues, please send your comments to: editor@mortgagerates.co.nz

EDITOR’S LETTER

04

NEWS

Speculation continues among advisers that banks will reverse their current position and start

paying trail commission on third party originated home loans.

ANZ chief executive David Hisco says

brokers remain an important channel for the bank, but the bank has no intention of changing its broker remuneration model.

There has been talk that one of the big banks will reintroduce trail commissions for brokers. Hisco said it isn’t ANZ.

“We haven’t even looked at it,” he said.If trails were reintroduced ANZ won’t be

first out of the block. “It’s not something I would be leading,” he said.

Currently, the proportion of ANZ generated by mortgage advisers has remained static. Its interim results for the six months to March 31 show that advisers account for 29% of sales.

While ANZ does pay trail commissions in Australia, Hisco noted Australia banks do many things NZ banks do not.

Another was the launch of an offset product.Hisco says they are not really appropriate in

New Zealand. “No one has any spare money to put into an offset account.”

Hisco says ANZ is winning the battle for new business in Auckland and Christchurch, writing 31% of all new loans in Auckland and

29% of all new loans in Christchurch.Its branch network has seen the strongest

growth in distribution at the expense of its mobile managers. Now half of all mortgages sales are through branches which previously account for 43% of sales.

Hisco attributes the growth in lending to such factors as making increased branch numbers, having more mortgage specialists within branches and giving branch staff discretion to approve applications.

“People can wander into a branch and get an answer,” he says.

The latest results show that ANZ has been living well within the Reserve Bank’s lending restrictions with loans with an LVR of more than 80% making up around 5% of new lending. Hisco said the restrictions had done their work.

While not categorically saying that they will go anytime soon, he is clear that rising interest rates will be a much more effective tool for cooling the housing market.

“Nothing dampens home loans growth like rising interest rates,” he said. ✚

06

ANZ says it isn’t interested in reintroducing trail commissions on home loan business written by advisers.

ANZ no trail blazer

David Hisco

We would like to invite all mortgage advisers to take part in this feature. The main criteria will be the volume of loans settled over the past 12 months. To take part in this feature either contact

Philip Macalister (Ph) 0274-377527 (E) philip@goodreturns.co.nz or go to www.mortgagerates.co.nz/topbrokers

In the next issue of TMM we plan to compile a list of the country's top brokers. The feature will celebrate the success and good work mortgage advisers do for their clients. It is also an opportunity to profile the biggest writers in the business and find out what makes them successful.

NEWS

❝The Government’s expansion of the scheme last year

increased the income and house price caps

to make Welcome Home Loans more

accessible.” ❞

08

T he Co-operative Bank joined the scheme last month, and at the announcement Smith encouraged

others to follow suit."(I am) encouraging other banks to

also join the scheme."Currently the only big trading bank in

the scheme is Westpac; BNZ and ANZ have said they aren’t looking.

The Welcome Home Loans scheme has been running for many years and hasn't been very popular with lenders or borrowers until recently when the Reserve Bank introduced its LVR lending restrictions.

Since then, the scheme has found popularity as the low equity loans written as Welcome Home Loans don't count as low deposit loans in terms of the Reserve Bank's criteria.

Lenders spoken to by mortgagerates.co.nz report that they have had strong levels of Welcome Home Loan business.

The Housing Minister, Nick Smith, is encouraging more banks to join the Welcome Home Loan scheme, but they are saying no thanks.

Major banks wary of Welcome mat

Nick Smith

Housing Minister Nick Smith said interest in the scheme had heightened since the introduction of the Reserve Bank’s loan-to-value ratio limits.

“The Government’s expansion of the

scheme last year increased the income and house price caps to make Welcome Home Loans more accessible,” Smith said.

Housing NZ has approved 1091 loans so far this financial year, 250 more than the number of loans approved in the entire 12 months before that.

Under the scheme, borrowers need at least a 10% deposit and there are regional lending caps.

Current providers include just one big retail bank, Westpac, three of the smaller banks plus Heartland, although it does not do residential lending.

The other accredited lenders include a building society and two credit unions. ✚

F SCL says it has not found in favour of the complainant every time a clawback case

come before it. “This is a very testing subject for

both the insurance and mortgage

Commission clawback tricky issue

adviser industry and such a sweeping incorrect statement infers FSCL has a pre-determined position in such cases and is not independent,” FSCL general manager Trevor Slater says. ✚

Nick Smith

09

W estpac says its residential mortgage portfolio grew 3% to $38.6 billion in the six months to March 31 and there is a marked

shift to fixed rates.Currently the proportion of variable rate mortgages

is 32.2%, down almost five percentage points from the same period last year and down more than 10 percentage points from the first half last year.

Westpac says nearly three quarters (74%) of its loan origination came through proprietary channels, meaning brokers account for 26% of its business.

It says the quality of portfolio remains high and well secured, with 81% of the portfolio having a LVR less than 80%.

Delinquencies, over 90 days, are stable reflecting “improved origination” and stable employment levels.

Westpac New Zealand has a servicing assessment approach, that includes a buffer which in the current interest rate environment is 1.00% to 1.15% higher than the standard lending rate. ✚

Westpac presents strong mortgage book

NEWS

010

Prosper Group has entered into a partnership with an Australian aggregator which will result in a tie

up with the ReMax real estate group.Under the deal Prosper joins up with

Australian Property Finance which is jointly owned by Vow Financial, a large aggregation group and Remax Australasia. It will then be able to provide financial services support to the clients of Remax real estate agents throughout New Zealand.

The agreement gives Prosper sole licensing rights to the New Zealand Property Finance name which will be used in association with Remax.

“Where possible services will be provided through existing Prosper people but it is

Up to four organisations are looking to take advantage of the new laws which allow peer-to-peer lending services.

Under the Financial Markets Conduct Act crowd-funding and peer-to-peer lending are two new sources of finance in New Zealand.

The Financial Markets Authority is anticipating four firms will seek peer-to-peer licences.

Wayne Croad at Finance Direct is establishing a business called the Lending Crowd; Lendit, which is fronted by New Zealand Manufacturers and Exporters Association chief executive John Walley is another player who has expressed interest along with a firm called Harmoney. Its chief executive is major owner is Neil Roberts, a former general manager at Pacific Retail Finance, and ex-head of sales and business development at Flexigroup in Australia.

Croad says he hopes to have the Lending Crowd, operating this year.

Prosper links up with ReMax

Lenders eye peer-to-peer services

Geoff Bawden

envisaged that in areas where we currently have no representation we will either recruit under the NZPF (New Zealand Property Finance) umbrella or where there is good reason under Prosper,” Prosper director Geoff Bawden says.

New NZPF advisers will aggregate under Prosper’s current master aggregation agreements.

“This is an exciting development for Prosper and it will enable us to achieve significant growth organically in partnership with a company which shares similar ideas in relation to its development in New Zealand,” Bawden says.

He says the partnership aims to kick off in Auckland in mid-July. ✚

He said peer-to-peer lending was an inevitable next step in the evolution of the finance industry. He said the internet was “disrupting” a number of industries, and it was just the next in line. “It’s one of those ‘you can’t stop progress’ moments.”

Croad said his company was well positioned to take advantage of the opportunity, as Finance Direct already had a good understanding of lending and risk. “It’s an area where we want to participate.”

Peer-to-peer services would target business that was currently the domain of the big banks, he said. “It’s a direct play against bank customers. The rates will be more competitive that what banks are

offering for debt consolidation, credit cards, car and boat loans. That’s the space we’ll be looking at.”

He expected to offer loans up to $50,000 and said the market would decide what the interest rate was.

Croad said he expected to see opportunities in peer-to-peer lending for mortgage brokers. “We deal with a number of mortgage brokers now. I think the right thing to do would be for mortgage brokers to refer customers to the site. If they can’t use their property as security for a loan, I hope [brokers] would refer them through and put together a different type of arrangement, with commission paid for the referral to the site.” ✚

011

Wellington-based life insurance business AdviceFirst has inked a deal to take over running the

Roost mortgage broker network.Roost has 13 brokers who currently are

part of AMP Financial Services. However a memorandum of understanding has been signed which sees the business move to Advice First – which is also owned by AMP.

AdviceFirst has around 40 advisers who work mainly in the life insurance area. Roost, formerly Mortgage Choice, was sold to AMP many years ago and rebranded. The idea was that the channel would be able to sell life insurance off the back of home loans.

While other organisations have been

A bill making the biggest changes to consumer credit legislation in more than a decade has passed its third reading and is due to become law soon.

The Credit Contracts and Financial Services Law Reform Bill when passed will spawn a responsible lending code.

Already the Minister of Consumer Affairs and Ministry of Business Innovation and Employment are seeking input on the formation of the code.

The Bill amends the Credit Contracts and Consumer Finance Act, the Financial Service Providers (Registration and Dispute Resolution) Act, the Private Security Personnel and Private Investigators Act and the Personal Property Securities Act.

It also repeals the Credit (Repossession) Act and incorporates its content into an expanded Credit Contracts and Consumer Finance Act.

The bill requires lenders in the consumer credit market to act with skill, care and diligence in all dealings with a borrower throughout the life of a consumer credit contract.

It also requires more timely and complete disclosure of loan terms and extending the ‘cooling off’ period for borrowers to cancel their loan.

There will also be a standing disclosure regime where lenders must provide free of charge their standard form contract terms and costs of borrowing. ✚

AMP-owned brokers off to new roost

Responsible lending arrives

Mark Ennis

successful with such a strategy it hasn’t been successful at Roost.

AdviceFirst chief executive Mark Ennis says by bringing the two businesses together there will be great opportunities for referrals between the firms.

He also says it allows AdviceFirst to “offer additional product solutions to our customers and an expanded nationwide network of advisers with specialist expertise.

“Over the next few months we will be working through a transition plan to combine the best of both businesses,” he says.

The announcement follows the recent acquisition by AdviceFirst of the Wellington-based insurance broker, Wells Everett Wynn

– a brokerage focusing on general and life Insurance.

Since being founded in 2008, AdviceFirst has acquired 18 organisations making it the largest financial advice business of its type in New Zealand with plans to expand even further. ✚

PEOPLE

PEOPLE ON THE MOVE

Wayne EvansAnthony Healy

New bank boss 1BNZ has named Anthony Healy as its new chief executive and managing director, replacing Andrew Thorburn.

Thorburn is returning to Australia to become chief executive of BNZ’s parent company, National Australia Bank.

Outgoing NAB chief executive Cameron Clyne said: “For more than four years, Anthony has led BNZ’s business bank, BNZ Partners, and during this time, he has shown exceptional leadership and commercial acumen.”

The change of leadership has raised the possibility BNZ many look at entering into third party distribution again. The head of NAB’s broker business, Rob Kane, is due to visit BNZ soon.

012

Michael Dowling

New bank boss 2Wayne Evans has been appointed chief executive of SBS Bank, replacing Ross Smith, who is retiring at the end of July after 22 years.

Evans established Finance Now, the $120m consumer finance subsidiary of SBS.

“The financial services industry is evolving at a rapid pace, placing opportunities and challenges in front of us,” SBS chairman John Ward said. “Wayne’s proven financial services background in retail networks, IT, and marketing will enable SBS to continue to be strategically positioned within the banking sector.” Evans said SBS was starting to play a greater role in New Zealand’s financial services sector.

New president at IFAMichael Dowling has replaced Nigel Tate as president of the Institute of Financial Advisers.

Tate is retiring after seven years as a board member, including four as president.

Dowling has been a member of the IFA and its predecessor organisations since 1990. He has been on the board for the past two years

and is director of Status Financial Services, based in Wellington.

Two new directors have been appointed to the IFA board – Vanessa Bourke from Wellington and Meredith Cornelius from Nelson.

They take up their appointments in July and replace Jordi Garcia and Michael Dowling.

Loan Market movesJohn Schell, who is an AFA, has decided to move his existing mortgage and insurance business under Loan Market and Insurance Market brands. The business includes Schell, Donna Collins as mortgage advisers, and Sheriyn Fretton as their risk adviser.

Yang Zou has joined Loan Market’s growing migrant team. A qualified architect, he hails from an extensive property background. His move into finance is already proving successful and he will deal with many of the migrant opportunities within the Ray White network.

Nicole du Plessis is an experienced lender and she has been advising for just over a year after joining the group from Kiwibank and has transferred her lending skills through to her advisory business. After trying to do everything herself for a year she is now able to leverage the Loan Market support network to grow her business in South Auckland. ✚

013

Property consultant Olly Newland would quite like a holiday – but there isn’t time. His phone is ringing off the hook with people wanting help with their property

investments, tips to reboot or kickstart their portfolios, or just a general tune-up.

Although the news has been full of stories of dropping residential sales turnover, Newland says investors can still see opportunities and are jumping to take them. “Many people want to get in, others want to readjust their portfolios or move to commercial. It’s getting quite busy, to put it mildly.”

The statistics released over the past month have pointed to a slowdown generally, and especially at the lower-value end of the market.

The Real Estate Institute reported there were 5670 dwelling sales in April, down 20.2% on the same time last year and down 22.5% from March. The REINZ median price was $432,250 in April, up $41,750 compared to the year before but down $7750 from March.

The institute’s chief executive, Helen O’Sullivan, said all regions had suffered a

decrease in turnover. Month-on-month, Southland had the biggest fall in April, with sales down 28.7%, but it was followed closely by Auckland, down 27.2%. Compared to the year before, Manawatu/Wanganui had the biggest fall, down almost 30%.

“April is generally a softer month for real estate sales coming off the back of a generally strong March and with the added complications of school holidays and Easter. However, these factors cannot explain the entire drop between April this year and April last year – the volume of sales has retreated to 2012 levels, and is the seventh-lowest April volume recorded by REINZ," she said.

She said the number of sales for less than $400,000 continued to fall faster than the market overall, down 31.6%. There had been an increase in activity in the over-$1 million part of the market. That could make the median price appear higher than it otherwise should.

Barfoot and Thompson added its own statistics to the story of dropping sales numbers.

The Auckland real estate agency said sales were down 15% compared to the same time

last year and the higher-than-normal 3623 listings for the month put competitive pressure on sellers. Barfoot and Thompson sold 811 properties during April for an average price of $708,603 and a median of $619,550.

Managing director Peter Thompson said sellers needed to be pragmatic about property prices. “And not overprice them if they want them sold.”

Quotable Value, which reports sales data upon settlement, rather than REINZ’s unconditional sales, said year-on-year house price inflation had slowed to 8.4% in April. Prices were up just 0.2% in the previous three months.

Auckland valuer Bruce Wiggins said some of the heat had come out of the market. “Values are still increasing but at a slower rate than last year and some properties are taking a little longer to sell than they were prior to October last year when the LVR speed limits were introduced.”

He said the number of sales was down compared to mid-to-late 2013 and there were price reduction stickers appearing in some areas. “This could show that sellers are needing

MURKY MARKETSET FOR A REBOUND?Sales have slumped but will prices follow suit if LVR restrictions are lifted towards the end of the year?

014

HOUSING COMMENTARY

By Susan Edmunds

to re-align their sale price expectations to the true market trends and the fact that market conditions are less competitive

But spokeswoman Andrea Rush said there were signs of a pick-up. “The nationwide index for April shows values accelerating at a similar rate to last year and Auckland values have also risen across all five main former territorial authority areas after a few months of slowing earlier this year.”

Westpac’s chief economist, Dominick Stephens, complained last month that the data was too murky to get a picture of what was happening.

This month, he said things were becoming clearer when it came to prices. “The REINZ’s House Price Index rose 0.6% (seasonally adjusted) in April, and is 8.6% higher than a year ago. This is the measure that may have been

affected by the composition of sales, but those concerns don’t apply this month - there was no big change in the composition of sales in April. So prices really are rising at the minute. That said, we still think the REINZ’s annual house price inflation figure is overstated, because the composition of sales today is very different to the same time last year.”

He said QV’s monthly price index was more reliable. “It suggests that house prices were flat over the first few months of 2014, but have started rising again. This seems pretty consistent with our call that the market would go through a modest, and brief, revival through the middle of 2014, before slowing more definitively later in the year. Our forecast for house price inflation this year is 5.5% slowing to 1% next year – that still looks realistic.”

But he said the fall in sales was less clear. “The weakness in sales may have been exaggerated by the timing of Easter and ANZAC Day – people may have treated the three-day week between the two as a holiday, thus temporarily depressing sales turnover. There will probably be a rebound in seasonally-adjusted house sales in May – we will judge the true state of market turnover by the size of that bounce.”

Newland said he thought prices were still strong – but the market could be set for “a wobble”.

Factors such as the election, rising interest rates, a disrupted April and the loan-to-value restrictions could slow the market and make buyers nervous, he said.

But he said after a temporary slowdown, it would pick up again, especially if the Reserve Bank removed the LVR rules at the end of this year, as it has hinted. “It always picks up again. There’s a steep rise, everyone goes ‘gasp’ and then a levelling off. Then it rises again.”

Property commentator Alistair Helm said people should not be surprised if data towards the end of the year showed a drop in prices.

He said the loan-to-value restrictions were still skewing price data, making it look as if house prices were rising when all that was happening was that more expensive homes were selling. He said the number of sales had been falling month-on-month since the rules were introduced in October. “Prices follow volume. Prices will turn a corner, they probably already did at the start of spring last year”

Once the LVR rules were no longer artificially boosting reported average and median prices, people would likely find they fell, he said.

Investors were still active in the market, he said, although some would have been disadvantaged by no longer being able to leverage as much. “Investors are always active and they’re probably seeing opportunities at the bottom end of the market where first-home buyers have not been able to access the money to buy – it’s probably a buyer’s market in that sector of the market, predominantly provincial New Zealand. The smart ones are pretty active.” ✚

015

REINZ SALES: DOWNSales in

February were down 20.2% on

the same time a year before.

MORTGAGE APPROVALS:

DOWNAnnual growth in

seasonally adjusted mortgage approvals

and major banks’ new mortgage

commitments dropped 22 and 17 percentage

points respectively between September 2013 and March 2014.

OCR: DOWNIt has been suggested

the Reserve Bank may slow the rate of these increases

because of the effectiveness of the LVR restrictions and the strength of the

Kiwi dollar.

IMMIGRATION: UPMigration is soaring as fewer Kiwis leave

for Australia and more immigrants move to

New Zealand.

BUILDING CONSENTS: NEUTRAL

Building activity continues to increase but is still not at 2003

levels and has a lot of lost ground to make up for.

INTEREST RATES: DOWN

Interest rates are increasing, especially for longer fixed

terms.

RENTS: UPRents are rising as investors pass on

higher interest costs to their tenants.

Two things are striking when you cross the ditch to look at the Australian mortgage advisory industry – its size and its togetherness. Philip Macalister attended the recent Mortgage Financial Association of Australia’s convention on the Gold Coast and explains the differences.

T here is nothing worse than being envious about something the Australian’s do well. But it was easy to feel like that when I walked

into the Gold Coast convention centre for the MFAA conference.

The sheer size and vibrancy of the convention illustrated the strength of the mortgage advisory industry across the Tasman and the support it gets from lenders.

The big news on the first day of the convention confirmed that. MFAA chief executive Phil Naylor announced that half of all home loans in Australia are originated through third party distribution, rather than through bank channels.

This is a significant increase from the 42% market share figure from two years ago.

It is also in stark contrast to New Zealand where the number is estimated to be in the mid-20s; well down on the 46% recorded nearly 10 years ago.

Naylor also told delegates that mortgage advisers were far more successful than bank staff at converting proposals into deals.

The other striking difference, and this was well illustrated by the number of exhibitors at the convention was the number of providers.

AustraliaNaylor says the purpose of the MFAA is

pretty simple: “To help credit advisers thrive.”While the association has its roots

in the mortgage broking world, it has changed the language it uses to describe itself and its members.

The main term now is “credit advisers”, although the term mortgage broker pops up occasionally.

Naylor says the association decided to ditch the mortgage broker moniker as it has connotations of being a transactional role and just competing with banks.

“What the broker brings to the transaction is advice,” he says. That advice component is where MFAA members differentiate themselves.

He admits the name change to “credit adviser” is taking some time to get through to the market, but the association continues to publicise the title.

When the two markets are compared and the question about what the major differences are one phrase immediately pops-up; trail commission.

Australian lenders still pay trail commission to brokers and it is a major driver of business.

RP Data research director Tim Lawless

estimated annual up front brokerage available in Australia sat at around A$531 million each year and an additional A$176 million was paid out in trail commissions.

No one can really explain why the banks take contrary positions on commission in the two markets.

However, Naylor said there is an attitudinal issue.

“The mentality of people in banks (towards brokers) changes,” he says, as the market share of third party distribution grows.

There is a flip side to this difference and it is one where many people said Australia can

LEAD STORY

016

'What the broker brings to the transaction is advice, that advice

component is where MFAA members

differentiate themselves.'

LEAD STORY

017

LEAD STORY

learn from New Zealand. That is in the area of insurance sales.

New Zealand advisers have been very good at driving sales of life insurance, and to a lesser degree fire and general, off their home loan businesses.

One lender described Australian advisers as being “apathetic” and “lazy” towards risk as they earned good money from home loans.

Part of this comes about as the commission on life sales in Australia at 100% upfront and 10% on trials is considerably less than what a New Zealand adviser is paid.

StandardsThe MFAA is a highly active body in Australia working on enhancing professional standards, lobbying and consumer awareness.

Naylor is quite clear on the ingredients for a competitive mortgage market.

A clear difference between the two countries is that the MFAA totally supports securitisation, going as far as saying it is vital for competition.

In New Zealand securitisation is almost non-existent and a dirty word after the experiences of the global financial crisis.

The MFAA also sees a “vibrant and innovative non-bank and small lender sector” as being another necessary ingredient along with a strong broker channel.

MFAA takes the view that the regulatory regime has to be “competition enhancing or, at least, competitively neutral in its impact on the various players in the lending market.”

Where there is a difference between the MFAA and adviser associations in New Zealand is the MFAA disciplines its members.

Its code of professional standards gets signed off by ASIC periodically and currently the regulator is going through that process with the association.

“The MFAA has higher educational and professional standards on its members than required under the National Consumer Credit Protection Act (NCCP),” ASIC deputy chair Delia Rickard has been on record as saying.

Naylor says the association always has to have higher standards than what is required by law. When the association went down this track there was some resistance, especially from its older members, but, judging the current membership this position is now endorsed and entrenched.

On the membership front Naylor reported to conference that the association has met its annual targets well ahead of schedule.

It has seen membership growth of 8.9% to bring the total to 10,336. The goals for year members was 10% of the total membership

and that was achieved within 10 months. The retention goal for 2013/14 was 90% and after 10 months that was running at 93.4%

While the MFAA works on keeping and recruiting members it has also started a pilot programme in New South Wales to bring younger people into the industry.

It has a partnership with the education department to offer a Mortgage and Finance Traineeship to secondary school pupils. The aim is that they will learn more about the credit industry and follow a career in the sector which could lead them to becoming advisers.

In the lobbying it has been heavily involved in discussions around housing affordability and has worked with other professional associations including ones representing real estate agents, financial planners and accountants to drive change.

Naylor outlined four other areas it has lobbied recently including ➜ Making the costs of adviser education tax deductible – In this instance the government was proposing to remove the tax deductible status of education and the MFAA lobbied and finally won the day on this issue, protecting its members.➜ Electronic conveyancing – Here the association is worried that a move down this route will cut mortgage advisers out of the house sale process. The association’s position is to “try and engineer where brokers can be involved in the process.”➜ ASIC’s performance – While the MFAA is highly supportive, and works well with ASIC it was asked to take part in an enquiry into the regulator.➜ AML/CFT rules – Naylor describes this as some on-going work designed to make the process easier for advisers.

“We’ve won most of these,” Naylor says.

Regulatory differencesThe introduction of the Financial Advisers Act in New Zealand has caused a lot of work and pain for the whole industry; however, the regulatory environment between the two countries is quite marked.

New Zealand has the Financial Markets Authority and pretty much all of its focus is on Authorised Financial Advisers.

The large majority of mortgage advisers are Registered Financial Advisers, and this group (insurance and home loans) are largely out of sight of the regulators.

A presentation from ASIC deputy chairman Peter Kell highlighted how active the regulator was in Australia, policing things like responsible lending, mortgage fraud, advertising and the work SMSF are doing in the property investment and home loan markets.

Kell said the regulator wasn’t interested in how big or small players were; it’s goal was to remove the bad eggs from the market.

Since the National Consumer Credit Protection Act (NCCP) came into effect it has removed 41 mortgage brokers and credit advisers from the market.

While this number is far higher than what has happened in New Zealand (the FMA has only taken out two players, both AFAs (and one of those was Ponzi scheme operator David Ross) it needs to be put into perspective with the size of the market.

'The MFAA has higher educational

and professional standards on its members than

required under the National Consumer

Credit Protection Act (NCCP).'

018

LEAD STORY

"there are some things New Zealand

does better than Australia, and the key one is selling

insurance."

O nly one New Zealand adviser attended the convention and that was Prosper head Geoff Bawden. Bawden has been to many of

conferences and says New Zealand brokers can learn a lot from them.

One of the key differences he sees is that the lenders, particularly the banks, are highly supportive of third party distribution.

The head of one bank group, who wished not to be named, told TMM that brokers were really important and they reached customers the bank couldn’t get to. Also they brought in high quality business to the bank.

Bawden said it wasn’t just the banks who went out of their way to support brokers. Other second-tier lenders were equally supportive of third party distribution and went out of their way to help.

An example, and possibly an extreme one, is that National Australia Bank was the principal sponsor of the convention and has just inked a “landmark, two-year partnership” with the association.

Yet its wholly-owned subsidiary in New Zealand, BNZ, still, officially, refuses to deal with the broker market.

Naylor, said of the deal: “This is a significant show of support for the mortgage broking industry and we are delighted that NAB and its division NAB Broker are supporting us to further help build the important role credit advisers play in the lending sector.”

NAB Broker general manager Steve Kane said “NAB is proud to be supporting this very fast growing distribution channel and we look forward to working with the MFAA and its members.”

“The broker channel and NAB Broker business remain vital to the future growth of NAB.

Bawden is a fan of how the MFAA works with lenders and promoting the industry saying they do an exceptional job at representing

their members.His views on this are currently being

tested amongst leading industry figures in New Zealand to see if the MFAA should establish some presence in New Zealand.

The president of the MFAA, Tim Brown, is supportive of this idea and is also looking to see of there are opportunities on this side of the Tasman.

Like Naylor, Bawden says there are some things New Zealand does better than Australia, and the key one is selling insurance.

After banks cut commissions on lending in New Zealand Prosper started getting into insurance. Now the group’s income was about the same as it was before the cuts, but 35% of that income comes form risk sales.

While market changes pushed the group into this market, Bawden now believes that mortgage advisers have to do risk otherwise the regulator could say they are not doing their job protecting the assets they have helped clients build up.

- A Kiwi Adviser's view

Bawden says besides trail commissions there are two other differences between the markets. One is draw down rates. While there is no public numbers on these he understands in Australia the rate is around 75 to 80% while in New Zealand it is as low as 35 to 40%.

Bawden says New Zealand lenders could change this situation with “a stroke of the pen”, by not accepting sub-standard or incomplete applications. ✚

019

How is Christchurch recovering from the devastating earthquakes?

The Christchurch recovery is very slow; a lot of the ‘too hard basket homes’ are still waiting on EQC and insurers to take responsibility. The slow progress on infrastructure is an impediment as well and traffic flows are a nightmare now. With Christchurch sinking into the swamp it was built on hasn’t helped, either.

Are those impediments a reflection perhaps of central and local government inertia?

After eight years building up a business in China I can’t help feeling that democracy is not always helpful as the Chinese would have had it all sorted by now leaving no doubt a few unhappy.

In general, though, given the sad backstory, what is the mood these days?

General business is picking up but is still patchy, with some in the trades going very well, but not all sectors. People are looking for help, but don’t always know where to go or even the questions to ask.

Of what are people most in need? I am seeing a significant increase in budgeting help requests.

In general, people have a rough idea of their cost of living, but not an accurate one. Being a trained budget adviser since 1996, I use the basics which still apply. Monitor your spending so you can manage your cash flow.

You’ve been around for some 18 years now as a budget adviser. What of your previous experience?

I started Financial Service Providers in late 2000 after having completed 22 years with the ANZ, in New Zealand and three years in the Solomons. My focus was always on the client and our company slogan from the start was, ‘Our Aim, Your Gain’.

What did you instigate which has now become de rigueur? Having been a specialist franchise manager with ANZ, I was

willing to look at franchising so worked on writing a procedural manual and template documents. Interesting we are now legally required to do this.

David Weusten, a Christchurch consultant, financial adviser and publisher, says general business is picking up in the quake-damaged Garden City. Is Auckland’s loudly heralded housing boom trickling south to his industrious city?

MY BUSINESS

By Phil Campbell

Not all broom and dust in Christchurch

Dave Weusten

020

General business is picking up but is still patchy,

with some in the trades going very

well, but not all sectors.

How do you nurture clients? Being an educator at heart and looking to

resource my clients, not own them; I set my website to be a resource centre. The many articles I have written are free to access as is my last book I wrote ‘Money, Your Master, Your Slave, Your Choice!’ The other two books, ‘What do Banks want, so you can get what you want’ is now out of print; I should have called it ‘What the Banks Aren’t Telling You’ the last one and reprinted recently is ‘Owning Your Own Business’.

How has travel helped define your business philosophy in Christchurch, indeed in general?

The business book has been useful as a hand out with my business mentoring, under Business Mentors NZ, here in Christchurch, and when I was appointed a Pacific Island Business Mentor, December, 2011. We are a team of five and sent every six months to PNG to help business people there, first in Port Moresby, three visits, and now Lae, three visits.

How have they helped? These trips are a highlight both in

helping people who want to learn and use their entrepreneurial skills, but also in the experiences. In October last year, we visited a crocodile farm!

In broad terms, on what do you mainly focus? My focus has never been on the income

side, but obviously I still need to pay my mortgage and survive. I have a great work life balance and I would still do what I do even if I won Big Wednesday tomorrow.

Typically, how do you span your week? I don’t have a typical day or week, as one

minute I could be talking to an author about a book our publishing company is working on www.willsonscott.biz to answering an email from a PNG client about a business plan, to helping people with budgeting, to talking to first home buyers, to discussing a business purchase and financing for a client in Auckland looking at a cafe. The permanents of my week are EAP, Tuesday afternoons and Wednesday mornings, as I am the Christchurch Financial Advisor contracted to EAP. Writing an article on buying a home in NZ, (this was published by the Christchurch Press on April 13), to preparing a half day Money Management seminar to be offered throughout the country. I am also a founding member of the Advocates BNI meeting every Thursday morning.

Have you proved a feeder, an inspiration to similar advisory entities?

Over the years I have helped three Christchurch and one Auckland broker get into the industry and become established. I even arranged business finance for a client to buy a Mike Pero Franchise.

Challenges, forever challenges – how do you facilitate them?

Challenges have been many, from getting clients at the start, especially as I was BDM for ANZ and all my contacts were brokers. Even getting accredited with WBC at the start, which led me to be a founding member of Allied Mortgage Brokers (Now NZFSG) out of Wellington to the GFC where demand dropped away, to the earthquakes here in Christchurch (I will be forever grateful to the government for the financial support offered in the early months).

Your view of the property market? The property market currently is a

challenge with many auctions and the demands for unconditional approvals with low chances of success. The LVR changes have not affected my clients too much as a significant number are business focused.

Rather than boom and bust, as it appears in Auckland, Christchurch in a stately sense seems more 'broom and dust’?

I often wonder why our politicians are not addressing the Auckland property situation (Christchurch’s boom has different reasons) and start offering large employers incentives to set up in Bay of Plenty, Hamilton etc., as it is dangerous for Auckland and New Zealand to over saturate the Auckland area. Happy to keep the South Island as New Zealand’s backyard, though. ✚

021

The 2013 PAA Mortgage Adviser of the Year award winner and finalists have a number of things in common, but one that really stands out is the enjoyment

they take from helping clients achieve their property goals.

A year after our award winner and finalists were congratulated by colleagues at the PAA conference, we asked them to look back at their careers – what they’ve enjoyed, the challenges, and where they see the industry heading – to understand the attributes that have contributed to their success.

Helping clients achieve what is often the biggest financial goal in life is an essential part of job satisfaction for all three, or as John Bolton, principal of Squirrel Mortgages, and 2013 PAA Mortgage Adviser of the Year award finalist commented:

“People really appreciate what you do. Buyers are ecstatic; they’ve just realised their dream and you’re a part of that. That’s an awesome place to be – I don’t think there are many roles that can offer that kind of satisfaction.”

Our other finalist, Paul Wang, general

manager and adviser at Mortgage Success, agrees. As he mostly works with clients newly arrived to New Zealand, Wang derives considerable satisfaction from helping people settle into their new home – not just the bricks and mortar, but their new country.

“I really enjoy helping clients to settle in New Zealand,” Wang says. “I like being part of helping them and their family grow and to have a better life in this country. This gives me a lot of passion and I really enjoy those moments.”

The importance of providing a high level of client care was also highlighted by Grant McFlinn, winner of the 2013 PAA Mortgage Adviser of the Year award and franchise owner and adviser with Mike Pero Mortgages, when asked what career pointers he would give his past-self when starting out.

“In this role, you’re assisting clients through a process which can be life changing,” McFlinn

"No one cares how much you know until they

know how much you care’"

– Grant McFlinn -

Making every day’s goals a reality

Paul WangJohn Bolton Grant McFlinn

Client satisfaction is paramount for mortgage adviser award winners

022

market yet again,” Bolton says.“The notion of mortgage advisers as simply

introducers is changing in the mind-set of the banks which has significant implications for the industry. Banks have realised that an introducer model is not sustainable.”

“As a next phase, we’ll see banks focusing more on quality - things like how deals are presented, how much it needs to be reworked, error rates – and viewing it more as a relationship. They’ll be putting more emphasis on stick-ability as opposed to churn – they are going to want to see business that stays on their books for a while.”

“There are some real rewards in this for advisers. In terms in moving back towards a relationship model, I strongly believe you’ll see the re-emergence of trail commission. If there was ever a time where I thought the market was starting to shift back towards a proper relationship model, this is it.”

A key issue highlighted by Grant McFlinn is the need to attract younger advisers to the industry – for future consumer needs and business succession planning.

“The apparent lack of younger people coming into the industry should be a concern for all,” McFlinn says. “Both from a sustainability and succession planning perspective, there will always be a demand for independent advice and at some point we’ll all be looking for someone to sell our businesses to. I don’t confess to know what the answer is but left unaddressed, the issue will certainly become a big one for our industry.”

That people will always need independent advice was also highlighted when Wang spoke about industry trends. Recent changes in housing market conditions has raised the question – what kind of volumes will we see in the market over the next year?

“Interest rates are going up; but it’s just another cycle,” Wang says. “When the market is quieter, it can be difficult, but we simply just have to keep up our professional standards.”

“People still have to buy and sell – so as long as you do a good job people will still come to work with you. Simply, a good reputation serves you well in the quieter times.”

To finish our conversation, we asked Paul Wang, John Bolton and Grant McFlinn who, if they had a party of six for dinner, would be around the table. Family members, clients and colleagues were commonly preferred as well as such other guests as Richard Branson, author and entrepreneur Seth Godin and, of course, Reserve Bank Governor, Graeme Wheeler.

Many things – some common and some individual – have played a role in the success of our award winner and finalists. But coming back to the initial point, it certainly seems that the enjoyment they each take from helping their clients achieve their property goals is a key, simple yet powerful ingredient in their success. ✚

says. “And in my experience, no one cares how much you know until they know how much you care. Cheesy but 100 per cent true.”

McFlinn also points to the importance of focus. “The ebbs and flows of activity can be challenging; and some days there are just not enough hours,” McFlinn says. “I’ve found it important to set a level of commitment to the business on a daily and weekly basis because in short, if you’re not totally engaged when you are at work, you may as well be on the golf course.”

Bolton agrees that one of the biggest challenges for advisers, in particular when starting in the profession, is managing the work load and not burning out. “When you first start out, you literally bend over backwards,” Bolton says. “In the first year or two, I was running around like a crazy thing – doing meetings every night, going to the client’s house – trying to please everyone the whole time.”

“When things start to settle down, you begin to value your own time a lot more and to see yourself as a professional service,” Bolton says, adding with humour, “You don’t see accountants and lawyers running around at all times of the night”.

Having processes in place to first make the shift from running around from A to B and then to growing a successful business is clearly important, and our award winner and finalists highlighted some smart approaches that they have put in place.

“We have an open space office; in our company we all sit together,” Wang says. “By all of us sitting together, we learn from each other but we also make a professional example for each other. It really works for us not only in developing customer experience best practice, but in helping each other learn and stay on top of things like changes in policy, new rules etc.”

Process, as Wang points out, is not simply about business efficiency, it is also about client relationships and putting in place simple but effective ways to drive new opportunities.

“I have sent out handwritten Christmas cards without fail since the first year I was in business,” Wand says. “Without question, it has been the most well received client interaction I have done.”

“Fourteen years ago, the fact they were handwritten set them apart from the corporates. That’s still the case, but amongst a sea of electronic Christmas cards, arriving by post and being handwritten ensures real cut through at a busy time of the year.”

“There’s no question that they drive a high percentage of the early New Year activity and for that I’m forever indebted to my dear wife, Vanessa, who is the hand writer.”

In an industry known for pace, it’s important to regularly consider the question: What’s next? We asked our award finalist and winners their thoughts on trends or issues in mortgage advice which may have a big impact on the status quo.

“I think you are going to see a change in the way that banks approach the mortgage advice

Making every day’s goals a reality

Client satisfaction is paramount for mortgage adviser award winners

023

LEGALSALES & MARKETING

The headlines are full of it and many of your clients are no doubt worried. Don’t wait for the phone to ring – be proactive and come to your client’s rescue.

Email or phone as many as you can in the next month. Work out a suitable script based on a key statement or set of questions. This is not only potentially business generating but patch-protection as well, as it should stop clients contacting their lenders directly.

If you want to advertise your business, how do you do it? Logic tells you that TV, radio, newspapers and magazines (such as real estate magazines) are the best and most obvious choices. Some may add banner-ads to this list (the ads you see down the sides of web pages) and of course Search Engine Optimisation of their own web sites. At this point the list generally runs out.

Before I refer to five years from now, let’s look at changes over the last five years. Has radio changed recently? Yes, big time. Spotify and Sirius are among companies changing it. With a simple internet connection, you can listen to streaming audio from almost any radio station around the world. You may have noticed the flurry of re-branding of local stations recently – all trying to recapture that lost market.

Podcast is another trend in radio broadcasting, where individuals put together a recording that resembles a radio show and then post it online for anybody to listen to. This trend is accelerating. Traditional radio is losing its listeners.

What about TV? On which of the nearly 200 current channels would you advertise? Worse still is that the most popular series such as The Walking Dead and Mad Men are often downloaded through the internet minutes after they screen in the US – again commercial free and watched on a computer rather than a TV.

Then there are newspapers. The increasing use of internet search engines has changed readership habits. Instead of perusing such general interest publications as major daily newspapers, readers are increasingly likely to seek out their favourite commentators, blogs or sources of information about their specific area of interest.

POPULAR BLOGSFor example, the mostly non-judgemental and general-interest Otago Daily Times web site is ranked around 145 out of all New Zealand sites in terms of number of visitors. By comparison, the very biased, opinion-based right wing blog Whaleoil.co.nz ranks 42 in NZ.

By Paul Watkins

It seems we very much enjoy reading opinions that match our own.

What about magazines? Interestingly, they are holding their own for now, mainly because of the focused approach to topics. In the past you may have found a general car magazine, but now there are specialist magazines for vintage cars, hot rods, cars pre-1920, classic cars, new car reviews and some car manufacturers such as BMW even have their own that only discusses their brand.

The nature of media has shifted rather significantly and in a short space of time.

People don't wait for information, they look for it. Information is there in abundance on the Internet, coming fast and often in real time.

Within minutes of an event, there will be a post about it somewhere on the web. And it is unedited or moderated. Consumers now raise their voice and give a firm opinion on a brand or service. They are not afraid to talk and tell the world. Social media such as Facebook and Twitter have been prime movers in this. And on the subject of social media, this didn’t really exist five years ago.

To illustrate just how dramatically things have changed, one service based company I work with (not in financial services) spent $300,000 on advertising in 2013. In round figures, $200,000

in marketing brokerage spiN

The media world is changing quickly. Traditional media are struggling to keep up.

024

Paul Watkins writes blog content and newsletters for financial advisers.

was spent on traditional media, predominantly press and radio, $20,000 on social media and $30,000 on upgrading their web site and search engine optimisation. Carefully monitoring calls and responses, 81% came from Facebook activity, 11% from organic searches of their web site and just 8% from traditional media advertising. I might add that this all accounted for 70% their total business, the other 30% coming from referrals.

Bringing out their statistics from five years earlier in 2008, the total promotional spend for this company was the same at $300,000, but 77% of enquiries came from traditional media. A drop from 77% to 8% is somewhat significant!

So what are they doing for 2014? Their total promotional budget has been cut to just $150,000, with traditional media now only being $40,000 of that spend. Online activity has been ramped up and a new specialist marketing team member has been employed who will devote their time exclusively to the web site and social media.

Generating referrals was never a conscious effort for this firm in the past – despite it accounting for 30% of their overall business! So this year, an aggressive programme to generate referrals have been activated.

The result is that for the first quarter of this year, overall enquiries are already well up on the same period last year for half the cost!

It basically means that putting out a carefully crafted message with a cute headline and pretty pictures in traditional media is not enough anymore. Brands have to work at getting people to interact with them. You are a brand. You have brand values just like major companies like Microsoft and Coca Cola. Continuing to advertise in the traditional media as discussed above will have an ever diminishing impact.

So with this discussion on how the media has changed so dramatically over the last five

❝It basically means that putting out

a carefully crafted message with a

cute headline and pretty pictures

in traditional media is not enough anymore. ❞

in marketing brokerage spiN

years, what will happen in the next five years? Most advertising commentators believe that it will be variation on trends we are seeing now. Facebook will be supplemented by other forms of yet-to-be-invented social media, TV will be entirely internet driven and the decline of newspapers will accelerate.

“Viral marketing” is the buzz word of today. This is not just funny video that go viral on Youtube, but having a message that is worth talking about. This means having a focus or connection to your chosen target market that resonates with them. It means providing outstanding levels of service that will be talked about and recommended to others. It means making your market feel like they are the only one to whom you are talking.

All this sounds rather vague and philosophical, so here are some practical things you can do.

First, Google yourself. When someone has an initial contact from you they look for your web site, LinkedIn page or search you on Google. What would they see? A cliché ridden three page web site? Or perhaps no web site at all? Will they find an outdated LinkedIn page with a handful of connections and no endorsements? Or maybe a Facebook page full of embarrassing holiday pictures!

ONLINE PRESENCEThis doesn’t cut it. Your online presence is now everything. Spend time on your LinkedIn page and make it impressive. Endorse others and in most cases they will endorse you back. Be mindful of what you post on your Facebook page. Talk to a talented web developer about our web site and more importantly its content. Start a blog to increase your searchablity and relevance to your market. (This is easier to do and populate with good stuff than you might think) Think up interactive elements to your site and add video content.

The bottom line is that advertising has changed forever and the change will accelerate. And the change is towards the Internet in all its forms and invasions of our lives. The first and best step you should take time to understand it more. Go to Youtube and search for such phrases as, “How to promote my brand online” and “How to use Facebook to promote my service” and similar. There are literally thousands of videos on such subjects.

What will marketing a brokerage look like five years hence? Somewhat different from now and primarily consisting of online activity and referrals. ✚

025

INTEREST RATES

RBNZ hikes 0.25% again in April As widely expected, the RBNZ lifted the Official Cash Rate (OCR) from 2.75% to 3% at its April review. The interest rates on floating rate mortgages are lifting by a similar amount, to around 6.25%. Shorter-term fixed rates may also be in line for some upward adjustment.

The RBNZ has lifted the OCR at two consecutive meetings, and another increase looks likely when the bank meets again in June. Accordingly, floating mortgage rates and short-term fixed rates are likely lift again soon. If borrowers have not reviewed their situation already, now is definitely the time to give it some thought and look at strategies to manage higher borrowing costs over future years.

RBNZ April OCR Review summary and outlookThe RBNZ’s forecasts (within the March Monetary Policy Statement) indicated around six 0.25% hikes in total by March next year, and the OCR rising to 5-5.25% by early 2017. Accordingly, the April rate hike came as no surprise to analysts and economists, including ourselves. The RBNZ’s view on the strength of the economy remained understandably upbeat in the statement that accompanied the April OCR increase.

Following the April hike, we slightly altered our forecast to build in a follow-up hike in June (previously we expected the next rate hike to come in July). After the expected hike in June, we are forecasting the RBNZ to pause to assess the impact of the initial OCR increases, and remain on hold until December.

For 2015, we continue to expect a further four hikes, taking the OCR to a peak of 4.5% by December, 2015. This is less aggressive than the RBNZ’s forecasts. We still see several reasons why the tightening cycle should be fairly cautious or gradual. There are

Expect interest rates to increase over the next two years. But borrowers can lock in some certainty without paying too much more than the current floating rates.

considerable uncertainties over how households respond to rising interest rates and, given the short duration of outstanding mortgages, higher interest rates may well have a quick and noticeable impact on the economy.

The NZD will remain firm on the back of rising interest rates, prolonging the challenges for many exporters. In April, the RBNZ noted the recent weakness in dairy prices and ongoing strength in the NZ dollar but didn’t appear overly concerned about them at this stage. But, assuming the NZ dollar remains firm over 2014 in line with our currency forecasts, it will trigger RBNZ caution in time.

Future mortgage rates The RBNZ’s decision to lift the OCR again in April has had immediate consequences for some borrowers – floating mortgage rates are already rising. Whenever the RBNZ raises the OCR, the floating rate typically goes up pretty much in lock-step with each increase, all other things being equal.

The only way for borrowers to avoid these increases is to move to a fixed term. Right now, the economy is on much firmer footing than it has been for several years, and the RBNZ seems very determined to lift rates several more times this year and next. Nothing is 100% certain, but financial market pricing implies around 150bps or 1.5% of further OCR increases over the next two years, and the RBNZ’s March forecasts imply slightly more tightening, and an OCR of around 5-5.25% by early 2017.

We think the OCR peak may be slightly lower – around 4.5%. Based on our forecasts, the

Chris Tennent-Brown

floating rate will lift to around 7.75% by late 2015, and should stay around that level if we are correct in forecasting an OCR peak of 4.5%. But borrowers need to consider that if the RBNZ delivers the extra OCR increases that are currently implied in its longer-term forecasts, then floating rates will likely be above 8% by 2017.

Some fixed-term mortgage rates in New Zealand had already been lifting in anticipation of a series of OCR increases from the RBNZ. For example, the two-year fixed rate has lifted from around 5.5% towards 6.5% over late 2013 and early 2014. The five-year fixed rate lifted by a similar amount, and is now around

Borrowing strategies> need a

rethink

026

" Fixing for longer terms now does

give extra insurance against stronger

OCR increases than we are expecting’"

7.4%. From now onwards, OCR increases will

have the greatest impact on short-term rates. Long-term rates started moving last year in anticipation of OCR increases. Longer-term mortgages are also influenced by developments in global interest rate markets, particularly the US Treasury market, where rates are gradually rising from extremely low levels in the wake of the global financial crisis.

If our forecasts prove correct, in two years’ time we would expect to see the OCR at 4.5% (up 1.5%), and floating rates around 7.75% (up the same 1.5%). For term rates, we would expect the one-year fixed rate to lift to around 7% (up another 1-1.2% from current levels), while the five-year rate may only lift modestly from today’s level of around 7.4%, towards around 7.8%.

It is important to consider the assumptions on which these types of forecasts rest. Two important assumptions in our current mortgage forecasts are:➊ Our view that the OCR only lifts to 4.5%, which is lower than the RBNZ’s latest forecasts suggest. ➋ Long-term global interest rates remain historically low over the medium term, and in doing so keep New Zealand’s long-term rates relatively contained.

There are risks to both of these assumptions, and this means New Zealand interest rates could be higher or lower than our forecasts. But with the economy growing well, and the RBNZ’s tightening cycle underway, we think

it is safe to assume the RBNZ will keep lifting the OCR, and it is prudent to plan for steady mortgage rate increases from today’s level over the coming months and years.

Identifying best strategyOnly with the benefit of hindsight can we be sure of the best mortgage strategy. But there are a number of helpful things that we can identify.

Firstly, floating rates are not the cheapest rates right now (the six-month rate is) so borrowers can create some certainty, and obtain a lower rate than floating by fixing for six months. In the same vein, many of the carded rates at the main banks out to around 18 months are lower than floating rates at the time of writing.

Secondly, all fixed rates are still below their long-run (10-year) average. So by this simple measure, the fixed terms are reasonable value, as shown in the charts.

We can also calculate the cost of other strategies such as rolling one-year terms for the next one or even the next five years, and compare the interest rate expense with the interest rate of the fixed terms available today for two to five years.

Based on our forecasts, rolling short terms is still the cheapest strategy. This really hinges on our view that the RBNZ will have several pauses in its OCR increases over the coming years, and the OCR will peak at 4.5%. We stress that if the RBNZ hikes more aggressively than we expect (i.e. more hikes early on in the cycle), or lifts the OCR higher than 4.5%, then these shorter-term rates will lift more than we are forecasting, making this strategy more expensive than the longer-term rates on offer today.

To illustrate, we can estimate what would happen to mortgages if the RBNZ lifts the OCR to 5% (in line with its March forecasts, rather than our 4.5% peak). By 2016 we would expect the variable rate to be around 8.25%, and fixed-term rates to be up around 8% too, rather than the 7-7.8% levels we are currently forecasting.

With this in mind, a key thought is that fixing for longer terms now does give extra insurance

against stronger OCR increases than we are expecting. Depending on borrowers’ risk appetite, that insurance may be worth taking. The cost of some certainty is actually not too high, based on current mortgage rates. This can be illustrated with another example: ➤ The carded floating rate is between 5.90% - 6.25% at the main banks at the time of writing. If the RBNZ lifts the OCR again in June (as we are forecasting), the floating rate will most likely lift to around 6.5% in June. A follow up hike in December would likely see the floating rate end the year around 6.75%.➤ A borrower can fix a two-year mortgage for under 6.5% right now. In other words, a borrower can lock in now a rate that is in line with what we expect the floating rate to be very soon, and lower than what we expect floating rates to cost by the end of the year.

Final thoughtsMore interest rate increases should be expected over the next two years. Borrowers can at present lock in some certainty without paying too much more than the current floating rates (which look set to rise the most out of all the mortgage rates). One of the characteristics of floating mortgages that borrowers have enjoyed has been the flexibility of repayments that floating offers. Splitting the mortgage into different terms, or a mix of fixed and floating mortgages can be a good strategy for keeping a bit of flexibility while locking in some interest rate certainty.

Ultimately the best mortgage strategy is one that also takes into account an individual borrower’s cash flows, tolerance for uncertainty, and ability to deal with changes in future mortgage payments as interest rates change. It is always important for borrowers to weigh up their own priorities and make the mortgage choice that looks the best aligned with them: there is more to it than just picking the lowest interest rate. ✚

Home Loan Rates %%

Source: ASB

VARIABLE RATE

1 year rate

3 year rate

5 year rate

1111

1010

99

88

77

66

55Jan 07 Jul 08 Jul 11Jan 10 Jan 13

Home Loan Rates

Source: ASB

% %

Two year ahead

10 -year average

One year aheadCurrent

April 2013

9 9

8 8

7 7

6 6

5 51-year RateVariable Rate 3-year Rate 5-year Rate

ANZ changes the way it reports loans

GDS

By Margie Macalister

Reserve Bank figures show total home loans increased $2.3 billion (1.2%) to $190.6 billion in the quarter ended March 31 this year. There were 77,000 home loan approvals valued at $12.9 billion reported.s/what-businesses-need-to-know

Market Share Total $ Billion Qtr Change Annual Change

Mar-13 Mar-14 Mar-13 Mar-14 $Billion % $Billion %

ANZ 31.9% 32.2% 54.798 58.508 0.631 1.09% 3.71 6.8%

ASB 22.9% 22.8% 39.432 41.527 0.300 0.73% 2.095 5.3%

BNZ 16.8% 16.4% 28.959 29.82 0.223 0.75% 0.861 3.0%

Westpac 21.2% 21.2% 36.462 38.566 0.584 1.54% 2.104 5.8%

Kiwibank 7.1% 7.4% 12.236 13.504 0.386 2.94% 1.268 10.4%

100% 100% 171.887 181.925 2.124 1.18% 10.038 5.8%

BNZ and Westpac both wrote more loans in the March quarter than the December quarter. BNZ wrote 230% more than in the December quarter when the loan

book increased by only $97 million but this quarter’s $223 million increase is still only 50% of the $455 million it wrote in the March 13 quarter.

Westpac wrote 22% more than the $477 million growth in the previous quarter and at $584 million this was also slightly above the $571 million growth reported in the previous March quarter.After both recording record growth in the December quarter ANZ and Kiwibank March figures were down 51% and 7% respectively.

ASB’s growth dropped for the third consecutive quarter.The following graph shows how the share of new business was divided between the five biggest banks in the March 14 quarter and the December 13 quarter in relation to their overall stake of the total lending.

028

ANZ Loan Book - $Billion31/12/2013 31/03/2014 Change % Change

31.9% 32.2% 54.798 58.508

Less than 80% Does not exceed 80%

0-60% 20.126 20.636 0.51 3%

61-70% 9.68 10.196 0.516 5%

71-80% 15.005 16.315 1.31 9%

Low LVR 44.811 47.147 2.336 5%

In the previous issue of TMM we highlighted the different way ANZ reported the break down of its loan book by LVR to the other banks.ANZ included 80% lending as high LVR whilst the other banks all calculated high LVR from above 80%.

LVR Lending - ANZ is now an Apple

Perhaps someone from the bank read the article because in its latest GDS they have changed their reporting to match the other banks and as expected this has had a significant impact on the high versus low LVR composition of its loan book.

The table below compares the breakdown of the loan book in December, when it classified low LVR loans as less than 80%, with the breakdown in March when low LVR loans are classified as “does not exceed 80%”.

In the graph below BNZ and Kiwibank look conservative in terms of the composition of their loan books. It is possible however that ASB and Westpac are actually the ones out of kilter. Their “high LVR” lending looks more in line with ANZ’s, however ANZ excludes 80% lending from its High LVR breakdown

80-90% 8.53 7.079 -1.451 -17%

91%+ 4.536 4.282 -0.254 -6%

High LVR 13.066 11.361 -1.705 -13%

57.877 58.508 0.631 1.1%

029

By Jonathan Flaws

LEGAL

Our wayA new Bill, some parts of which take immediate effect, iis seen as a forerunner to responsible lending.

The Credit Contracts and Consumer Finance Amendment Bill has passed its third reading and should now be law. It was due early June, 2014.

Apart from a few sections that will take effect from outset, the bulk of the Act will not come into effect for some time. The Act introduces the concept of lender responsibility principles and is the forerunner of a responsible lending code. The delay in introduction of the principles is to allow the code to be created, published, and submissions from the public on them to be considered.

The provision that will become immediately effective is that preventing creditors who hold a personal property security using a power of attorney to appropriate after-acquired consumer goods to the security. The all-encompassing security that includes the right to use a power of attorney to obtain security over non specified consumer goods that are acquired after the date of the contract has lost this power.

In comparison, the all-encompassing security that contains a hook covering all presently owned property, even consumer goods, may not be affected. The type of property most likely to be appropriated in this case is a motor vehicle.

The caveat lending practices of finance companies that rely on using a power of attorney to register a mortgage are not affected by this provision.

The Ministry of Business, innovation and Employment has published a section outlining the delayed introduction of sections of the Act. http://www.consumeraffairs.govt.nz/legislation-policy/changes-to-credit-laws/what-businesses-need-to-know

Aligning with Australia?Credit law legislation was described by one of our judges in the Court of Appeal as prophylactic. I assume this means that it is

designed to prevent borrowers from becoming pregnant with unwanted debt. Another judge in the same case (Bartle v GE) waxed lyrical on the virtues of New Zealand credit legislation harmonising with Australia.

But the Supreme Court had other ideas and said it was for Parliament, not the judges, to change credit law; it came down in favour of the big lender and the elderly couple sucked into the Blue Chip scheme still had to deal with repaying their mortgage. Interestingly, as far as I am aware, those nasty big lenders have been more than fair and reasonable and have gone out of their way to accommodate the Blue Chip borrowers.

This doesn’t mean the borrowers have made

windfall gains and been let off repaying their loans – it means that lenders have been responsible and have treated borrowers with respect and done what they can to help them. I suspect that between the Supreme Court and the attitude and approach of lenders, the right approach was taken.

I’m not sure that this amending legislation is a response to that case – most of the publicity has been directed at the loan sharks and those who prey on the poor and gullible.Same direction, different tracksBut to the extent that this legislation is a response to the Bartle case then it has not harmonised with the Australian credit law. If we can learn anything from the Australian National Credit Code it is

030

❝ Legislators seem to be fixated

with the concept of the level

playing field. ❞

that we should not clone it for New Zealand conditions. The concepts that our respective credit laws grapple with will lead us in the same direction but we need to find our own track .

We have always gone our own way in this area. Here are some examples of the differences.

Legislators seem to be fixated with the concept of the level playing field. All lenders must expose themselves to prospective borrowers in a way that is consistent and allows the borrower to compare what the lenders are offering.

The assumption is that borrowers really do shop around and it is only fair that when they do so they are able to decide for themselves which lender is offering the deal that best suits their “requirements and objectives”.

IntroducedWhen the Australian Credit Code introduced the concept of the comparison rate as a means of comparing lenders offerings by forcing them to provide a comparison rate for each product, New Zealand dropped the concept of the “finance rate” which was pretty much the same sort of thing. The Australian comparison rate is generic for a product but the New Zealand finance rate was specific to each loan.

The trouble with the comparison rate is that it assumes generic information when the specific of your loan may be different. The trouble with the New Zealand finance rate was that the specific rate you were disclosed was presented to you at the time your agreement was given to you. The old credit law required a lender to advertise a finance rate if they advertised the interest rate. In fact, many lenders did not advertise either the finance rate or the interest rate.

To avoid the issue with generic disclosure or non-disclosure, the New Zealand credit law moved to a more stringent regime for credit fees. It was assumed that if all credit fees were restrained so they were reasonable and only reflected the actual cost or loss sustained by a lender, then the only way that a lender can receive profit is through the interest rate.

If all lenders are in the same boat, then the rate they call the interest rate will be consistent across lenders. As a result, consumers can make a more meaningful comparison by looking at the rates.

Credit fees and chargesIt was a good try but didn’t go far enough. The recent Sportszone case outlines circumstances in which lenders have tried to use fees to recover what the courts and the Commerce Commission regard as general operating expenses.

The new Act has revised the sections covering fees and endeavoured to make them more closely aligned to direct costs and losses made by lenders.

The Act tightens what is meant by a prepayment fee and links this now directly to the creditor making a loss because of differences in interest rates. This is similar to the Australian requirement in relation to “break fees” under the National Credit Code.

What this means for a mortgage broker or lender is that wording of the early repayment

fee is relevant. Will it be sufficient to simply pass on the cost incurred by a lender for breaking a swap contract? This constitutes a loss to the lender under a contract that hedges an interest rate exposure. But will the break fee when its passed on to the borrower be a fee that is a result of differences in interest rates or is it a loss under a commercial contract relating to hedging interest rate exposure? A lender will need to ensure that its prepayment fee wording captures this if it simply passes on break fess under a swap. It will also need to ensure that the break fees under a swap are a result of difference in interest rates and don’t include additional benefits to the counterparty.

Default fees have always been an issue. In the original Credit Contracts Act, we provided for a convoluted process that meant you could either have a higher or lower interest rate that applied to the whole loan amount or you could just charge interest on the amount in default. The CCCFA seemed to move towards the latter but left open the opportunity to charge default interest on the whole amount.

The changes make it celar that there is only one option. That is to charge interest on the amount in default for the period it is in default. In the case of a mortgage – once the notice of default under the Property Law Act has expired and the loan is called up in full, the default rate can apply to the whole loan amount because it’s repayment is then in default.

Regulation of financial service providersThe Australian National Credit Code goes to great lengths to create a regime that requires all participants in the lending industry to hold an Australian Credit licence. It is the classic regulators or bureaucrats response to a problem – licence the participants and subject them to a strict compliance regime. Only the really serious will survive.

Our way is more subtle. The new Act, like the old Act, doesn’t recognise anyone other than creditors. Licensing of financial advisers and creditors is something that is left to other legislation, the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

The CCCFA, therefore, doesn’t recognise brokers. But the FSP Act does. The key effect of the FSP Act is that all persons providing a financial service need to be registered. All financial service providers are required to be members of a dispute resolution service.

However, only those that fall into the category of authorised financial advisers providing a full range of financial advice

need undertake continuing professional development on an annual basis.

A creditor must be licensed if it wants to have the right to enforce the recovery of interest.

ResponsibilityPerhaps the most significant new reform is the introduction of the lender responsibility principles. The biggest difference between Australia and New Zealand in this area is that the only lenders are required to comply. As far as the principles are concerned, brokers, in New Zealand, appear not to exist.

Which is of course nonsense. Perhaps the only real difference is that whereas in Australia a broker can have the full force of ASIC descending upon it if it does wrong, in New Zealand, the broker is subject only to the wrath of the lender.

In some respects this is a more appropriate way to deal with these issues for it is ultimately the lender who has the relationship with the borrower and it is the lender’s responsibility to ensure that the lender responsibility principles are met. To the extent that the broker is required to adhere to these principles, it is doing so on behalf of the lender.

The final version of the Bill provides for the lender responsibility principles to be delayed and come into effect at the same time as the Responsible Lending Code is ready and in force.

While the code is not mandatory, lenders will invariably follow it for adherence to the code provides a safe harbour in some areas.

SuitabilityThe Responsible Lending Code is likely to outline in detail the assessments that lenders are required to undertake in order for the lender “to be satisfied that it is likely that the credit or finance provided will meet the borrower’s requirements and objectives and the borrower will make the payments under the agreement without suffering substantial hardship”.

It may also outline activities or steps that a lender can take to “assist the borrower to reach an informed decision” and “be reasonably aware of the full implications of entering into the agreement.”

The Bill, as enacted, also indicates that assisting the borrower includes the three things outlined – no deceptive advertising, plain language documents and provision of information that is not likely to be misleading, deceptive or confusing. The use of the word “includes” was deliberately included by the Select Committee. It did not want there to be any misapprehension that just doing these things was enough. It may not be – particularly if English is the borrower’s second language.

It was inevitable that changes were going to be made to the credit law and in the face of this inevitability; I am pleased that we have chosen to do it our way and not just cloned the Australian legislation. ✚

031

By Susan Edmunds

PERSONAL LENDING

It’s a question that most new borrowers are asked when they take out a home loan direct from a lender, particularly when they are not already customers of that bank.

But when the loan is being arranged through a broker, there’s nothing of the sort.

Now, some mortgage advisers say it’s time for that to change, and for banks to allow them to offer a wider range of products alongside home loans.

Glen McLeod, of Edge Mortgages, said it would make sense for banks to allow mortgage brokers to offer credit card products to their clients.

“We can do KiwiSaver, fire and general insurance, personal risk, all the things the banks are doing, with the exception of credit cards.”

Wouldyoulikea creditcardwith yourmortgage?

Many Australian brokers offer credit cards and McLeod said it would be a logical step for the banks in New Zealand to follow suit.

He said it would be a natural fit: If a broker was setting up a revolving credit facility and explaining how to use it in conjunction with a credit card’s interest-free days, it would make sense to organise the credit card as well.

NZ Home Loans chief executive Mark Collins agreed.

His firm only offers a revolving credit facility and guides borrowers through using their credit cards to make all their payments during the month, leaving their income in their mortgage account to offset interest, and then paying the card off in full once a month.

If they already have a credit card, the NZ Home Loans adviser will show them how

to use the system with their existing card. But some have to set up new cards.

Collins said, because of that, NZ Home Loans was actively working to develop a credit card product that its advisers could offer.

Collins said it would be quite a lot of work for the provider to set up. He wanted the card to carry NZ Home Loans branding. “I would like us to do it within the next year. It does fit.”

Because NZ Home Loans has a focus on customers paying off their cards in full, in theory none of them would pay interest. But he said the credit card partner would make their profit from the deal through fees. “There’s an acceptance that most cards have fees.”

He said it would not generate any extra income for NZ Home Loans advisers. “This would be about providing an entire service to a client.”

McLeod said being able to offer everything a customer would need would strengthen the relationship advisers had with their clients. But it would benefit consumers, too.

“Registered financial advisers give advice but staff in the banks’ QFEs don’t. They say ‘here are the rates you can have, what would you like?’ We have to justify why we suggest a particular rate or why we might want to split a mortgage over several terms.”

Similar advice could go into decisions on credit cards.

Broker David Windler said it would make sense for brokers to be able to offer credit cards to clients. But he did not think it should be just a service offering or added bonus for clients. “Absolutely, if we got something for rounding out a bank’s suite of products for them.”

McLeod said he had spoken to Westpac’s director of third-party banking, Kylie Kneale, and she had suggested that those peripheral products might be something that the bank would look into eventually. But a spokeswoman said it was not something the bank was actively considering at this stage. “There’s no demand for this.”

032

❝ A few people could use credit

cards well, maybe buy a property

and put $10,000 or $20,000 on

their credit cards for a renovation then revalue the

property❞

When Westpac revealed its half-yearly financial results recently, it said one of its goals was to be a one-stop shop for customers, covering all their financial needs, from credit cards and home loans to personal insurances and KiwiSaver.

BNZ said it was not something that had been considered and ANZ said it had no plans at this stage to offer credit card products to brokers. A GE Money spokesperson said of its Gem Visa cards: “Our priority in New Zealand is growing and developing existing retail partners and direct acquisition channels.”

Ian Webb, managing director of New Build Home Finance and former mortgage chair of the PAA said mortgage advisers’ desire to offer more products was a logical response to other financial services providers encroaching on their territory.

He said advisers’ demand for other products waxed and waned depending on the conditions of the market. “Our space is always being invaded and advisers want to find ways to occupy a greater space for their customers.”

He said he had seen a big push from brokers for Sovereign to offer credit cards, and for mortgage brokers to be able to provide those cards to their clients. ASB said it was not something it was looking into at the moment in either the Sovereign or ASB brands.

Webb said there was not a lot of money to be made for brokers in dealing with credit cards. “It would be a service offering.”

Credit card balances are about $6 billion, back to the levels recorded before the global financial crisis.

But broker Kris Pedersen, said he would be concerned about helping clients get into credit card debt. He said his past experience

with personal loans and consumer finance had not been favourable.

“A few people could use credit cards well, maybe buy a property and put $10,000 or $20,000 on their credit cards for a renovation then revalue the property and top up the mortgage to pay off the credit card. But the majority of people use it as bad debt.”

About two-thirds of the $6 billion credit card balance is accruing interest.

Pedersen said he already told people who wanted help with things such as small personal loans or car loans to go away and do it themselves because he did not think it was a comfortable fit with his business. “Offering credit cards would only be looking after myself.”

He said it was likely that the suite of

consumer loans brokers could offer would expand before they saw any significant movement on cards – provided the big banks did not interpret it as encroaching on their territory.

Many brokers already offer short-term loans or hire-purchase-style arrangements to their customers. Webb said some of the banks seemed to have been taken by surprise by how well advisers were able to capitalise on their relationships with clients to manage other products.

“Mortgage advisers’ relationships with clients are a lot stronger than banks thought. Advisers can effectively cross-sell a range of products and banks would love to limit that.”

Webb said that whereas 10 years ago, most advisers either dealt with mortgages or insurance, most were now cross-selling at least two products and were increasingly versatile. “Customers are interested in trying to look around and find additional products, consumer products are more where the market is going to go.”

Advisers were finding client demand for things such as car loans when their customers’ home loans would not stretch to cover new spending. “It’s a natural way to offer multiple services.”

But Windler said consumer finance products required a change in approach that was not a comfortable stretch for many brokers. “We have tended to not prioritise this in our business and have done very, very little over the years. If anything I think consumer loans have been looked down upon by brokers as they are usually present when we are cleaning up messy situations. We are more used to debt consolidating them than putting them there in the first place.” ✚

033

INSURANCE

By Steve Wright

Steve Wright is general manager products at Partners Life.

At a recent adviser association meeting I mentioned how pleased I was that insurers and advisers were beginning to realise how important it was to

recommend trauma cover for children and the large sums required.

When I mentioned that I had considerable trauma cover on my son (many hundreds of thousands of dollars) a comment was made that that was “a lot of money”.

Later I dwelled on the comment and just how unconsidered it was because it took into account not one pertinent piece of information, so it must have been brought about by some inherent belief.

Imagine for one moment the financial consequences of a five-year-old going blind. How many insurance claim dollars would that child’s family and, later, that child itself, require?

When one considers the lost income opportunity of the child alone, I’d suggest millions, not thousands of dollars, would be lost. Insurance is about indemnifying people against loss and any sum insured less than the actual loss suffered is under insurance.

Reaching the point finally, until advisers fully understand the financial implications of death and disability, they may continue to believe that completely inadequate amounts are sufficient simply because their belief system considers the amount “large”.

Unless advisers have a realistic understanding of financial losses caused by

death or disability, they can never give their clients compliant advice and their clients will probably end up underinsured or not insured at all.

On top of this, the adviser, assuming they are paid on commission, is short changing their own income. If, as an adviser, you irrationally believe a sum insured is large, so will the client and you are likely to sell less and earn less.

Conversely, if you believe a “large sum” is not big enough, so will the client and there is a bigger likelihood they will take more cover.

Of course, larger sums insured come with larger premiums and so take more effort to “sell”. Advisers tell me that they recommend insurance covers and sums insured to suit what they think the client will be prepared to pay because if they don’t they may lose the sale.

The first question I ask these advisers is, “How do they know how much the client is prepared to pay?”, and, secondly, “How much do you think the client will say they would have paid if they are unhappy with an inadequate payout at claim time?”

Recommendations should then be to take the full range of covers and the large sums insured this inevitably requires. Once clients have all the advice they need, they are then able to make an informed decision on where they want to cut corners if the resultant premium is more than they are prepared to pay. How the adviser then helps the client reduce premiums in a way which minimises lost cover is an important part of the

advice process.I’d suggest advisers who make it clear up

front with the client that this is the preferred approach will find they don’t lose sales when the premium is presented and that in most cases their sales will go up, with a consequent rise in their income.

Something else that will hurt an adviser’s pocket is ignoring the stay-at-home spouse or partner. A stay-at-home mum or dad in particular, is worth insuring because their death or disability can have a grave impact on household expenses or incomes, especially when it impacts on the survivor’s ability to go to work, not to mention the loss of future income they may have generated if a return to work sometime in the future is contemplated.

Stay-at-home spouses need special consideration because some products are not available to them and others may have restrictive provisions.

Ignoring these potential clients may not only present a possible compliance problem for the adviser but will most likely result in lost sales and commissions. Most advisers have a great opportunity to revisit the insurance requirements of the stay-at-home spouses or partners of their existing clients, do a good professional job of better covering them and adding to their revenue at the same time.

Finally, don’t forget insuring the children! ✚

Understandinglosses by

Advice misconceptions can hit advisers in the pocket

034

Offset home loans are big overseas and are now starting to grow in New Zealand with the arrival of a new player. NZ Mortgage Mag, together with NZ Property Investor, have prepared a special report. This report compares the three products in the market and all their features and benefits.To get your copy of this guide email your details to: offsets@mortgagerates.co.nz