Investing 202

Many people would be surprised to know that the funds management industry in New Zealand is really only 30 years old.  We had seen the development of personal superannuation products from the early 80’s and defined benefit – defined contribution workplace superannuation prior to that.  But unit priced open (not locked in by means of a superannuation trust deed) managed funds only became main stream in the early 90’s.

It explains why the greater population is focused to products such as term deposits, bonds, direct equities through stockbrokers and direct property.  These options have prevailed for years.  The funds management industry not so.

When I left the bank and eventually joined the insurance industry in the late 70’s – our actuary was also the investment officer.  Whilst both these disciplines are focused to ‘risk’ – an actuary is focused to morbidity and mortality (a mathematician calculating product profitability – life assurance products – versus human statistical probabilities – for sickness and/or death) the investment analyst is predicting the likelihood of a good investment purchase (stock selection / listed company selection) through its overall intrinsic value and its current price.  The Prudential was the largest United Kingdom insurer of the time and New Zealand an off shoot of that huge organisation.  Our CEO of the time – very British, and very conservative.  Always subjected to Kiwis impatience for decision making, never obliging.  Things changed when they sent an Aussie over to run the show – but that’s another story.

For New Zealanders then the market for investment into managed funds was split – and the result of those next 20 years – prior to the evolution of KiwiSaver meant the reputation and effectiveness of funds management was poor.  The reasons - commissions and poor funds’ performance and the debate remains current.

For the funds management industry to distribute its products it required sales people.  Unlike banks (who had not yet entered the race) there was no retail outlet.  The insurance industry distribution became the funds management product distribution arm.  Very much like the actuary situation– the two disciplines being different.  Selling insurance and selling investment – very different rationale although similar needs analysis procedure.

But insurance agents took to it like a duck to water because :-  

1. they could now sell a product with a more positive outlook and therefore marketing capability
2. They got paid the same or similar to selling insurance products – a large upfront commission

Whilst the unit trust products did not pay as much commission as the ‘unbundled’ insurance ‘investment’ products – the fees were sufficiently high to have a majorly detrimental effect on long term returns and a disastrous effect on short term cash values.  Whilst the products – either unbundled insurance ‘investment’ products or the Unit Trusts were marketed as long term investments – the public inevitably (just as is now being experienced with KiwiSaver) found reasons to expect early access.

The funds management industry never really exploded due to these two key situations – up front commissions and the effect upon the products returns and a lack of alternative distribution to insurance agents.  That changed when the banks bought the insurance companies.  New Zealand’s largest insurer (Sovereign) is owned by the ASB which in turn is owned by the Commonwealth Bank of Australia.  In one swoop the Commonwealth Bank got to own, Prudential, General Accident, Aetna Life, Colonial, NZI Life and Sovereign.  Their timing was exemplary and now of course they have captured the market.  Their investment into technology and client ownership (insurance clients) has given them the scale to market internally.  They don’t need advisers.

Investing and insuring clients however need advice. That’s the transition occurring at the moment. Transaction and product – from the bank. Investment and insurance advice from an independent adviser.

Next week – why the advice is needed.