TMM - The NZ Mortgage Mag Issue 8 2013 by TMM - The NZ Mortgage Mag

tmm

Issue

2013

The New Zealand Mortgage Mag

WHAT DOES YOUR GROUP DO FOR YOU?

THE GEN-Y PERSPECTIVE

A NEXT GENERATION OF POTENTIAL CLIENTS

VEHICLE FINANCE

OPTIONS FOR BROKERS

THE ART OF NEGOTIATION ESSENTIAL SKILLS NEEDED TO NAIL IT

CONTENTS

WHAT DOES YOUR GROUP DO FOR YOU?

UPFRONT 04 EDITORIAL

Publisher Philip Macalister wraps up the year.

05 NEWS

Changes at Westpac; RESIMAC get all of NZF; KiwiSaver funds should offer home loans.

08 People on the move

All the latest appointments.

Broker groups are at the heart of the mortgage advisory industry. This issue of TMM has our regular annual survey where we look at how the groups have evolved in the past year and what they offer members.

features 10 HOUSING COMMENTARY

Investors replacing first home buyers on the market.

28 PERSONAL LENDING

Why you should consider offering vehicle finance as part of your package.

26 KIWISAVER

Mortgage brokers who think they canâ&#x20AC;&#x2122;t touch KiwiSaver are selling themselves (and their clients) short.

34 SPEED BUMPS

New statistics show how lending restrictions have impacted the market.

columns 18 PAA

PAA marketing co-ordinator Lauren Driffill gives you a Gen-Y perspective on borrowing.

22 SALES AND MARKETING

Paul Watkins provides more great tips on how to use social media.

24 INTEREST RATES

ASB economist Daniel Smith looks forward to predict what may happen to interest rates next year.

20 LEGAL

The art of negotiation.

32 INSURANCE

How much detail do you need to know about each insurance product?

EDITOR’S LETTER

Key changes turn for loan market with their groups of mobile managers. It would be fair to say their co-operation in talking about distribution has been pretty poor. This is best illustrated when they won’t even tell you how many mobiles they have claiming it is “commercially sensitive” information. What rubbish.

elcome to the final issue of TMM for 2013. This issue has its traditional focus on the broker groups and what has happened over the year. We run this feature at the end of the year as many people take this time to ponder their options and plans for the next year. The way the mortgage broking industry is structured you have little choice than to belong to a group. That is quite different to the two other main disciplines in in the advisory industry, investments/financial planning and insurance. If you are a broker and considering which group you will belong to then we hope you find this guide useful. If you are not then I hope you still find it useful in terms of understanding what is happening in your industry. There have been a number of key changes including the Loan Market/ Allied Kiwi merger bedding in; Newpark taking a new direction, Mike Pero becoming fully owned by Liberty Financial and Adam Parore Mortgages going into hibernation. This year we have also attempted to understand the banks and what they are doing

The big lending issue Of course the talking point of the year is the Reserve Bank’s lending restrictions. There is little doubt these are hurting the first home buyer market. But it looks to us as though it is a little fillip for the property investor sector. A survey we did for the NZ PROPERTY Investor Magazine shows that property investors tend to have plenty of equity and a good-sized group of them are considering filling the void left by stranded first home buyers. It also showed that around a third of them used a mortgage broker. This appears to be a niche market that brokers could consider target while the first home buyer market is quiet. It is quite a different space, but investors need advice and help, particularly around structuring their debt. It’s been a big year at TMM with a new look (which we hope you like), our first Round Table and a focus of looking at new areas and products you should consider offering to your clients. From all of the team at TMM and www.goodreturns.co.nz we whish you a safe and happy Christmas and New Year and a prosperous 2014. Till then au revoir.

Philip Macalister Publisher

MANAGING EDITOR AND PUBLISHER: Philip Macalister SENIOR WRITER: Susan Edmunds SUB EDITOR: Phil Campbell CONTRIBUTORS: Amanda Morrall Paul Watkins Bruce Cortesi Daniel Smith Steve Wright Jonathan Flaws GRAPHIC DESIGN: Jonathan Harding ADVERTISING SALES: Sarah Smith Freephone: 0800 345 675 sales@goodreturns.co.nz SUBSCRIPTIONS: Dianne Gordon Phone 0800 345 675 HEAD OFFICE: 1448A Hinemoa St, Rotorua PO Box 2011, Rotorua Phone: 07-349 1920 Fax: 07-349 1926 editor@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

NEWS

Changes at Westpac broker unit

avid Gopperth will no longer be heading up the Westpac broker unit which is based in Christchurch. Gopperth is well-known in broker circles and has run the unit for around 11 years. Westpac Head of Retail Ian Blair says the bank will be appointing a new head for the unit. He has quashed rumours that it would move from Christchurch to Auckland, although the northern city accounts for a large part of its business. He would not comment on the reasons for change, and Gopperth was unable to comment to TMM. Westpac has had someone from Australia, who was “highly experienced” in the broker market in New Zealand, talking to local advisers to see what it needs to do in this space. Blair said Westpac was still committed to the broker channel but acknowledged that

Ian Blair many had seen business volumes fall due the Reserve Bank’s lending restrictions. He said there was more demand for low equity loans than supply and that broker customers would not get the same treatment as Westpac customers or people who joined its new HomeSaver programme. However, he also said that “now is the time when advice from professionals really comes to the fore.” Blair said Westpac, like other banks, was looking at what it could do in the broker space. Westpac HomeSaver package is designed to help potential property owners save for

their first home. Customers will receive preferential low equity approval, a $1,000 first home booster when they take out a home loan, special interest rates and help from an e-coach. “With new LVR restrictions limiting the number of low equity loans available, Westpac will give preference to HomeSaver customers for low equity loan pre-approvals.” “We understand saving for a first home deposit is a major undertaking, and we want to help our customers reach this goal. The earlier they start saving for their deposit the better”. One of the key objectives of HomeSaver is to help customers demonstrate strong savings behaviour. Key requirements to qualify for the $1,000 first home booster at the time of their home loan draw-down, are that a person must save for at least six months and save a minimum of $10,000 towards their deposit. When asked whether the bank would offer this service to brokers to use he said he was “not sure how they could use it” and that it wasn’t something they had thought about. He said brokers could use it, but when asked if the bank would remunerate brokers to get clients to join HomeSave he said no. Blair said the bank wasn’t going to offer this service to brokers to use as they don’t generally play in the deposit side of the business. ✚

NEWS

KiwiSaver schemes should originate home loans I

William Cairns

t would benefit everyone involved if KiwiSaver funds started offering mortgages to their members, one finance company says. William Cairns, of General Finance, first suggested the idea last year but said the new loan-to-value restrictions made it even more relevant. “There’s an opportunity as they get bigger to diversify and put 10% of their funds in mortgages. It would give more competition in the mortgage market and would be exempt from the loan-to-value restrictions.” He said it made sense for investors in the KiwiSaver funds too. “If you can only get 3% or 4% on bonds

but you can get 5% or 6% on mortgages, and it might go up in a year, it gives KiwiSaver providers another assert class.” After three years in KiwiSaver, he said people could be allowed to borrow 90% of a property’s value from the provider. They could then withdraw their own savings to make up a 10% deposit. A similar system operates in Singapore. “If you’re lending a couple 90%, that’s very good lending, they’ve usually both got jobs and it’s a way to get them established. They start participating in the community. I believe we should get first-home buyers into the market as soon as they want to.” ✚

NZF sells last of its loan book RESIMAC last month took full ownership of the NZF Home Loan mortgage book.

t bought the remaining 20% stake in RESIMAC Home Loans, held by the NZF Group for an undisclosed sum. This purchase will see parent company, RESIMAC Limited, take 100% ownership of RESIMAC Home Loans. “This is an exciting step forward for RESIMAC Home Loans,” RESIMAC Home Loans general manager mortgages Adrienne Church says. “We have continued to expand our New Zealand operations and this latest announcement shows

we are committed to investing in the New Zealand market for the long term.” Meanwhile the Serious Fraud Office has dropped its probe into NZF Money, which was placed in receivership in July 2011 owing debenture holders some $16.4 million. The probe was dropped as there was “insufficient evidence.” The investigation included the adequacy of NZF Money's prospectuses, the sale of NZF Homeloans to NZF Group, and the accuracy of

the valuation of NZF Money's assets in 2010 and 2011 financial statements. "The SFO remains open to reconsider its decision if fresh evidence as to the actual knowledge and intent of those in control of the company becomes available," SFO director Julie Read said in a statement. "We will be referring the matter to the Financial Markets Authority so that they may use the information obtained by the SFO in the course of their inquiry," she said. ✚

Diary of events 2014 Basics of mortgage lending ➊ When: February 19-20

When: Auckland

This course covers both the theory and the practical aspects of home lending and is designed to provide a detailed overview of the skills and functional activities essential to those intending to practice as advisers in the mortgage industry. You will gain a good grounding in how to provide mortgage adviser services to clients using multiple home lending product providers. The course includes case studies, group exercises and a knowledge test. This is an introductory course for those who have, or who are about to join the Mortgage Advice Industry & insurance or other financial advisers who wish to add home lending to their service offering. It is also a great “refresher” for those with lending experience.

More info: lauren.driffill@paa.co.nz or call 09 600 5174

NZFSG Mini- conferences ➋ When: February 5, 20 and 27

When: Christchurch, Wellington and Auckland respectively

NZFSG has decided to hold two mini conferences next year after the PAA decided against having an annual conference. These half-day conferences will he held in Auckland, Wellington and Christchurch.

More info: Call 0508 722 205

Loan Market 20th anniversary ➌ When: August 7 - 8

When: Hamilton Island

Loan Market is holding its 20th anniversary conference in at Hamilton Island next year. It is a combined Australian and New Zealand conference and promises to be big. The conference returns to where the business started and will have inspirational speakers, and presentations from fellow brokers.

More info: events@loanmarket.com.au

➍OCR announcements

The Reserve Bank makes an announcement of the OCR every six weeks and and has quarterly Monetary Policy Statements (MPS). Its first announcement is on January 30. The second one is when economists pick it will increase the cash rate. This is due on March 13.

Other dates are: April 24 - OCR only June 12 - OCR and MPS July 24 - OCR only September 11 - OCR and MPS October 30 - OCR only December 11 - OCR and MPS

PEOPLE

PEOPLE ON THE MOVE TNP Home Loans boss leaves

Darren Pratley has leaving TNP after a threeyear stint with the dealer group. He started with the dealer group to build its mortgage division and has been general manager for distribution and marketing for the past 15 months. He told TMM he has no immediate plans and is taking some time out to consider his future. However, he still owns the Home Loans Group brokerage firm. TNP will not be replacing the role. TNP director Jamie Coltman will be taking over the management of TNP Home Loans and he will be working very closely with its home loans business development manager Jodi Anderson. Chief executive Jeff Page will take over the management of TNP Risk Distribution and the business development team. Pratley said that TNP home loans has

nearly 70 members. "Over this time we have seen many mortgage brokers develop their business into a financial services advice model with a new and positive client service proposition. This has to be the way of the future and more mortgage brokers need to look at developing this.â&#x20AC;? While he ran home loans he has spent considerable time within the insurance distribution side of the business and working with both the insurance companies and advisers to enhance the sale of financial services products with an advice model philosophy.

Loan Market

Darren Pratley

NZ Financial Services Group has made onemore appointment following the departure of David Hart. Cameron Marcroft is now the sales manager for the non-branded side of

PEOPLE the business (Allied Kiwi). He has been with the group since it was Kiwi Mortgage Market. His new role is based in Auckland.

Simon Allen said. “He has worked in investment banking, legal and risk management, and advised on corporate governance, compliance and other regulatory matters.” “Everett brings to FMA a truly global perspective on financial markets and regulation and he will be a great asset to FMA.” Previously Everett (45) was a director in the UK with Promontory Financial Group, a global regulatory consulting group. Before that he spent 17 years at Bank of America Merrill Lynch, in Europe, Asia and North America. His roles included Chief Operating Officer for Europe, the Middle East & Africa (EMEA); General Counsel, Head of Legal and Compliance, EMEA; and Head of Legal for Investment Banking, EMEA and before that for Investment Banking, Asia Pacific region.

Express growth Rob Everett

New watch dog named

The Financial Markets Authority (FMA) has appointed Rob Everett as its new chief executive to replace Sean Hughes. “Everett has a wealth of experience in law and compliance having specialised in capital markets and corporate finance,” FMA chairman

Harcourts-owned Mortgage Express has added yet another broker to its ranks. The latest recruit is David MacDonald who will be a mortgage and insurance adviser based in Invercargill. MacDonald originally hails from the United Kingdom, and he has more than 20 years’ experience in the financial services industry. His most recent position was as a financial planner for a large, corporate organisation in t he United Kingdom, where he dealt with a wide

David MacDonald range of financial advice, including inheritances, debt management, pensions and mortgages. He also holds a Diploma in Financial Planning from the Chartered Insurance Institute. MacDonald will offer a full range of financial and insurance adviser services to his clients, and is currently working with clients between Invercargill and Gore. ✚

HOUSING COMMENTARY By Susan Edmunds

SIGNS OF A SLOWDOWN

Fewer first-home buyers may be the first indicator of a slowdown in the housing market

REINZ HOUSE SALES: NEUTRAL 2.1% more sales than in 2012 but indications turnover might be easing.

INTEREST RATES: DOWN Interest rates are starting to creep up, especially in the longer fixed terms.

f the first sign of a housing market slowdown is a drop in turnover, the initial inkling of a change may have been seen in recent weeks. Until very recently, every data release was full of reports of hot demand and buyers struggling to keep up. But in October, the first indications started to emerge that some properties, particularly in the traditional “first-home buyer” category, might be

010

OCR: NEUTRAL Still on hold but indicators point to an interest rate rise next year.

IMMIGRATION: UP More people are moving into New Zealand than leaving.

BUILDING CONSENTS: NEUTRAL Up a seasonallyadjusted 2.6% last month but still lagging behind what's needed.

going begging. BNZ chief economist Tony Alexander’s monthly survey of real estate agents, run in conjunction with the Real Estate Institute, showed that 78% thought they were seeing fewer first-home buyers than they had in the previous month. And net 17% said they thought it was now a buyer’s market they were operating in, from a net 11% who thought it was in sellers’ favour in

MORTGAGE APPROVALS: DOWN Down almost 5% in the week of November 8 compared to the same time the year before.

RENTS: NEUTRAL Rents are rising about 3% yearon-year in Auckland.

the previous survey. A 0% result would indicate that opinion was evenly divided. What everyone wants to know is how much of an effect the new loan-to-value restrictions are really having on the market. For the past couple of months, banks have only been able to lend one in ten of their new loans to people with a deposit of less than 20%. To get to grips with the policy, many banks have been lending far fewer than that.

" The house price-todisposable income ratio in New Zealand is still elevated at around 4.5. "

The Real Estate Institute’s latest data showed that prices continued to rise despite the restrictions in October. The national median price increased $7,525 compared to September to $407,525, a new record median high. Auckland, Canterbury/Westland and Waikato/Bay of Plenty all recorded new median highs in October, with Auckland reaching $582,000, Canterbury/Westland $380,000 and Waikato/Bay of Plenty $335,000. Compared to October 2012, Central Otago Lakes recorded the largest increase in median price, up 19.5%, followed by Northland with 12.5% and Canterbury/Westland with 10.8%. But there were indications that the restrictions might have put the brakes on turnover a bit. There were 6,778 sales in October, up 2.1% on the same time the year before and just under 1% more than September. Chief executive Helen O’Sullivan said agents around the country had indicated that buyers were uncertain and much less likely to want to commit to properties. She said: “Typically in the real estate market sales volumes change more quickly than prices and overall sales volumes are lower than what we would expect for this time of the year, although in a few regional centres sales are strong. Northland and Otago stand out as two regions with strong sales growth, although in other regions the picture is far more mixed.” Auckland real estate agency Barfoot and Thompson’s statistics probably painted the clearest picture of a change in demand. Its October figures showed that buyers had more properties to choose from in the month than they had in some time. Managing director Peter Thompson said: “The number of new listings during the month was 2016, an increase of 23.2% on those for September, and the first time in more than five years new listings have exceeded 2,000. At month’s end the number of available listings increased to 3,646, a 14.3% increase on those for September, and the highest number in the last seven months.” Concern about overheated prices centres on Auckland but QV said in its statistics release that the restrictions would be felt least in the cities where prices were hottest.

Its latest property value index shows values for October are up 8.9% over the past year, and 2.7% over the past three months, nationwide. They are now 10.4% above their previous market peak. Research director Jonno Ingerson said that index was being driven by the price rises in Auckland and Canterbury. “Most of the rest of the main centres are also increasing but at a slower rate. In contrast, many of the provincial and rural areas have declined in value." Investors would pick up the slack left by first-home buyers who were not able to purchase in Auckland, he said. Westpac chief economist Dominick Stephens said he had been predicting for some time that November would be the start of a change in the direction of the housing market, and so far that appeared to be proving true. “The first few straws in the wind are indicating that are slowdown is nigh.” He said the drop in mortgage approvals had been overstated but there were signs that demand was easing. “The market remained strong right through to October. I anticipate that the first sign of a change will be lower turnover but I still expect to see strong price action through to the end of this year.” The restrictions on lending had combined with a significant lift in mortgage rates to change buyer behaviour, he said. Interest rates had changed markedly over recent months, he said. “[A change in interest rates] normally acts with a six month lag on prices.” The Reserve Bank has reiterated that it is concerned about the housing market and the effect that higher interest rates could have on heavily indebted households’ ability to service debt. It still expects to increase rates by 2% between 2014 and 2016. But a lot of New Zealanders seem to think that rising house prices might not be such a bad thing, after all. BNZ’s most recent consumer confidence report found that a net 13% of people welcomed rising values, up from 6% the previous month. And eventually it may be affordability that puts a damper on demand, to a much greater extent than bank restrictions could ever hope to. Harbour Asset Management's director, fixed interest, Christian Hawkesby, said the restrictions might cool the market in the short-to-medium term but it would be affordability that eventually put the brakes on more permanently. “The house price-to-disposable income ratio in New Zealand is still elevated at around 4.5. This is not only high by historic standards but the IMF, OCED and rating agencies all highlight that it is also high by international standards. Debt servicing costs in New Zealand have been eased by record low mortgage rates, but could start to bite in a rising interest rate environment.” ✚

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LEAD STORY

WHAT DOES YOUR GROUP DO FOR YOU? In TMMâ&#x20AC;&#x2122;s annual broker group survey Philip Macalister examines the changes over the past year and reports on how the groups are developing. 012

LEAD STORY

ne of the comments we often hear is that there must be a rationalisation of broker groups in the market – but it looks like being a slow game to play out. In the past year we have seen little change on that front, but plenty of change elsewhere amongst the groups. One little bit of rationalisation is that the Adam Parore Mortgages group has essentially stopped operating. The head of the group, Dion Jones, left early this year for a role with Turners Finance. It is understood the group is essentially in hibernation and may come back to life at some stage. However that could be like the Corpse Flower which recently flowered at the Wintergardens in Auckland. It took seven years to flower, and no-one knows whether it will come back to bloom again. There have been other changes too. Last year when we completed the annual TMM survey Allied Kiwi and Loan Market were in the final stages of their courtship. Now that has been consummated the focus is on bringing the groups together. The third change is amongst the two life insurance aligned groups; Newpark and TNP. Early in the year Glen McLeod and Edge Mortgages decided to exit its joint venture with Newpark and join TNP. Newpark then teamed up with Mortgage Link. Any review of groups can’t ignore Mike Pero Mortgages which is now, after an incredibly acrimonious fight, fully-owned by Australian group Liberty Financial. The group, which takes a high profile position in the media chose not to partake in our survey. The reasons behind this are not known. It’s a shame because they are arguably the best-known brand in the market and still write a good volume of business. TMM sources estimate the group would write more than $1.1 billion in loans in a year. This can be seen through the accounts of its former half owner NZF. Where Liberty will take MPM is still unknown. During the takeover battle Liberty in New Zealand was run by Peter Rollason. However he has returned to Australia and Liberty have sent Simon Priest across the Tasman to run the firm and MPM. Priest wasn’t willing to talk about his plans when TMM went to press as he hadn’t properly relocated to New Zealand. One change we expect is to see is that MPM will push more Liberty product through its network, especially after NZ Home Loans replaced Liberty on its lending panel with RESIMAC and MPM brokers aren’t allowed to use RESIMAC products. It’s unfortunate MPM would not take part in the survey as the other big franchise business

❝ It’s a similar story with the second biggest player NZ Home Loans. Its volumes increased from $962 million to $1.04 billion which is just over 8% growth. ❞

run by Clive Atkins. It is a significant amount of change in the overall leadership of the broker fraternity. Judging the significance of these changes is a little hard, but it could well result further evolution of the groups. One of the biggest challenges for groups is around profitability and offering services to members. An important point of differentiation between mortgage groups and insurance groups is around how they get remunerated. Insurance groups often get paid extra commission from the life companies to provide services to members.

in the market, NZ Home Loans, readily takes part in the survey. While NZ Home Loans has a different proposition in the market, it has gone through some ownership change this year, becoming fully-owned by NZ Post subsidiary These changes though haven’t changed the shape of the market or the number of participants markedly.

CHANGING OF THE GUARD Looking through the results we collected one of the key changes is in leadership. The changes here include: ➤ David Hart stepping down as the head of Loan Market to take up broking again ➤ Darren Pratley, who essentially set up TNP Home Loans has left the firm and is considering his future. ➤ Warren Stephens has handed the dayto-day responsibilities of running the Lifetime Group to Michael Oliver. ➤ Steve Weston finished up as general manager of Mike Pero Mortgages to join Medical Assurance. ➤ Glen McLeod left Newpark and that group is now run by Paul Gill of Mortgage Link. ➤ AMP-owned Roost Mortgage Brokers is now

David Hart

Michael Oliver

Biggest groups 1

NZFSG

$6.35 billion

NZ Home Loans

$1.048 billion

Mike Pero

$1 billion (est)

TNP

$980 million

Mortgage Express

$800 million

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LEAD STORY

What does it cost to belong to a group?

The membership options are highly varied depending on what sort of service you want from a group. A number of groups offer straight aggregation models as well as ones which combine other services. NZFSG - Allied Kiwi Monthly fee

Hybrid model $400.00

$250.00

Software platform

MyCRM

Remuneration

100% of all commission

2.5% of up front commission, 100% of trail commission.

NZFSG – Loan Market

Tiered commission split based on individual production

TNP

Mortgage broker only

Mort and risk adviser

Monthly fee

$402.50

$172.50

Software platform

Yes

Share option

Yes

Remuneration

100% commission generated

95% of commission generated 5% of gross commission received on home loan business payable to TNP

Min requirements

Min of two risk policies per month to be sumbitted through TNP agency

PROSPER Monthly fee

$250.00 for an individual but capped at $500.00 for multiple advisers. Ie: $250 for 1, $500 for more than one.

New Build

Commission-based. Large proportion of up front commission paid to advisers, balance covers overheads, staff, office etc.

New Build generates its profitability primarily through renewal streams of its loan and risk books. NZ Home Loans and Mike Pero each run a franchise model. Mortgage Express and Mortgage Link run a licence model which uses split commission.

To download a spreadsheet with details about each groups either scan this QR code or go to www.mortgagerates.co.nz/brokergroups

These “over-ride commissions” can add up to many millions of dollars a year. Meanwhile lending institutions don’t pay over-rides to mortgage groups. Rather the main model is that brokers pay a monthly fees to their group and also get to keep all, or most of, the commission paid on the products they sell. NZFSG director Bruce Patten says one of the challenges is to provide services to members as well as being an aggregation group. He doesn’t like the pressure broker put on groups to lower their fees and certainly doesn’t want to be the first one to get to zero. Patten says NZFSG has become a dealer

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group rather than an aggregator and is looking to offer additional revenue sources to its members. Two examples of this are life insurance, (and the group wrote $1 million of annual premium in November) as well as general insurance where it has a referral agreement with TOWER. Share NZ chief executive Scott Black has similar views. “For groups the perennial problem is how do they add value to their advisers? Much of the revenue for groups is driven by clipping the ticket of the advisers, particularly in respect of insurance production. As the commissions reduce, which I believe will happen, so will their major source of revenue and their ability

to add value to their advisers. Groups need to change their business models to a more sustainable fee-for-service .” Patten, like other people TMM spoke too, questions how some of the other groups can survive in the market with their current models and pricing. He says a group needs to have scale to survive.

SIZE COUNTS By far and away the biggest group is NZFSG which settled $6.3 billion on home loans through its two groups; Allied Kiwi and Loan Market. While it is a significant amount of business the growth from the previous year was 9.48%.

❝ The biggest issue for mortgage advisers at the moment is 'how to build a holistic advice business.' ❞ It’s a similar story with the second biggest player NZ Home Loans. Its volumes increased from $962 million to $1.04 billion which is just over 8% growth. TMM estimates Mike Pero wrote similar amounts of business as NZ Home Loans. Harcourts-owned Mortgage Express is the next biggest firm writing around $800 million worth of loans in the year, which compared to last year is an increase of around $50 million. Getting a handle on the number of brokers has been difficult to quantify, however overall most of the groups are recruiting and have shown net increases in their member count. As can be expected NZFSG is the biggest player with around 400 members. Of this total around 80 are in its branded proposition, Loan Market. NZ Home Loans is also up there, however its mix of 80 business owners, 50 new business consultants and 26 client servicing consultants. The survey was initially sent out soon after the Reserve Bank’s lending restrictions were introduced. The responses to these speed bumps ranged from a slow down in enquiries, particularly from first home buyers, to many saying it was too early to tell. The make up of the mortgage advisory industry is heavily towards registered financial advisers. Very few of the groups have significant numbers of authorised financial advisers. Likewise the fee-for-service model is not widely used in mortgage advice circles. One group which is keen on the fee-forservice model is TNP. Jamie Coltman, who now heads up the home loan operations says it is a focus for the TNP group as a whole. He says one of TNP’s points of differentiation in the market is that it is pushing its members towards a full advice model which will help advisers and brokers grow their businesses. Coltman says the biggest issue for mortgage advisers at the moment is “how to build a holistic advice business.” What portion of TNP mortgage brokers are charging a fee isn’t clear. Rather Coltman says it is “a growing number.”

The other area where a fee might be charged is explained by Mortgage Express chief executive Marcus Williams. “A client fee is charged when using a nonpanel lender or a lender that does not pay us – so based on this at any time all our advisers could charge a fee.” One of the things which has started to emerge in the survey is that banks that don’t officially deal with mortgage brokers, such as Kiwibank and BNZ, are actually quite active in the market. Kiwibank gets a lot of business via NZ Home Loans (as both are owned by NZ Post) but a number of firms revealed that their brokers where using products from the governmentowned bank. Although there are very few AFAs amongst the mortgage broker population there is an emerging trend that KiwiSaver will play a more important role with some of the groups. While some leave the advice to their AFA members others let RFAs offer class advice on KiwiSaver. Mortgage Express for example is in the process of accrediting its 39 members. Likewise TNP already has some relationships and is looking to roll out a new service around KiwiSaver next year.

Mark Collins THE OUTLOOK We asked groups about their prospects and the future outlook. Overall they are a rosy bunch and generally all exude positive thoughts. This is illustrated by comments from some of the larger players. NZ Home Loans chief executive Mark Collins says his “predominant goal is to double production to $2 billion annual new business over the next four years.” Newbuild managing director Ian Webb says the broking industry may take a hit thanks to the Reserve Bank’s lending restrictions, but “deep roots survive droughts.” “In adversity comes new opportunities, often with fewer competitors. To remain relevant though we need as many advisers to remain strong in the industry,” he says. ✚

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MY BUSINESS By Amanda Morrall

Tight funds, smaller deposits stuff of dreams? â&#x20AC;&#x153;Many clients we talk to are very aware that funds are now much tighter with few options with small deposits. We are working with them to try and plan how to achieve their dreamsâ&#x20AC;?. 016

MY BUSINESS

nnette Kann is a mortgage broker and authorised financial adviser. She is owner of Roost North Harbour Ltd, a franchise of Roost Mortgage Brokers.

How long have you been an adviser and why? I’ve been doing the job for 13 years. I had a back injury while I was working at the bank. I was off for eight months and during that time started to consider what other options I might have working for myself. A friend suggested mortgage broking and once I had explored some options it seemed like a great option and now I just love what I do.

What was your former role in banking? I was a relationship Personal Banker. This meant I was looking after the top 5% of the banks “High Value” clients-looking after all their banking requirements including mortgages, day to day banking, and also insurance from time to time.

Was it a natural transition? For me it was. However, I don’t think that you need to have banking experience to become a mortgage broker. It’s more about having the hunger to make a deal work and you have to be good with numbers.

What’s the best part about your job? Getting people into homes when they don’t think they can. Making their dreams a reality especially if they’ve been to the bank and the bank has declined them. We step in and know where and how to put the deal together. It’s a real buzz’ telling a client they can buy a house is amazing.

How are the new LVR rules impacting business? We looked at business for the previous 12 months and the majority of our business was under 80% anyway. However, it will have an impact especially in the short-term while the banks are settling into this new phase and waiting to see how many of the existing preapprovals will be taken up. That said, many of the clients we talk to are very aware that funds are now much tighter with few options with small deposits. We are working with them to try and plan how to achieve their dreams. They’re in a position where they can’t look at it until they know what percentage of those are going to be approved.

It’s a lot of hard work but it’s a lot of fun as well. It’s an incredibly rewarding job and I love it. Learning the ropes will take some time but it’s worth that investment if you like working with people and numbers. Do you think it was a good idea and will it achieve the intended effect? I think that it will have to slow the market to some extent unless of course more buyers appear with a 20% deposit and keep things moving as they have been. It’s a tough decision especially with a moving goal post and prices for first home buyers now so high. Saving the full 20% deposit when you are on smaller incomes will be very hard.

What advice do you have for clients when it comes to KiwiSaver and first time home deposits? I don’t give advice in this area. For clients wanting to understand the impact if they do drawdown on KiwiSaver, I have a great financial planner who specialises in investments that I would refer them to in order to assist.

What’s a typical day like for you? I usually start pretty early in the morning at the office sorting out paper work and replying to emails. The rest of the day is spent either meeting clients, referral sources, banks

or on the phone trying to finalise deals. I have a few networking meetings that I attend on a regular basis early mornings as well. We usually make time once a week to go for lunch with the rest of the office.

What’s the best business advice you’ve ever received? To work hard and be passionate about what you do. To be true to yourself, and to clients.

Worst advice? I don’t think that there has been any.

What tips, if any, would you have for someone thinking about becoming a broker tomorrow? It’s a lot of hard work but it’s a lot of fun as well. It’s an incredibly rewarding job and I love it. Learning the ropes will take some time but it’s worth that investment if you like working with people and numbers and making a deal work.

What’s been the best influence or support system for you in your capacity as a broker? Having been part of a franchise certainly helped me in the early days. Not originating from New Zealand I knew relatively few people when I started out so having others to discuss deals with and to help me run the business if I needed it was amazing.

What’s your goal for retirement and how do you see yourself living in retirement? I am not sure if I could retire completely but within the next five years I would like to think that I could perhaps be helping someone else take the reigns while I stepped back a little. Travelling a lot I suspect would feature somewhere. And maybe the winters; somewhere hot each year!

What kind of car do you drive? A Peugeot 307 convertible. I love it!

Favourite quote? “Whenever you see a successful business, someone once made a courageous deci sion.”

What do you like doing in your spare time? I enjoy good food and wine and entertaining good friends; cycling, travelling and renovating property. ✚

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By Lauren Driffill

THE GEN-Y PERSPECTIVE

Lauren Driffill has been with the PAA since April and offers some valuable insight into the industry. Here she offers a fresh perspective from the next generation of potential clients.

s 2013 comes to a close we can reflect on what has been a year of change for the financial advice industry and mortgage advisers in particular have seen many legislative changes which have begun to alter the way they do business. With LVR restrictions coming into play advisers have been given the opportunity to provide a range of clients with what banks cannot, to get them into a home. Finding new ways to attract clients in the low LVR space, as well as retaining those who are now wary of purchasing a home has been at the forefront of many advisers minds. When I walk into a bank seeking advice on a home loan, do I really get advice? I am probably going to be offered a range of products which may or may not be relevant to me based on whatever special offers or incentives are available at the time. It is unlikely I will truly be guided through the process. This is where mortgage advisers have the opportunity to separate themselves, adding value to the services provided by doing more

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than just ‘going through the motions’. There are the obvious things that consumers have come to expect from an adviser - offering refinancing options, seeking out alternatives where necessary, identifying potential issues that may arise in the future which will affect my ability to service mortgage repayments. Then there are the added extras – getting to know me, helping me to understand exactly what is happening each step of the way through my mortgage application and acting as my trainer when it comes to the world of finance and mortgages. When I consider the process of purchasing my first home it is hugely overwhelming, and a little bit frightening, while at the same time being an exciting milestone. In choosing an adviser to guide me through the process I want to know that I have the best person for the job .

MAXIMISE PROFITS Going the extra mile is something that I see much less of these days. Everyone rushes through sales in a bid to maximise profits

or commissions, be it when I am buying a television or getting a manicure. This often means that customer service takes a back seat. It doesn’t just take a bad experience to change my view of the services provided, it can be the realisation that there is better on offer elsewhere. It comes back to the old adage: quality, not quantity. In any service based industry, if you focus on quality then the quantity will follow. If I am your client, the better the service you provide me, the more likely I am to seek you out again in the future or recommend you to friends and family. Word of mouth is an extremely powerful form of advertising, and negative experiences do not just mean bad service! How would you feel if you found out that your friend goes to a similarly priced hairdresser to you, but while you get the basic cut and blow dry with no bells or whistles, she gets offered a flat white, enjoys a head massage during the shampoo, walks out with advice on which products are best suited to her hair type, styling ideas, and perhaps a

Lauren’s Top Five Tips for Mortgage Advisers – A Client’s Perspective Clarify everything. Make sure I have a clear understanding of what is going on every step of the way. Be sure to clarify any points I am not clear on, and ask me each step of the way if I need you to explain further or run through anything again – I might be too shy to ask. Don’t be condescending, but acting as an adviser means coaching me through this – and the more I understand the easier your job will be in the long run.

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Listen and make a connection. This is not just about recalling assets and liabilities, this is about gaining a well rounded understanding of who I am in a way that allows you to tailor your service. Connect with me – find common ground.

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Exceed my expectations. Go the extra mile, and don’t be afraid to point it out to me. If you can see room for improvement in my current situation do not be afraid to make suggestions. I may initially see you only wanting advice on purchasing my first home, but you have the opportunity to provide more than this.

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Use technology to your advantage. Do you have a smartphone or a tablet? Use it! In an increasingly paperless world these are key tools which will save you time, allow you to be more mobile and are hugely cost effective. There are a variety of apps and programmes available to help you here, and these are the tools that as a Generation-Y am familiar with, and most comfortable using.

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Up the anti. Arm yourself with the knowledge you need to be successful in providing me with the best possible service. When creating your Professional Development plan for 2014 remember to ask us for any assistance, and keep in mind that it not need to be solely mortgage related. There are a wide array of workshops that will give you an edge in customer service and communications. I want to know that I am dealing with a competent adviser.

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free product sample. Suddenly your perfectly satisfactory haircut is not looking so good, and you are now more probably considering going to your friend’s salon next time.

HUGE PROBLEM Arguably one of the most valuable things you can do for clients is educate them on their finances. Financial literacy is a huge problem in New Zealand, with many adults having little or no understanding of basic principles such as budgeting, saving for retirement or the home loan process. When I joined this industry as a fresh faced 22 year old many of the basic terms were unfamiliar and confusing. When first

dealing with advisers it was not uncommon for me to misinterpret what I read or heard – often without the adviser realising! Educating yourself is important too. A key part of my role at the PAA is to assist advisers with their CPD. Keeping on top of professional development is key in keeping on top of your game. When I am talking to someone about my finances I want to know that I am dealing with someone who is well educated and has the most up to date information. Invest in yourself! This is not about gaining exactly 10 structured hours a year (watch this space for Code of Professional Conduct changes!), it is about maximising your career. I get a lot of emails from RFAs who are unsure of their CPD requirements. While you are not bound to the Code of Professional Conduct like AFAs, you are still expected to demonstrate the same qualities of care, skill, and due diligence. The easiest way for you to do this is by regular CPD. In such a fluid and dynamic industry none of us can sit back and say that we know it all – there is always new information, better practices to share, skills to brush up on or additional products and services to wrap your head around. The FMA remind us that CPD is not a target to hit, but that it is in place to protect clients and ensure that you are able to demonstrate competence, skill and knowledge. As with any industry, the more you know the more likely you are to be successful. Perhaps a lot of your clients are small business owners? Make the effort to attend our Communicating with Small Business Owners workshop – not just because it will give you five structured CPD hours, but because it will give you a toolkit of new skills and provide you with a deeper understanding of your clients. Perhaps you could brush up on your Business Writing (it is amazing how many of the basic grammar functions are forgotten thanks to spell check and secretaries!), take a Basics of Risk Insurance course to expand your scope, or challenge yourself with a public speaking course. With the proposed changes to CPD next year AFAs are going to find themselves taking a lot more responsibility for their own learning. Your Professional Development Plan (PD) will become your bible, and will dictate what will be classed as structured CPD for you. Remember, this will differ between advisers depending on what they have identified in their PD plan as areas to improve on. Recognising areas for improvement is an important skill, and one that many often struggle with. Most people find it difficult to identify areas they need to improve, and advisers are no exception. The PAA team is happy to assist in identifying any areas you may wish to include in your PD plans. ✚ Lauren Driffill is the Marketing and Professional Development Coordinator at the Professional Advisers Association.

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LEGAL By Jonathan Flaws

Nailing jelly to wall possible Before everything turns to jelly, prepare well before negotiating with clients.

“I

t was like nailing jelly to a wall” was how a lawyer friend of mine recently described a commercial negotiation in which she was involved. It’s an interesting concept and seems like an impossible task. But she explained that with time, patience and a little innovation, it is possible to nail jelly to a wall. Negotiation is an art, sometimes a sport, and it is a necessary part of all human interaction. It happens at home, regularly, with your kids. It happens as an essential part of doing business. She eventually explained how she “nailed it” so I thought it might be useful to share some of the skills she needed to deploy.

Don’t panic – stay calm

The first element you need to nail is yourself – get into the right mindset before you start. Prepare before you start your negotiation. You need to accept that it could take a long time and that the thing you are negotiation or the person you are negotiating with will more than likely change during the process. Jelly certainly changes – it’s designed to. Jelly starts off as a liquid and it is only once it solidifies, or more correctly, coagulates, and becomes a solid form that it can be nailed to the wall. Until then it slips and slides all over the wall. Expect this – don’t panic when it happens. Keep calm, be patient and wait for the change to occur. Your first realisation is that you have to do something to settle the jelly down; make it stay in one place and stop sliding down the wall in front of you.

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But one characteristic of jelly is that it does not have a brain. You can’t reason with jelly. You can tell it something one day but without a brain, it has no place to store that information. Therefore what is logical one day is just another drip on the wall the next. Contain yourself – and the jelly

Instead of going into a blind panic, you first have to convince yourself that it is not an impossible task. Obviously, trying to nail jelly with just a nail and a hammer won’t get you there. You can’t

approach it head on. It requires additional tools and objects. Think about the nature of jelly. Think about how you would deal with it horizontally rather than vertically. When you start, jelly is in liquid form and you need a mould to pour it into. You need to set the parameters of the negotiation. Define the limits beyond which the jelly or the negotiation cannot go. Vertically, you need a platform that you can fix to the wall – something solid that forms a base and which the jelly can’t slide around; a shelf with sides and a front to contain the jelly so it doesn’t flow off the platform and leak on to the floor. In other words, you need to understand and set your base position. You need to know the limits beyond which you will not go. If your base position is solid, the negotiations can move around above that and it doesn’t really matter. You could concede everything above your base and still achieve your goal.

Provide something for the jelly to cling on to

The reality is that you can’t actually nail jelly – nails are piercing and sharp. If you are too piercing and sharp in a negotiation you just cut the other side to pieces and you kill the negotiation. You need broad flat nails that the jelly can cling to once it hardens and stops moving. So instead of piercing the other side, you need to provide them with broad flat arguments that they can hang onto and around which they can solidify.

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Good jelly, stay – bad jelly, move on

Sometimes the other party provides this – they are called “clingers”. The other side is most likely to stick to their own clingers because it’s always more comfortable taking a position around something of your own creation.

Let the jelly decide

And herein lies the clue to nailing jelly to a wall. It has to want to do it itself. You can try and talk to the jelly and provide the logic and the reason why it should coagulate and start thinking like a solid instead of a liquid. But one characteristic of jelly is that it does not have a brain. You can’t reason with jelly. You can tell it something one day but without a brain, it has no place to store that information. Therefore what is logical one day is just another drip on the wall the next. But a brainless jelly will reach a solid state because it is designed to do that. All you can do is to let nature take its course and if you have the right ingredients jelly will turn solid naturally.

When the jelly refuses to cooperate

But not all jelly behaves as you would like so if the jelly refuses to understand, if it is taking too

long to get there on its own, then it may need a little help. You could try and stir the jelly into motion. Get a big wooden spatula and turn the jelly over and over on itself – maybe this will help it solidify. It won’t help. Use the spatula to belt the jelly into submission. It won’t like this and is more likely to become like a living creature and develop a pulse in time with the beating. Belt it too hard and the jelly will just suck the stick down into it and consume it. If it really gets too hard and uncooperative and you want to nail it quickly, the most effective method is to grab a fire extinguisher – the ones that when you press the lever, really cold CO2 comes out that will freeze your hand and take off the skin if it gets in the way. Aim it at the jelly and freeze the stuff. Amazingly, it will not just go cold on you but it will turn into a solid block very quickly. If you have already put the nails or clingers into the jelly, it will solidify around them and stick to them.

Either naturally, or frozen into submission, the jelly will eventually stick to the wall. At this point, you can now remove the platform that you first put up to hold the jelly in place and – there you have it – jelly, nailed to the wall. Naturally set jelly will stay in place despite the environment around it. Frozen jelly is likely to melt when the lights go on or the sun streams through the windows and warms the room. Mission accomplished; game over; moved on to the next challenge. Jelly that you force to stick to the wall will never be permanent anyway. The real art of negotiation is to realise quickly what type of jelly you are dealing with and understand whether the success of your negotiation will be permanent, or temporary. If it is self-motivated and behaves like good jelly, the negotiation will be successful and a work of art. It will be a thing to be admired for a long time. If it is bad jelly and needs to be forced to the wall then once you achieve a result, use it and move on quickly. Once the jelly realises it’s been frozen into submission, it is likely to come unstuck, ooze down the wall and create a sticky mess at your feet and stick to your shoes. Be long gone before this happens.

How to choose a lawyer as a negotiator?

When choosing a lawyer to negotiate for you, look at the state of his or her shoes. ✚

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SALES & MARKETING By Paul Watkins

MARKETING PROFESSIONAL SERVICES THROUGH SOCIAL MEDIA

Marketing guru Paul Watkins offers you some more great advice on how to use social media successfully.

n the previous edition of TMM I took you step by step through a simple Facebook campaign. This was spelt out in detail to show you how easy it is and in the hope that it would introduce you to social media as a marketing tool. Just over one third of the entire world is now connected to the internet (2.4 billion) and of those, half are on Facebook. (1.2 Billion). You may well know people who are not, but they are in the very small minority, so don’t take them as typical. Facebook is only one of the many (read thousands) of social media sites that can be used for marketing purposes, each one having its own set of peculiarities and benefits. The one you choose to use should being

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determined by the objectives of the campaign you propose to run. For now I’ll focus on Facebook and while the suggested campaign in the last edition required a new page on your web site and a small ‘report’ to be written, there are even simpler campaigns that can run. As a general comment, the ones that have the most impact are where the advert appears in the newsfeed of the recipient, not as an advert down the right hand side of the page. There are a number of rules around such campaigns, such as word count. But the best part is the way you can target your audience. For example you can choose only those who live in your town or city. You can also choose by age and gender. It’s also possible to choose

only those who list a specific interest. Here are a few examples which explain this. Perhaps you want first home buyers, so you can choose to have your advert only appear on the pages of those between 20 and 30 who are married. The text could read “Looking to finance your first home? I may be able to help”. You may want potential investors to help arrange finance for their rental properties. So run your campaign to those aged 35 to 45 and the text could reading, “Got 25+ years to retirement? That’s perfect for buying an investment property”. Perhaps you work with a real estate agent and they have a lifestyle property with an airstrip on it. You could choose say those aged 35-55 and only those who list ‘Pilot’ in their

"My strongest recommendation is that you go to Youtube and type in 'How to run a campaign on Facebook, 2013'." interests. The text could read, “Want a property with its own airstrip?” Clearly in this case the number it would get to is small, but they would all be very highly likely to click on your ad. And as a follow up to this specific example, I just checked and in the Waikato – being defined as a 50 mile (80km) circle around Hamilton. The number of Facebook members who are aged 35-55 and list ‘Pilot’ in their interests is actually 180, so while that is not a big number to advertise your services to, they are very hot prospects for wanting to finance themselves into a property of that nature. You could argue that they the ONLY possible market for the property and this has allowed you to identify and target a large number of them. Therefore don’t worry about being too micro in your criteria, as this is the key to the effectiveness of marketing through social media! Before I explain this further, yes you are advertising the real estate agents services as much as your own in this instance, but that’s irrelevant, they still click on your ad and no doubt you have an arrangement with the agent anyway.

Targeting your audience So coming back to the micro nature of your targeting through Facebook, this is the ultimate WII-FM targeting (What’s In It For Me) approach. If they are into flying, then a property with an airstrip is probably their dream – and you know how they can finance their dream! So while press would get to the 200,000 people in the Waikato, only 180 are likely to care about this property – and you now know how to get to them! Facebook means no wasted advertising dollars. These examples should give you some ideas on how it can work. And remember that you only pay per click, which means you only pay when someone clicks through to your nominated web site page. The cost per click can vary a lot, but could be a few cents to $1 per click. You can set a budget for the campaign, and it stops when you reach that limit. Clearly that example was extremely targeted, the way to use it most effectively being to run a series of adverts, each aimed at a very specific target audience. You could run 10 at a

time, maybe even 20. Each one aimed at a highly defined group with a totally relevant WII-FM message. The purpose of the article is to get you to check out social media advertising. My strongest recommendation is that you go to Youtube and type in “How to run a campaign on Facebook, 2013” The reason for the date is to make sure it is current as too many rules have changed and just recently they changed them again. Watching a how-to video from as recent as 2011 is the dark-ages for social media and a huge amount has changed even in that short time. It’s even possible that by the time you read this, it has changed in some subtle way again.

Changing landscape Traditional media is losing its impact at an alarming rate. Newspapers are seeing around 5% to 10% loss of readership each year and radio is also having to look at innovative ways to maintain its listenership. Television has become very fragmented and as of about a year ago, research tells us that we now look at computer screens and gaming screens more than televisions. And despite it being illegal, a huge amount of downloading of movies and TV series is going on, meaning TV advertising is not being seen. The promotional landscape has changed dramatically, and will continue to change. What worked just five years ago rarely does now. The most important change to understand is that we can now pinpoint exactly who we want to see or hear our message. However, the other side to this is that it is labour intensive. It takes time to set up multiple micro campaigns and constantly monitor them. How do you do this? Let’s say your marketing budget is $12,000 a year ($1,000 pm). Part of this should be devoted to newsletters designed to generate referrals and to stop them going direct to the lender for re-financing. Then about $300 a month should be paid to someone who understands social media marketing. This is an outstanding investment and it is not hard to find such expertise to set up and manage your micro campaigns. They would pay for themselves many times over. Ignore social media at your peril. Facebook gets a bad rap at times, “Facebook losing members” and “Time on Facebook diminishing” are relatively frequent headlines. You may never go into it yourself, but millions do – multiple times a day! The fact is that it is still a phenomenally powerful, highly targetable and very low-cost marketing medium. Take the time to understand it or find someone who does. At the very least look up some Youtube videos on how to make it work for you. ✚ Paul writes newsletter for financial services professionals. email: paul@paulwatkins.co.nz

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INTEREST RATES Daniel Smith

2014: Fed, RBNZ both have tough decisions to make ASB economist Daniel Smith looks forward to predict what may happen to interest rates next year.

s 2013 comes to a close, the world economy seems to be on a sounder footing than at any time over the past few years. Of course, there are myriad uncertainties and much of the developed world is still suffering from economic weakness; but the outlook is brightening. Looking ahead to 2014, what are the key themes that will drive markets and interest rates? By far the most important factor over the past six months has been the policies from the US Federal Reserve (the Fed) – and that is unlikely to change. In around May of this year Fed officials started to openly discuss the possibility of scaling back (or ‘tapering’) its monthly asset purchases in order to reduce the pace at which monetary stimulus is added to the US economy. Any steps to do so would be dependent on economic data showing a sustainable economic recovery taking place. This introduced a fair amount of uncertainty and set markets off on the “Great Taper Guessing Game”. Eventually, the consensus settled on a September start to the taper, with longer-term interest rates rising in anticipation. When the time came, though, the Fed’s decision-making Board decided that the data did not justify tapering just yet. And so the "Guessing Game" continues. One complicating factor that will influence the Fed’s decision is the state of fiscal policy in the US. In October, the legislation funding the Federal Government expired without being

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replaced, so most ‘non-essential’ parts of the government were shut down. That dragged on for two and a half weeks, until a new funding resolution was agreed. However, that resolution only provides funding until January 15. The hope is that a more comprehensive agreement will be reached before then. A committee is currently in negotiations and is supposed to report back on December 13. A rational observer would say that the political incentives to reach an agreement (even a small-scale one) are far greater than the incentives to force another shutdown. But when it comes to US politics rationality is not something you can take as a given anymore. Aside from mild entertainment value, this does have implications for New Zealand. The longer this political uncertainty lasts, the longer the Fed will delay the taper – indeed, the looming October showdown was one of the reasons why the taper did not go ahead in September. Because of the continuing uncertainty, the Fed is likely to hold off from tapering until March 2014. That suggests longer-term US interest rates will remain lower for longer, as will the USD. Therefore the Kiwi is likely to remain fairly strong. Based on the current outlook for inflation and the NZ economy, we expect the RBNZ to begin lifting the OCR in March 2014. There are a couple of factors, though, that may mean the first hike does not come that early. The first is the currency; if the NZD remains high enough to keep inflation low then the

OCR may stay on hold for longer. That is most likely if the Fed delays its taper further. The second factor is the housing market. Of course, the key uncertainty here is the impact of the new restrictions on high-LVR mortgage lending. If the restrictions lead to a rapid slowdown in house price appreciation then some of the motivation for the RBNZ to hike rates diminishes. At this point it is too early to say what impact the restrictions will have. The RBNZ has said, quite rightly, that it will take up to six months to properly assess the impact of the restrictions. There will be some impact on demand (although it is difficult to say how much), and there is some evidence that more new listings are coming on to the market in recent months. It is therefore likely that the rate of growth in house prices will peak in late 2013/early 2014. We expect prices to continue going up over the next couple of years, but not as rapidly as has been seen lately. One early impact of the restrictions that has been clear is greater competition amongst banks for lending in the under80%-LVR space, pushing down some rates for borrowers with a larger deposit. While housing market activity will have some impact on the RBNZ’s OCR decisions, the primary target of monetary policy is of course inflation. Headline CPI inflation appears to have turned a corner, with the annual rate lifting from 0.7% to 1.4% in Q3. The outlook for the NZ economy over the next few years is bright, with GDP growth set to top 3% next year – the primary drivers being strong commodity exports and increasing construction activity. As activity ramps up, the economy’s spare capacity will diminish, giving rise to greater inflation pressures. With greater inflation on the horizon, the RBNZ will need to start lifting the OCR from its current stimulatory levels.

HIGHER RATES A VIRTUAL CERTAINTY Taking all of these factors into account, higher interest and mortgage rates look almost certain during 2014. The Fed will begin ‘tapering’ its asset purchases at some point, and that will push up longer-term NZ wholesale interest rates in line with those in the US (the 10-year US Treasury yield is currently around 30bps lower than it was in September when the taper seemed imminent). And the RBNZ will start to lift the OCR. We expect the first 25bps hike in March 2014, although a strong NZD a slowing housing market could push that back somewhat. When the increase in rates does come, we envision it being a fairly gradual one. We currently have 75bps of OCR hikes pencilled in over 2014 and expect the OCR to peak at 4.0% around the end of 2015. This tightening cycle is likely to be less aggressive than previous ones as near-term inflation pressures remain fairly muted and a much higher proportion of NZ mortgages are floating or fixed for only a short term – meaning OCR hikes will have a greater impact. In addition, when the RBNZ does start to hike it will be the only central bank in the developed world doing so – creating additional upwards pressure on the NZD. That will have its own deflationary impact. All of that suggest that the RBNZ is unlikely to catch borrowers out with a string of rapid hikes. ✚ Daniel Smith is an economist at ASB Bank.

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KIWISAVER By Susan Edmunds

Mortgage advisers

missing out Those who think they can’t touch KiwiSaver are selling themselves and their clients short, provider says.

housands of KiwiSaver customers are changing providers and funds every year – and nine times out of ten, they are doing it without any advice. Mortgage advisers are perfectly positioned to discuss the scheme with them, as part of conversations about other major life decisions such as the purchase of a first home. But complicated rules and a fear of crossing the boundary of what is acceptable are leading many mortgage advisers to not engage in distributing KiwiSaver. In doing so, industry participants say they may be doing their customers, and their own businesses, a serious disservice. Registered financial advisers have always been able to provide class advice on KiwiSaver. Some in the industry hoped to be able to provide full personalised advice on KiwiSaver via a “KiwiSaver-only adviser” qualification. However , the Code of Commitee for Authorised Financial Advisers backed away from this proposal. For some advisers, the additional qualification would have made sense – as KiwiSaver is already very well regulated, held under close scrutiny and a good fit with a lot of mortgage brokers’ normal conversations. Some said KiwiSaver should never have been a category one product, requiring the use of an AFA, in the first place. But others said the country’s registered financial advisers did not want the compliance burden of being AFAs – and being able to offer personalised advice on KiwiSaver, with its

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❝ I think mortgage advisers are in a fine place to be able to give advice on KiwiSaver within certain parameters.” – Peter Leitch

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relatively small commissions – would not be enough of an incentive to change that. The revised version of the code only allows authorised financial advisers who have not completed investment qualifications to offer advice on the first-home withdrawal aspect of the scheme. PAA former president and adviser Peter Leitch said it was a pity that the Code Committee had not decided to make it easier for RFAs to offer more personalised KiwiSaver advice. He said many were probably already offering some sort of class advice on the scheme. “I think mortgage advisers are in a fine place to be able to give advice on KiwiSaver within certain parameters, such as only for

first-home buyers, or only for funds less than a certain value or that have only been going for a certain period of time.” He said a lot of the advice that was being given around KiwiSaver was coming from banks – and it was no better qualified or more personalised than what mortgage brokers could offer. “And most of that involves the word ‘switch’. You have to ask whether that’s really in the best interests of the client, which is the main point of the code.” It is estimated that 90% of KiwiSavers have had no advice on their investments. But savers are moving between big bank funds in their tens of thousands every year. People would probably move more towards online tools such as Sorted’s new KiwiSaver fund comparison website for information, he said. “The downside is, is that they are very simplistic. But it’s positive in that it’s an opportunity for people to review a bank’s recommendation to switch. That’s good because it’s easier to do that than try to get an appointment or have a discussion with an AFA, of which there are less than 2,000 nationwide.” PAA board member and mortgage adviser Karen Mooney said she did not give any advice about KiwiSaver in her day-to-day business. Anyone who wanted to be told about any sort of investment was transferred to an investment adviser. “We make that quite clear.” But she said it did seem that people were missing out. “The industry is quite mature now and there are a lot of good operators who have long-term relationships with their clients. Clients look to them as someone they can trust

KIWISAVER

and they do ask those questions.” And she said it was a catch 22 situation because a lot of authorised financial advisers did not see KiwiSaver as lucrative enough to be worth their time. “They are not motivated so it seems that there is a big gap, a whole lot of people are not getting advice but really do want it.” Leitch said it probably wasn’t fair to say that AFAs weren’t interested. Those that were investment advisers would usually work with KiwiSaver, he said. “They want to be able to give advice on KiwiSaver but they need it to be part of the overall client proposition. If they are only giving advice on KiwiSaver, that’s challenging, particularly when your clients face a gauntlet of the banks and their switch mentality.” But Henry Tongue, of Generate Investment Management, said there was no reason why mortgage advisers should not be offering the same sort of class advice that bank tellers or other bank staff would. Mortgage advisers were in the perfect position to offer KiwiSaver information such as the benefits of KiwiSaver and the benefits of various schemes he said. “They can offer more than one product, they can explain all the benefits, work through risk profile tools and they have an established trust relationship with existing clients.” Too many people were in default funds and there was not enough being done to help improve the country’s financial literacy to the point where people would be bothered to change, he said. But advisers could play a big

part. “KiwiSaver is a great value-add for clients of RFAs and AFAs mainly because only 10% of Kiwis have had advice on their KiwiSaver and with average balances moving past $10,000 people are starting to become interested in advice. More than a third of KiwiSavers are still in default and conservative funds.” He said the aim of KiwiSaver had never been for people to sign up and stay put. “The recent Cabinet paper reviewing default schemes stated ‘When the government established KiwiSaver in 2007…. the default funds provided a temporary ‘parking space’ for default members who had not yet made an active choice.’.” Models using class advice for the vast bulk of consumers worked well in other countries, he said. Industry contacts in Australia said that advisers who started to work with super clients when the scheme was first launched were able to sell their books on retirement for hundreds of thousands of dollars. Tongue said: “In Australia, scaled advice, which is similar to class advice, has been instrumental to lifting the financial literacy of Aussie Super participants and is a widely given form of advice on Super. Class advice will improve our financial literacy by explaining the benefits of KiwiSaver and specific KiwiSaver schemes and by assisting Kiwis to select the correct fund based on risk and time to retirement, which may have significant benefits to the value of our KiwiSaver at retirement.” Tongue said there was merit in what the Code Committee had originally proposed, but big improvements could still be made without

such a big change. “We see value in a KiwiSaver-only class AFA to support self-managed KiwiSaver and as balances get bigger than $100,000. However, with currently less than 0.5% of KiwiSaver members in self-managed and average balances at approximately $10,000 we have a long time to go before that is the norm and class advice can fill the void and improve Kiwi’s financial literacy and retirement nest eggs in the meantime.” Generate offers RFAs a product to pitch to their clients, with the back-up of personalised advice from the Generate team when it is needed. “Generate provides all the training and resources to help advisers do this easily and in a compliant manner.” But some mortgage advisers said even though they were aware of the opportunities of a product such as what Generate offers, it was too tricky to work out what they were and were not allowed to say to their clients. One said: “I am far too nervous about using the product with my customers. I don’t want to end up with the FMA having a crack and being an example.” Tongue says there is a lot of bad information out there. It is very clear what an RFA can and cannot say when giving class advice. Leitch said it would be an issue for the industry for some time. The solutions that were found would be vital for the future direction of many advisers. “I just hope that in time we can continue to help and give advice to people. It’s a huge challenge for everyone at the moment.” ✚

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PERSONAL LENDING By Susan Edmunds

Vehicle finance and personal lending Loan-to-value restrictions are making life tougher for some first-home buyers and the mortgage brokers who service them. But one sector of the finance market seems to have been given an instant boost by the new rules: Vehicle finance and personal lending. 028

PERSONAL LENDING

❝ Glen McLeod, of

Edge Mortgages, said his business had been offering other forms of finance for many years and it made sense to offer as many products as possible to a customer. ❞

avid Hart has spent a lot of time in his car over the past month, heading out to see clients who need help getting their debts under control. Sometimes it’s a car loan, sometimes out-ofcontrol credit cards or hire purchases. Since the restrictions came into force at the beginning of October, banks have been unable to lend more than 10% of their new home loans to borrowers with equity of less than 20%. Still feeling their way around the requirements, many banks have targeted a much smaller amount. That’s prompted a surge of interest in other types of finance. Borrowers are looking to vehicle finance as a way to use their cars as security on smaller loans to top up mortgage deposits. And those who would traditionally have used a mortgage top-up to do things such as home renovations are being forced to look elsewhere. Vehicle loans are often a bit cheaper and more appealing than other personal loans because the lender is able to take the car as security. Dion Jones, of Turners Auctions’ finance team, said there was a big gap becoming noticeable in the market and there were a lot of opportunities available. He has this month started a new programme, offering vehicle

finance products to mortgage brokers. He said being able to offer vehicle finance would benefit brokers as well as their clients. By offering another product, advisers were a step closer to being able to ringfence their clients. Rather than sending them to the bank for a car loan, where they might also be sold other products, they could offer the full suite of services on the spot. Jones said his company would not try to sell broker clients anything else, or contact them directly. He said there was already creative thinking being applied to vehicle lending. “They can tap into the equity in the vehicle to put towards other things.” Over the past couple of months, he had seen several instances of people using their cars as security to borrow for home renovations. The banks had turned those customers away when they asked for a topup on a pre-existing home loan. “We don’t care what the money is used for. There’s an opportunity there at the moment.” Auckland mortgage broker Erica Wills said her business had not done a lot of vehicle lending in the past because clients usually had equity in their homes and it made more sense to use that for other borrowing. But she said just recently, it had proved very useful. “We used it recently as a means of increasing

EX BROKER ON CAR FINANCE

urners Auctions’ manager of finance and insurance Dion Jones used to be a mortgage broker himself and said the market was a natural one for his firm to target. This month, he has started to offer a referral fee to brokers who send vehicle finance deals his way. He said brokers’ networks of clients would be invaluable to his business and they would offer good quality referrals. He said few mortgage brokers were doing vehicle finance because the loans were too small to be lucrative. “They are such small loans, there’s not a lot in it for them.” Jones said the Turners referral fee would be higher than standard bank commissions. He has already approached broker groups, who had responded positively. Turners would offer loans of $2000 to $100,000 and would lend up to slightly more than 100% of a vehicle’s value. “They’ve just got to meet our criteria, and if they can get a mortgage, they’ll be fine.” Jones said the interest rates charged were not exorbitant. Loans did not have to be on cars that were bought from Turners, and provided there was a vehicle for security, could be used for any purpose. He said it was interesting to see the other side of the finance equation. “I used to say ‘don’t pay finance company rates, consolidate your loan with your home loan’, but that often means you pay it off over 20 years and you end up paying for the car three times. Paying off a loan over a short period makes sense.”

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PERSONAL LENDING By Susan Edmunds the deposit up to 20%, they were really close, within $6000 and had an expensive car, so we said ‘well there could be better ways of doing it’.” The Reserve Bank won’t necessarily be happy if vehicle-backed deposit top-ups take off – banks have been warned they must not break the spirit of the rules, even by turning a blind eye to the methods borrowers use to pull together a deposit. But it should have no qualms about mortgage holders who cannot borrow any more on their home loans and go elsewhere for smaller loans. Glen McLeod, of Edge Mortgages, said his business had been offering other forms of finance for many years and it made sense to offer as many products as possible to a customer. McLeod said it had to happen because the marketplace that financial advisers operate in was changing so much. “What a lot of advisers run the risk of is that if they don’t get into a position where they expand what they do, if the market slumps, there goes their income. We’ve seen that over the past four years. The philosophy is that if you get left behind, you die.” Rather than just connecting a bank with a borrower, McLeod said his business was about offering holistic advice, regularly checking in with clients and making sure things were structured correctly for their circumstances. Offering vehicle finance was just another part of that, he said, even though it was not always especially lucrative. “This market is changing and we are heading towards a full service one stop shop for the

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❝ Dealerships

are often all about selling, not giving people the comparables of what they’re taking. There’s often no understanding of affordability. ❞ client. My role is to look after my client the best I possibly can. If they need money out of a personal loan, or vehicle lending, c’est la vie. It’s about the whole package. If someone came wanting a $5000 mortgage top-up, I’d still do that, even though I’d only get $100, if that. They might have come to me a year earlier and borrowed $1 million.” Encouraging borrowers to check in regularly meant that brokers had more opportunity to keep in touch and make sure they were top of mind the next time a big purchase was made. Loan Market broker Guy Parkes said it was natural for mortgage brokers to focus on their “bread and butter work”. “But when clients

need things that are outside that, you either cover that or they have to go somewhere else.” He said most of his work was still mortgages but there were always vehicle loans coming through. It was a matter of understanding another level of loans, he said. And it was important to give as good advice for a topup loan or vehicle finance as it was with a full mortgage. But he said by offering clients the right loans, brokers could help them to avoid credit mistakes, or rehabilitate their credit history, which, in turn, would make them better mortgage clients in the future. PAA board member Karen Mooney said financial advisers of all descriptions should be encouraged to get into other types of lending. She had seen a number of financial advisers working with providers such as MARAC and The Co-Operative Bank but said it was still not as common as it should be. “I think it’s a good thing that financial advisers are giving advice in that area because some people are not getting good advice.” She said mortgage brokers could use the same approach they would use to a mortgage to explain to people how much their repayments would be and what they might pay overall. “Dealerships are often all about selling, not giving people the comparables of what they’re taking. There’s often no understanding of affordability. It would be good if more financial advisers were involved. We operate in that space, especially looking at the overall picture of serviceability and affordability.” ✚

INSURANCE By Steve Wright

UNDERSTANDING

PRODUCTS HOW FAR MUST YOU GO? Advisers should see beyond the sizzle to ensure a good understanding of what the product will and won’t do. The client’s policy document is the legal contract the client has with the insurer which carries the weight of law and must be examined if you want the full picture.

INSURANCE

s an insurance adviser constantly bombarded by insurance companies with new policy features and benefits and sometimes new products, how much time and energy must you spend researching and understanding the new offering? Specific arrangements with clients aside, I think an adviser's general obligations are to understand what the new product does and how it works, among others but in particular: ➤ On what events will it pay a benefit? ➤ How much will it pay and for how long (if it’s an income benefit)? ➤ When will it expire – in other words even if the client is willing to pay premiums, when will cover end? ➤ How appropriate is it for my particular client; namely: ➤ How does it compare with other solutions? ➤ What are the strengths and weaknesses? ➤ What are the dealmaker and deal breaker features? By law all advisers must act with due care, diligence and skill. You cannot do this in my view without a thorough, direct personal, knowledge of the solutions available to solve

Which rating house is right?” And the answer it seems to me is, “It depends on what is important for your specific client." the client’s particular risk or problem, this often means studying actual insurance policies. Can you just rely on the insurance company glossy brochures? While sales brochures are useful, they are primarily sales tools and seldom give enough of the detail needed to be able to give proper advice. In particular, “real life” examples may be conveniently focused to highlight strengths or specific sets of circumstances. How might the policy work with different examples with different circumstances? Comparisons can also be tricky: what is the comparison made against, is it appropriate, is it “apples for apples”, is there a more appropriate comparison? Advisers really need to see beyond the sizzle and ensure they get a good understanding of what the product will and won’t do. The policy document the client receives is the legal contract the client has with the insurer and it is this that carries the weight of law: it is this you must examine if you want the full picture. Most people find reading policy documents very tedious and so simply do not. This is a luxury advisers do not have, you must read policy documents and ask for clarification if you don’t understand. The good news is that; with experience, it becomes easier and easier to quickly identify important clauses in policy documents, significantly easing the pain and even making your work more satisfying. Even better news is that reading policy wordings increases your income: reading policy wording and becoming a product expert will turn you from an adviser into a great adviser as well as increase your professionalism and confidence. This professionalism and confidence will more often than not rub off on clients, giving them the comfort and confidence to accept your recommendations and sign that application form. In our industry we value a positive

outlook and this is useful, almost essential, to finding and keeping clients. When it comes to analysing products, though, it can be useful to focus also on the negative. Focusing on the negative does not mean forming a dislike for the product, as products are just tools. They do a job, they really should not be “liked” or “disliked” – they are either appropriate for the job at hand or not. Focusing on the negative is essential in critically analysing a product, finding out its “weak spots”, those factors which detract from its suitability for the client and their needs. Understanding a product’s short comings is as important as understanding it’s advantages. Ask yourself this: ”Will my client be disappointed at claim time?” Can you just rely on product ratings? While the various product rating tools are useful for comparing and learning more about products, they can never determine the most appropriate policy for your particular client and, accordingly, I don’t believe making recommendations based mainly on a product rating alone is appropriate. A feature not highly valued by the rating house might be very important to and highly valued by the client. Rating houses cannot know what is important to your client, the rating house does not even know your client. Only you know the client, what their needs are and which products or features are likely to be more appropriate for that client. A rating house is not responsible to your client, you are! You are the client’s adviser! Recommendations based on ratings means you should be switching to the highest ranked product every time a ranking changes, surely something that makes no sense even if practically possible. Finally, which rating house will you use? There are a couple of things to think about when considering product rating options, such as: ➤ Who is making the call? ➤ What is their philosophy? ➤ What science or research goes into the rating? ➤ Does it make sense to you – you are the adviser you should have an opinion! ➤ Is it reliable? The different product rating houses do things differently and while there are sometimes consistencies in ratings across product categories, sometimes there are not. So the obvious question is, “Which rating house is right?” And the answer it seems to me is, “It depends on what is important for your specific client”. ✚ Steve Wright is general manager products at Partners Life.

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LENDING STATS Speed bump numbers

NEW STATISTICS SHOW FALL IN HIGH

LVR.LENDING

The Reserve Bank has given its first official look at what impact is LVR restrictions have had on bank lending.

ank lending on low deposit loans halved in the first month after the Reserve Bank-imposed restrictions on high loan-to-value ratio (LVR) came into force. The central bank says high-LVR lending excluding exemptions fell to 11.7% of total new mortgage lending in October, with exempted lending accounting for an additional 1.1% of total new lending. It says the high-LVR lending share was down from 25.5% in September and had been around 30% earlier in the year. Reserve Bank deputy governor Grant Spencer said the October result showed that banks were adjusting to the new policy and were well placed to meet the speed limit, which will initially be measured as a proportion of total new residential mortgage lending over the six-month period from October 2013 to March 2014. “The reduction in high-LVR lending will

help to reduce the risks of a sharp correction in house prices in an already overvalued housing market,” Spencer said. “The banks are having to manage a pipeline of loans that were pre-approved prior to the LVR restrictions taking effect. The share of high-LVR lending is expected to fall further over the coming months as these pre-approvals run down. “While there has been a significant reduction in high-LVR lending already, it is too early to assess what impact this is having on aggregate housing market activity and credit growth.” Westpac senior economist Michael Gordon said the drop in high-LVR lending was being countered by more lending to those with more equity. “This is important as it suggests that the LVR limits have led to a shift in the composition of home buyers, ameliorating the overall impact on the housing market. We predicted that the nature of the speed limits would lead to a

bifurcated market, where lenders would not only try to ration demand for high-LVR loans, but would push to grow their low-LVR lending, so that they could make more high-LVR loans within the 10% speed limit.” He said lower mortgage rates, and reduced first-home buyer competition would create favourable conditions for investors. The value of loans issued in October was up on the same time the year before. Auckland Property Investors Association president David Whitburn agreed that was what had happened. “More investors have come out of the woodwork and picked up the slack from firsthome buyers in the Auckland market” he said. The new statistics are from a survey of banks implemented earlier in the year to collect better quality data on lending by LVR. While the survey may be expanded in the future, LVRs broken down by region or by type of borrower are not currently available. ✚

Total new commitments

LVR 80% or below

LVR above 80%

Exempt

High-LVR share before exemptions

High-LVR share after exemptions

Aug

$4,298m

$3,160m

$1,137m

N/A

26.5%

N/A

Sep

$4,705m

$3,507m

$1,198m

N/A

25.5%

N/A

Oct

$4,470m

$3,899m

$571m

$53m

12.8%

11.7%

The first three columns of the table show banks’ mortgage commitments, which are finalised offers to customers to provide mortgage loans or to increase the loan value of an existing mortgage loan, as evidenced by the loan documents provided to the borrower. The high LVR share (after exemptions) is calculated by excluding exemptions from LVRs above 80 percent (column 3 minus column 4) and dividing by total new commitments less exemptions (column 1 minus column 4).

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TMM - The NZ Mortgage Mag Issue 8 2013

Articles inside

PAA