You Get What You Incentivise - Published in the Sunday Star Times, 22nd January 2012

Over the holidays, I decided to buy a new TV and so, I did what I have always done when wanting a new appliance: I headed off to Noel Leeming. I knew Noel himself in the 1980s before he died and I have been loyal to his name and his old company ever since.

When I went to buy the TV, the shop assistant I struck was obviously anxious (even desperate) to make a sale. In his desperation he told me a couple of things which turned out to be untrue - they were not big lies (just about delivery and installation) but untruths nevertheless.

I duly had the TV installed but the desperation of the salesman and the lack of honesty in his approach left a bad taste in my mouth. The TV works just fine, but this customer no longer thinks well of Noel Leeming, the company.

Afterwards, I found out the reason for the salesman’s desperation: sales assistants at Noel Leeming are paid commissions on sales – they are paid a low wage and expected to increase their incomes through the commissions they earn. The current owners of Noel Leeming have incentivised sales.

Ultimately, you get what you incentivise. Incentivise sales and that is what you get, even though you may not build a good business. In the case of Noel Leeming, they have incentivised sales (which I presume they get) but it is at the expense of at least one loyal customer. That will not matter in the short term (my money is in their bank) but it really matters in the long term (no more of my money).

I tell this story because it seems to me to reflect a trend in many areas of commerce: the use of poorly thought through incentives which work for the short term, but cost in the long term.

A couple of examples: investment advisers who are incentivised by commissions for selling investment will (guess what?): sell investments. It does not matter whether the investment is right for the client or whether the client should instead pay off the mortgage; if you incentivise investment sales you will get investment sales.

Increase those commissions (as finance company Bridgecorp did) and they will sell more of them. Bridgecorp doubled its commissions to investment advisers just before it went broke, not because it thought that the investment advisers needed a pay rise but because it knew it would get more money into its coffers (it was desperate for investors’ money and it knew that the best way to get it was to give the investment advisers a bigger incentive). This was bad for the clients (obviously) but in the long run it was also bad for the investment advisers: they got some commissions in the short term, but with grumpy clients, they destroyed their reputations and practices.

Another example is the US sub-prime mortgage mess which nearly brought the world to its economic knees. This crisis was brought about because trillions of dollars of mortgages were sold to home buyers, many of whom had no income and little hope of ever repaying. For example, a Mexican immigrant strawberry picker with an income of $14,000 p.a. was given a 100% mortgage to buy a house for US$720,000.

How could such an outlandish thing happen? Answer: big commissions to the people who sold the mortgages - and the obscene bonuses of the investment bankers who bundled them up and sold the mortgages on at great profit to unwitting investors. Incentivise the sale of mortgages and you will get mortgages (although the quality may be dreadful and the outcome a disaster).

Much of this – Noel Leeming’s salary plan, investment adviser commissions and sub-prime mortgages - is frequently about short term gain at the expense of building something worthwhile. I think short-termism is a scourge - nothing worthwhile can ever be built for the next quarter’s financial results or the next tally up for a bonus.

Wall St is little better than it was a decade ago – huge incentives for a quick buck and to hell with the consequences. Some investment advisers still sell whatever they can on commission. And Noel Leeming, presumably, still pays its shop assistances to sell what they can rather than to develop and keep loyal customers. Be careful what you incentivise – you will probably get it.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice
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House Values and Prices - Published in the Sunday Star Times - Sunday 18th December 2011

It has never been easy to buy your first house. My own first house, purchased in 1974 for $8,000 with a $6,000 mortgage, sounds laughably easy today. In fact, it was a struggle. Most affordability measures do not look good for first home buyers at present – but, then, they hardly ever did.

Today, even with affordability not looking good, and by some measures houses being overvalued, the market shows some signs of life.

A couple of weeks ago, the English newspaper “The Economist” gave its periodic assessment of the future direction of house prices across a range of countries. In this survey, The Economist’s figures suggest that housing in NZ is 35% overvalued.

This created a bit of a stir as it came at a time when house prices had just gone up and when there were reports of an imminent housing shortage. One real estate spokesman said that buyers and sellers set values and that “The Economist was calling all buyers and vendors fools.”

So, we have an esteemed newspaper like The Economist saying that our houses are overvalued but prices going up (and the real estate people say they could go up some more). How can this be?

First, remember that the market gives the price, but not necessarily the value – often in the short term, price and value are not the same thing. Markets can be over-valued or under-valued and stay that way for several years – they frequently under shoot and over shoot, going far below reasonable value at times, and far above at other times.

There are many examples of this: older readers will remember the way the NZ share market went up in the mid-eighties (it doubled in 1986) but crashed in 1987. We also remember the dot-com boom of the late 1990s followed by the crash of 2000. The changes in prices in these markets were not because there was a change in underlying value of the companies from one day to the next – it was simply a change in sentiment. The price of Microsoft hit $70 in 1999, but it was sentiment that bid it up and value was not there - and so it eventually fell to its fair value and now trades at $25.

Markets do not always give value because in the short term they are often driven by emotion. Fear drives them when they are falling (a panicky need to get out) and greed drives them up (a panicky feeling to get in). My guess is that there are a few first home buyers in Auckland starting to feel that panicky “get in” feeling about now.

Irrational exuberance at times pushes prices so that they are way out of line with value - but eventually emotion takes a back seat. In the long run, rationality takes control and value comes through.

So, let’s look at how The Economist assesses value. It has two measures: first, it looks at the ratio between house prices and incomes to test affordability. By itself, this is a blunt instrument (it takes no account of interest rates or unemployment levels). Using this measure, The Economist found that NZ was 4% over-valued.

The second measure looks at prices compared to rents. This works on the assumption that when we buy a house, we are either looking for income as investors in earning rents or reducing expenditure as an owner occupier in substituting rent. We have a choice as to whether we rent a house or own it and to make that decision we will rationally compare the costs to do either. By this method, NZ houses are 66% overvalued. Again, a little blunt - but much better in that value is usually set by income or cost substitution.

To restore value either rents must rise or house prices fall. It could be that house prices rise in the short term as supply gets tight and greed rises. However, there is plenty which could push them down again: continued flight to Australia, local bodies allowing more subdivision, increased interest rates, banks tightening lending criteria and Government acting to cut off any property boom.

I am hoping that house prices will hold steady for a few years to allow a return to reasonable value. Any major increase could get very messy as booms always lead to busts and that would not be good for this country.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice
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Trust Gifting - Published in the Sunday Star Times, Sunday 27th November 2011

A few weeks ago, the repeal of Gift Duty came into effect. And what has happened since then? For a lot of people, not very much.

In the last week, I have met several different people who I know to have settled family trusts - and not one has taken advantage of the end of Gift Duty and completed their gifting, nor taken any advice. Worse, none of these five people had been contacted by their professionals (lawyer or accountant) to prompt them to consider gifting remaining debt that is owed by the trust to them.

The majority of people who have settled family trusts will still have debt in their names. When the trust was formed, the assets (family home, business, investments etc.) would have been sold to the trust and the purchase of these by the trust was funded by a debt going back to the settlors.

This debt continues to be an asset of the settlor and it could be removed only by gifting at the rate of $27,000 p.a. per person. Gifting at this rate would often take years and decades and, in the meantime, the settlors of the trust would not have achieved their aims of having all their assets in the trust.

The repeal of Gift Duty came as a godsend to some – they can now gift everything without any tax or duty in one fell swoop.

So, you would think that people would be leaping to do just that. You would also think that professionals would be leaping to tell their clients to come in for advice.

Apparently not: my small sample (admittedly only of a few people) says that people have not reacted. This was confirmed to me when I had a chat to a senior trust specialist – he confirmed that people were sitting on their hands.

It seems that many people think that they do not have to do anything to complete their gifting – that it somehow all just happens automatically. My trust specialist friend said that he even knew of lawyers who thought that people did not need to take action to complete their gifting. This is quite wrong.

In fact, even without Gift Duty, you have to make a conscious decision to gift and document the gifting properly. You will need to have your lawyer (or other professional) draw up a Deed of Gift, sign it, adjust the trust’s accounts and financial statements and minute the fact that the gift has been made.

You would expect that most lawyers and accountants would write to prompt their family trust clients to do this – but you obviously can’t always rely on that. If you have settled a trust and you have not completed gifting, you should therefore take the initiative: call your professional to get some advice.

Advice is needed: there are some people for whom it would not be best to gift all of their remaining debt. People who have solvency or relationship property issues or who may want to apply for a Residential Care Subsidy could be better advised to continue with the gifting programme that they have previously adopted.

Gifting to deprive a creditor or partner/spouse may be clawed back under legislation and I am told that WINZ is looking very hard where there has been gifting leading up to the application for a Residential care Subsidy. Any gifting over $6,000 p.a. in the five years prior to applying for a Subsidy will mean that the application is declined, and WINZ continues to disallow applications where the person has gifted more than $27,000 in any one year prior to that five year period. WINZ is taking quite a hard approach on this and applying the rules rigidly.

Clearly, not everyone should rush to gift everything immediately. Instead, they should rush to get good advice – this is a case where an expert needs to look at the trust that you have settled, its finances and your own position - and then advise carefully.

This will cost, but you can take some comfort from the fact most people are no longer going to get a bill for gifting every year. Compliance for gifting used to cost in total $70m each year (that is a lot of fees!) but for many, a professional’s bill for gifting will now be a once-only cost.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice
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In Praise of Volatility - Published in Sunday Star Times, Sunday 4th September 2011

I like volatility. I like it when the markets are scary, when there are more downs than ups and when the commentariat holds forth gloomily detailing all of the reasons why the world in general (and more specifically the world of business and investment) is off to hell in hand basket.

You may think that my love of volatility and economic mayhem is a personality defect, some kind of death-wish leading to compulsive risk taking behaviour. After all, I am a rock climber and mountaineer and that looks to attract those with a crazy self-destructive bent. Perhaps my love of volatility comes from the same defective part of my temperament and character.

Actually, the truth is quite the opposite - I am really quite risk averse. Climbing mountains is all about risk management and after 40 years doing it, I am still alive – I have managed risk in that respect well enough. Similarly in finance and investment: sure there have been times when I have been overly optimistic, taken big risks, made mistakes and lost money. However, I have learned from this and now, with that learning under my belt, I treat investment just like climbing - an exercise in risk management.

So, given all this, why do I like volatility? Why do I – why should anyone – enjoy collapses in the markets?

The answer is that there is less risk buying in times of great volatility. This may sound counter-intuitive but it is true. I like volatility not because it is more exciting but because buying during market mayhem is actually safer and ultimately boring (when it comes to investment, boring works). Buying cheaply gives what Ben Graham called a “margin of safety”.

Consider those speculating on gold at the moment: there must be a fair chance that the yellow metal is getting fairly near the top of the cycle. I am not saying that it is or it isn’t – I simply don’t know. What I do know, however, is that with gold trading around US$1,800 an ounce, there is more risk now than there was six months ago. The higher gold (or any other commodity) goes, the greater the chance (risk) of a big fall.

I am an investor rather than a speculator meaning that I buy assets which give income – I will never try to make money by buying gold. However, even if I was a speculator, I would be very careful speculating on gold at the moment. At these levels, after the great run that gold has had, there is simply too much risk. Perhaps gold will go to US$5,000 per oz as some would say but that seems to me a chancy proposition.

Buying cheaply at times of volatility means that there is a margin of safety – that is, you try to buy investments at prices that are less than their intrinsic value. Occasionally that may mean that you buy shares in businesses that are listed on the share market at a price that is less than the value of the business’s net assets. This used to be relatively common but it is now fairly rare to find shares that trade at less than net asset value.

Instead, most astute investors try to buy investments that give more income than you would normally expect. Regardless of whether you are investing in the shares of businesses, bonds or property, you are looking to buy a stream of income as cheaply as possible. The language may change between the bonds, shares and property (bonds are about yield, shares the Price:Earnings ratio and property the capitalisation rate) but they are all measuring the same thing – the amount of income compared to what you pay for the investment.

Obviously, the less you pay, the better the yield, Price:Earnings ratio or capitalisation ratio – you are buying that stream of income more cheaply and so for every dollar that you pay for the investment, you have more income. In volatile times, the income may decrease a bit but if the investment is a good one, that reduction will be temporary and will come back soon enough.

The key to good investment is to buy a good income stream on the cheap - and you buy lots of cheap income in gloomy times, when everyone else is fearful. You do not buy cheaply when everyone else is optimistic and greedy. And so I say: long live volatility.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Letter from Australia - Published in Sunday Star Times, Sunday 17 April 2011

Australia seems like a weird place for a boy from the mountains of Queenstown to go on a climbing holiday. It may sound like it, but Australia has some big cliffs and if tip-toeing up 100 metres of vertical rock is your thing, then Mt Arapiles, a few hundred km North of Melbourne, is the place to go. I have come here every year for the last few years but this time feels different. Sure, the rock and the climbing are just as good but there are two big changes: first this area is not the dry, bony place that it was. After good rainfall, even though badly affected by floods, the countryside is like the green of Southland instead of the Sahara- like brown or previous years.

Second, and more importantly, Australia does not quite feel the lucky country that it did in the last few years. A Prime Minister and Government struggling, overvalued housing, the country’ biggest customer China in some doubt, floods, cyclones, a very high currency and poor construction figures do not make a happy country – there is a peevishness that I don’t think I have ever seen here before.

I have long recognised what a good place Australia is to invest. Because it is just over the water, we Kiwis may take it for granted a bit, however, regardless of where you lived in the world, as an investor Australia should be on your radar. I have often thought that investors living in Brussels, Berlin or Boston (let alone Blenheim) casting their eye over all the global opportunities could hardly go past Australia – it has everything an investor could want: they speak English (of a kind), they have good rule of law and property rights, good transport and communications, and a 7.6 million square kilometer quarry in the back yard.

I have heard that NZ has more minerals per head of population than Australia but ours tend to be in areas of great natural beauty and we are reluctant to dig them up. Australia, with all of its mineral wealth out in the desert (and deserted) back blocks has no such qualms - with plenty of customers in Asia in general and China in particular, it has used its shovels with gusto.

Mining is still doing well (as is agriculture) but the rest of the economy is not so good; this is a two speed arrangement. There is a worry that Australia will catch Dutch Disease – an economic ailment that arose for the Dutch when the discovery of North Sea gas led to a hollowing out of manufacturing and other industries. Mining has led to a very high Australian dollar making life very difficult for other exporters and there is a worry that much of the non-mining part of the economy may be squeezed out of existence.

In fact, Australia’s major threat may be that their property prices are very high – the Economist newspaper says that houses are the most overvalued in the world (56% overvalued by its figures). High property prices are blamed on a dwindling land supply but this makes no sense to me – it has always seemed a rather big country with comparatively few people. My guess is that it is more about land zoning rather than simply a lack of land.

The worry about property prices and affordability has gone to the extent that a group has been formed to fight prices rises – members have signed a pledge not to buy until prices moderate. This is doomed to failure, of course but the house price problem is nevertheless very real.
A big fall in property prices to return to fair value as has happened in several countries (USA, UK, Spain and Ireland in particular) would cause severe economic difficulties. As an investor, this is something that I will watch carefully.

That aside, I am very optimistic that Australia’s long-run growth will continue. There will be dips, of course, but it is hard to see China and India reducing their growth and demand for resources for very long. This will be Asia’s century and Australia is ideally placed to fuel it.

P.S. Right at the moment, Australia is no bargain hunter’s paradise – whether investing or shopping. The very high Australian dollar makes goods in the shops expensive for Kiwis and investment risky: a fall in the AUD could obliterate investment gains. Kiwis need to consider very carefully before buying Australian investments while the currency is so high.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Commercial Property - Published in Sunday Star Times, Sunday 10 April 2011

When most people decide to invest in property they usually look to residential property – maybe some flats or an apartment or perhaps even a house in the suburbs. Only seldom do they graduate to commercial property – and “graduate” is the right word as commercial property is altogether a better alternative: higher yielding but with a lot less management.

The problems with residential property are manifold; they are high management (I have often said that few people could have more than 10 rental properties and keep their sanity as well as their day jobs); they are low yielding making financing difficult (and reducing returns); they are leased to people who usually can’t afford much higher rents (restricting growth) and are subject to political interference.

Residential property may seem the easy way but it is usually a poor alternative to the real thing – commercial property.

However commercial property appears distant to most people – very high dollar values (sometimes tens of millions of dollars) and with quite forbidding legalistic leases.

The few who do manage to graduate to commercial property often end up going into low value, very ordinary stuff, the sort of thing that most serious players do not want: older buildings with poor tenants on short term leases. However there is an alternative to buying either residential property or an old warehouse leased to a panel beater - buying into Listed Property Trusts (LPT’s). There are about ten of these listed on the New Zealand share market (think of Kiwi Income Property Trust, Goodman Property Trust, AMP Office etc.) and thousands of others listed on share markets around the world. They give a very quick and easy – and generally quite profitable – exposure to commercial property.

You should think of the LPT’s as being very large commercial property portfolios. Typically they own dozens of quality properties leased to several hundred top class tenants – as such they tick all three of the most important things that good property investors look for: excellent buildings in the best locations leased long term to a diversified group big corporate tenants. These portfolios are funded by relatively small amounts of debt (perhaps around 30%) with the equity being owned by investors who can buy and sell units on the share market.

Managers look after the portfolio: they take the rent, pay expenses (including interest on borrowings and their own management fees) and then pay what is left out to their investors as dividends. These dividends are usually good - and tax efficient as well: LPTs are PIEs which caps the tax that you pay on the dividends at 28 cents.

Instead of buying your own small warehouse leased for one year to some small enterprise, you are buying into a top class portfolio leased to a whole lot of great tenants for perhaps five to six years. You won’t own the total thing, but I would rather own 0.0001% of something that is good than 100% of something that was ordinary.

So how are these investments performing? Well the commercial property markets have had a hard time and tenants difficult to find. However because most of the tenants are committed to long leases, cash flow has held up reasonably well. Some of the LPT’s have weighted average lease terminations of near to 6 years and some considerably longer, meaning their tenants are bound by their leases to keep paying rent for years.

At the moment you can buy some LPT’s and get a cash dividend yield (after all expenses) of around 10% before tax. There may not be much growth for awhile but this yield alone gives a good enough return. Growth of both income and capital will eventually return although it may take a few years. With this sort of dividend yield these investments give higher returns than bonds and the total returns over long periods of time put them right up there with many shares.

Of course there are risks: most LPT’s carry some debt. Even though it is usually fairly conservative at around 30%, there is always a chance that a fall in property values or decline in income could see a breach of banking covenants.
Being bought and sold on the share market, LPT’s will be volatile. However the high income along with some capital growth over long periods of time make them an excellent asset for retired people as well as those wanting exposure to property markets without the management hassle.

Disclosure: Martin Hawes owns shares in several LPTs
Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Property Advice - Published in Sunday Star Times, Sunday 3 April 2011

At the moment I am sitting in my office looking at a magazine advertisement. The advert is for investment properties in a new Westport subdivision: a fairly hard sell for packages put together for property investors with a new house, tenant (or rental guarantee) and with finance arranged. Mostly I am wondering how they can get away with this while every other type of financial adviser could not.

I do not want to devote this column to dissing the investments on offer in Westport. (Although I could: when I cast my eye over the whole world of investment opportunities that are out there, why someone would risk $325,000 in a small town to get an initial yield of just 5.8% is beyond me. I might invest in Singapore or London property at that sort of yield but not in a small town in New Zealand).

Instead of knocking this investment, I want to query why the Government should allow such an unregulated investment promotion to the public. Why should this person be able to offer “investment strategies” and yet not come under the new financial adviser regulations?
You see, like thousands of others, I have spent a great deal of time and money attending courses, sitting exams, and generally stressing to become a registered and authorized financial adviser. The new financial adviser regime starts in July and means that people doing financial planning or giving investment advice will be bound by a Code requiring ethics, competence and care of clients.

That’s all good (it will be a great improvement) but there is one major area of finance and investment that is left out – property.

I can’t see why someone advising on unit trusts or KiwiSaver should need qualifications and a Code of Professional Conduct but someone advising on rental properties does not.

Over the years, some financial advisers have cost the public large amounts of money by recommending finance companies among other things. Government response to this was (quite rightly) to regulate financial advisers and to demand ethics and competence.

Authorised Financial Advisers will now have to hold qualifications, put their clients’ interests first, disclose fees, continue their professional education, keep records for seven years, maintain a Disputes Resolution Scheme, be registered and authorized, operate under the close scrutiny of the Securities Commission and a whole host of other things.

No such requirements for the promoter of Westport investment property - she can make claims like “there is no better time to invest than now” (quite a big investment call for which I would like to see some substantiation). She can offer a “free” service (it’s not a charity so I guess someone else is paying a commission. Who is paying this commission and is it disclosed to the client?) The promoter can “prepare a tailored investment strategy” without any of the qualifications, client care, ethics or official scrutiny that will soon be required of people advising on other investments.

All financial advisers used to be unfettered like this but now to do financial planning or to give investment advice you have to be registered, authorized and adhere to a code. Except when it’s about property. Why?

Government has left the door open for those promoting property investment – I can’t see the logic but somehow, someone in Government has decided that property investment “advisers” do not need to be ethical or competent, nor need supervision.

We seem to have forgotten Blue Chip already – some Blue Chip “investments” were sold to older Kiwis without any suitability analysis or any consideration of the purchaser’s financial position (some in their 70s borrowed on their houses). Authorised Financial Advisers would be in breach if they did not consider the overall suitability of an investment –but a property “adviser” could still recommend such a course without fear.

I think the investing public is very exposed. People’s lives can get wrecked making poor property investments just as completely as they do on other investments (in fact given the large sums of money and borrowings that are involved, probably more so).

It is a good thing that Government has finally regulated most financial advisers – there were some bad eggs in the industry and regulation was sorely needed. However, there is still a great hole that has been left wide open and the investing public is about to be lured into it again.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Money and Relationships - Published in Sunday Star Times, Sunday 28 March 2011

I just don’t get this thing that women have with shoes – shoes seem to me to be an obsession out of all proportion to their utility. I cannot for the life of me understand why, when our house has shelves and shelves of the things that a certain someone should swoon at the very sight of a shop with more of them. Mind you, that same someone does not seem to be able to understand why I need six ice axes: even though I explain very carefully that one is for steep, technical ice, another for glacier travel, another for … this usually quite intelligent someone just doesn’t understand. I try speaking slowly - but it may as well be in Swahili.

I am not giving this example of my domestic situation to show that there is a difference between men and women regarding spending (even though there probably is) nor to gain sympathy (although it would be deserved!) Instead, I want to consider how destructive or constructive relationships can be when it comes to money.

Our problem with shoes and ice axes is really quite minor. However, these kinds of little things can be symptomatic of the more important financial things that go on in relationships – they can end up as the line across which the battle is fought even when the more important issue ought to be the family’s financial goals. The key to money and relationships is alignment – and that alignment should start with the goals.

Every person’s expenditure makes sense to them – I can justify owning six ice axes even while standing in a shop eyeing up the seventh. I may struggle to see the need for shoe accumulation but I am sure it also makes perfect sense to Joan. Partners in a relationship often have competing priorities: one danger with this is that the conflict is resolved by accepting both as priorities and expenditure is doubled (they end up with a house full of ice axes and shoes).

Even more destructive is when one partner is focused on today (which is about expenditure) while the other is focused on tomorrow (which is about investment or repaying debt). Within a family, these two are not compatible – you simply can’t have a better tomorrow if you spend everything today. When this happens, either the relationship fails or the finances do (often both).

It is hard for one partner to accumulate wealth when the other just wants to spend (whether on ice axes or on shoes). If the goal for wealth is not shared, one partner is likely to sabotage it, intentionally or not.

Although the relationship may tear down the family’s finances and vice versa, I’d rather look at relationships and money in a more constructive and positive light: instead of looking at money as being a possible cause of relationship breakdown or the relationship leading to financial meltdown, I prefer to take the high ground and think of a strong relationship as having the potential to greatly improve a family’s finances. There are risks with money in relationships – but also opportunities.

A couple working as a team towards a common goal is much stronger than one person battling away solo (let alone two people each going off in different directions). Do it well and one plus one can indeed make three.

The most important thing for a couple to do is to have a very clear financial goal that both are whole-hearted about. Whether this goal is the deposit for a house, repayment of the mortgage or retirement savings, it needs to be unambiguous and agreed on enthusiastically by both.

When both are aligned to the goal, you can have something very powerful. Therefore, don’t make your family discussions about over-expenditure on shoes or ice axes – focus instead on where you want to be: your financial goals. Every other money decision will flow out of that.

This is why one of the only rules that I have for my financial advice work is to insist that where the client is a couple, both come to the initial meeting. I have found that there is trouble soon enough if only one of the couple looks after the money. I work to get both partners aiming for the same thing; setting the goal for their money and their future lives. If you can get that right, shoes and ice axes become small beer.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Family Trusts Anti-avoidance - Published in Sunday Star Times, Sunday 20 March 2011

Shortly after I wrote my first book on Family Trusts in 1995, I was scheduled to be interviewed by Kim Hill on National Radio. Ms Hill’s producer was apparently very keen for her to grill me on some of the more disreputable uses of trusts and I went into the interview with apprehension – Kim’s grillings often enough left her “guests” cooked like toast.

The interview was really about how people could use family trusts to escape their obligations – retain their wealth even though bankrupted, escape Superannuation Surcharge, continue to get a Rest Home subsidy while owning five rental properties and even, if I remember rightly, the case of a very wealthy farmer picking up the unemployment benefit.

With the announced abolition of gift duty in October of this year it seems to some that such travesties will increase. After all, everything will be able to be put into a trust immediately (no waiting for years as you gift it across at $27,000 per anum). It will be easy to flick all of your assets into a family trust and then the next day go bankrupt, claim a rest home subsidy or some other benefit, right?

Well, no - not right. As I explained to Kim Hill over 15 years ago, there is a great deal of law surrounding Family Trusts and much of it involves anti-avoidance. Take just about any of the possible uses of trusts and you will find that it is not the Wild West – you can’t (and will not be able to in the future) simply flick assets sideways into a trust and dance off into an obligation-free sunset.

Let’s take some examples of this: First is the idea that just before bankruptcy you are able to put assets into trust and retain use of them as a bankrupt. Both the Insolvency Act and the Property Law Act deal with this and look at intention to defeat creditors and the amount of time that has elapsed since gifting.

Second, the Social Security Act covers things like benefits and Rest Home Subsidies. If you have deprived yourself of an asset by gifting, WINZ can decline a benefit. In the case of Rest Home Subsidies, as a matter of policy, WINZ looks back five years and declines a subsidy if there has been significant gifting in that period.

In areas like Relation Property there are anti-trust provisions and there are plenty of lawyers involved in trust busting for clients whose relationships have failed and who believe that their partners have tucked away family assets in a trust. The IRD also has plenty of anti-avoidance provisions in their Acts and these provisions include the use of trusts.

Everywhere you look there are laws which stop the more brazen use of trusts to escape obligations – to achieve its aims, any trust has to be well intentioned, properly established and managed with all the beneficiaries in mind. It is most likely that with the abolition of Gift Duty, organizations like the Official Assignee when looking after bankruptcies, WINZ and the IRD will look at their policies and tighten them. And then they will strictly apply them.

At the same time that this is happening, the Law Commission is having a long, hard look at the law of trusts. Who knows what will come out of this but it is unlikely to be provisions to allow trust establishment and management to be slacker.
In fact, trustees will need to be very sure that they are managing things according to the book. A disciplined approach with independent trustees and good record keeping will be important than ever as trusts come under greater scrutiny – more groups will be looking to see if there really was an intention to form a trust and will try to have some overturned as shams.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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Beaten by the Budget - Published in the Sunday Star Times, March 2011

OK, I give up – I know when I am beaten. I have been wrong and now I will publically admit it: budgets don’t work.

For years I have extolled the virtues of budgeting, insisting that planning income and expenditure to achieve a surplus was a critical tool for financial happiness. For years in books and articles, at seminars and even on TV I have pushed the idea that planning, controlling and managing expenditure.

But now I admit that I was wrong because budgets just don’t work for any but a tiny minority of people.

This is not to say that the idea is wrong, nor is it to say that it is unimportant that you have a surplus. In fact, quite the opposite – no surplus means that you are only treading water, staying in the same place at best, slowly sinking at worst. No surplus means no progress.
I am saying, however, that the vast majority of people don’t (or won’t) work to a budget. They may want a surplus and certainly see the need for it but won’t accept the constraints that budgeting means.

People do not budget because there are so many things so expertly marketed that they want to buy. The attraction of the latest iPhone, new jeans, a summer holiday in June trumps the idea of a constraining budget – so much temptation, never enough money.
Today there is not the need to live strictly to a budget. In the olden days, if you ran out of money before the next payday, you didn’t eat (or the power was cut off). Now, any deficit is made up from credit cards - trouble down the track, perhaps but at least today you eat and stay warm (and continue to connect with the iPhone you bought last week).

So, let’s just accept that most people won’t budget. They can do it - but they won’t. How then are people to arrange their finances so that they get a surplus?

I think that two things are important: The first is to take a leaf out of my grandmother’s book. My grandmother, never particularly flush, used a range of jam jars into which she put money for separate purposes. As soon as she got some money, my grandmother put some coins into a jar for the rent, another for groceries, a third for power etc. She divvied up her money into the things that she knew were important (unfortunately she never had a jar labeled “savings”)

The modern equivalent of this is a series of bank accounts each for its own purpose: one for the house, one for groceries, one for utilities etc – and one for saving. This requires you to do some calculations (a plan for how you are going to spend your money) and then as soon as you are paid, transfer the money to the different accounts and spend only that amount allowed for in each area. This is easily done by automatic payment or internet banking and although there may be some fees for the bank accounts, that will be small compared to loading up the credit card.

The second thing to do is to monitor your expenditure, to spend a little time to see where it actually goes. You can’t manage what you haven’t measured – and you might get a surprise (and start to do some management) when you have measured where your money is going.
Being aware of precisely where you are spending your money is the most important step toward achieving a surplus.

In my experience, if you did nothing else but monitor your expenditure you would be much more likely to have a surplus.
Most of us won’t use the full budgeting process no matter how sensible and worthy it is, but some simple calculations adding up where your money is going just might give you the awareness to live within your means.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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NZOG Hedge - Published in the Sunday Star Times, March 2011

Last week, I bought some NZ Oil and Gas shares. This New Zealand company is an oil explorer and, in partnership with others, produces gas and oil for export out of Taranaki.

Buying into a company like this for someone like me might seem a bit surprising – on the whole I do not speculate and I certainly do not like the idea of gambling that a hole drilled in the ground will strike oil or gas. Laying bets on mining companies is not the way that I usually work – I prefer good and fairly predictable cash flow.

So, why did I buy NZOG shares? The answer is that I wanted a hedge, something that would mitigate the impact of a major (and possibly permanent) rise in oil prices. This is a way of thinking and an action that we should consider in many different areas.

The way that it works is simple enough: in the case of buying NZOG shares, I have a liability to put petrol in my car. Investment theory says that where you have a liability (e.g. to buy petrol), you should try to match that with an asset (e.g. shares in an oil producing company). If oil prices rise, I feel pain at the pump but my shares do well; if it falls, filling the car is easy but the shares do not perform. Either way, I am safe – the NZOG shares give me a hedge.

There are many examples of hedging our liabilities by buying a matching asset. A good one of these is in housing. Regular readers will know that I do not think that there is an investment case for residential property at the moment – however, there is still a very good case for buying your own home. That may sound contradictory – why would someone buy a house to live in at a time when property does not make a good investment?

The answer is that we all have a liability to put a roof over our head. That is a very long-term liability – we are always going to need that roof and so we ought to match it with an asset: a house. This protects us from rises in rents and house prices whenever they may come.

When you look at things from a liability point of view, the position of a prospective home owner is quite different from that of a speculator who is simply trying to make money. Viewed as hedging a liability, home ownership is a sensible thing to do.

Another example of matching an asset with a liability is for those who travel a lot (which seems to be nearly all Kiwis). When you travel, you have a liability to buy things overseas in foreign currencies.

For example, if you travelled to Ireland frequently, you may have a liability to stand your round in a warm Irish pub which would be paid for in Euros. At the moment, with the NZ Dollar buying 53 Euro cents, you can probably manage a few pints of Guinness (just!) However, if the NZ Dollar fell sharply against the Euro, you would be left out in the cold.

People who travel a lot should match that liability by having investments in the countries and currencies to which they travel, not just to buy stout but meet all of their other costs as well.

Other examples of hedging might be to buy Westpac shares to hedge against bank fees (don’t complain about the bank, buy it) or Contact Energy shares to hedge electricity prices.

I am not sure how my NZOG shares will turn out. However, as long as their performance matches the oil price, it does not really matter – I am safe from and hedged against Saudi protests and US gas guzzling.

Martin Hawes is an Authorised Financial Adviser and his disclosure document is available free of charge at www.martinhawes.com.
This article is of a general nature and no substitute for financial advice.
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