Rob Cameron: Building a bridge over troubled investment waters

Opinion

Many New Zealanders don't trust the finance sector - financial advisers and the companies that provide investment products.

That's hardly surprising, with the news media full of stories about the elderly being steered into highly risky investments that went wrong, worthless celebrity endorsements, and executives of troubled companies driving flash cars and hosting flash overseas parties.

Negative attitudes may have been shaped, initially, by the 1987 share market crash, in which New Zealand fared worse than the rest of world.

More recently the failures of some finance and property companies and losses resulting from poor advice have left many with a sour taste in their mouths. And New Zealand came bottom of 16 countries in a recent Morningstar report on investors' experience of managed funds.

No wonder people prefer property - as the figures show. Owner-occupied houses and rental properties account for about three-quarters of New Zealanders' household savings, according to the Reserve Bank.

Even if we allow for investments in unlisted businesses and farms, which aren't included in this research, we are still out on a limb.

In a number of other countries - Australia, Canada, Germany, Italy, Japan, Britain and the US - property makes up about one-third to one-half of savings.

Furthermore, just three per cent of New Zealanders' savings is in direct holdings of listed shares, with the rest in other financial assets. That is also very low by international standards.

New Zealanders' bias towards property increases investor risk and reduces options for everyone in our economy. Like many children at school, we "could do better".

The Capital Market Development Taskforce wants to bridge the gap between potential investors and the companies that offer investments. It aims to make it easier and safer for people to invest knowledgeably in our capital markets and to broaden the choices available to them, so they can enrich themselves and their families.

At the same time, it aims to make it easier for companies to use the markets to raise money to help them grow - enabling them to employ more people, provide more goods and services and earn higher profits for their investors.

If we're going to increase New Zealand's productivity and reduce the difference between our wages and those in Australia, we need to make sure that our capital markets work as well as they can for both companies and investors.

The taskforce is gathering ideas from a wide range of people on how to make all of this happen.

From the perspective of the ordinary individual investor, we are proposing several changes, including the following:

* All investors should be given short, easy-to-read summaries about investment products, so that they understand more clearly what they are investing in.

* Comparable information should be readily available on investment product fees and returns, to help people make informed choices.

* Financial advisers should be required to reach high standards of professionalism and competence. Preferably they should act only in their clients' interests. If they receive commissions or other rewards from product providers they should be required to explicitly state this and to explain how this might affect their advice. While some advisers act professionally and ethically, too many do not.

* Those who manage others' money on their behalf need to take seriously their responsibilities to investors - including the obligation to achieve the best performance they can within the instructions that investors give them.

* Regulators should be given the powers and resources to keep track of financial product providers, so they can act early to prevent investor problems rather than being the "ambulance at the bottom of the cliff".

* When the ambulance is unfortunately needed, all investors should be able to easily seek adequate redress.

* Regulators should require providers and advisers to act in a principled manner, and those who behave badly should be punished swiftly and publicly.

While most investors would welcome these changes, more sophisticated investors don't need the same level of protection. They should be able to opt out of the system and invest in less regulated markets with a full understanding of the risks they are taking on. On the company side, the taskforce is particularly interested in helping some of the hundreds of thousands of small and medium New Zealand businesses to grow.

Because of the small size of our domestic markets, companies tend to realise fairly early on that growth requires taking big steps - maybe expansion overseas or merging with another company. These are significant moves and usually require more capital and different capabilities from what the company has developed to date.

That's probably why some business owners are not interested in growing. Once they have earned enough to buy the "bach, boat and Beemer" they are happy. But others, keen to expand, find their growth stymied.

The taskforce would like to see stepping stones to help companies to fund their growth. For some firms it's a big move to list on the stock exchange, and we'd like to see more choices to allow companies to fund what they need at each stage of their growth. At the moment we see too few firms moving on to the stock exchange, and not enough growth in some of the companies that are listed.

If we are to succeed as a country, it's important that we are all pulling in the same direction - the private sector and the Government each have a role to play and need to complement each other.

For example, at the moment the Government supports networks of business "angels" and venture capital funds - which provide finance for unlisted companies - and it should continue to do that. Developing capability here is a long-term game. We also need to remove the red tape to make it easier for firms to access the skills and money that some of our business people have to offer them.

New Zealand companies and would-be investors don't have to be on opposing teams. What's good for one can be - and usually is - good for the other.

That's not to say that there won't still be companies that fail and investors who lose their money. New Zealand firms need more risk capital, and that will mean both more successes and more failures. But generally investors willing to take risk are rewarded for that.

Provided they diversify and invest only in what they understand, investors can be better off, and so can the firms they invest in.

* Rob Cameron chairs the Capital Market Development Taskforce. This was written with input from taskforce members.