Opinion: Small investors continue to learn the hard way

The negative impact on the NZ economy and investment environment from the global credit crunch and banking crisis has manifested itself in many ways. Firstly, the increase in home mortgage interest rates in November/December last year was due to bank wholesale borrowing margins increasing (because of the credit crunch) was the tipping point for the residential property market, that is now seen as a major cause of the economic recession we are in. Secondly, the finance company collapses were partly attributable to their inability to arrange alternative wholesale bank funding lines when Mum & Dad investors started to pull their money out. The banks stopped lending to all but a few of the first tier finance companies. The collapse in investor confidence has since become endemic as no-one trusts anyone anymore. The freezing of investor’s funds in mortgage and property trusts are another example of the contagion spreading. More recent news reports of investors losing money in dodgy investment schemes in New Zealand just demonstrates how naïve and gullible (and greedy perhaps) many small investors are. The Serious Fraud Office is investigating a chartered accountant’s investment operation in Waipawa (Central Hawkes Bay) where $20 million of client’s investment funds are at risk with the failure of his own “in-house” finance company. Rumours are that he was also playing the foreign exchange market casino with the investment funds entrusted to him. No prospectus, no investment statement and no reporting to investor clients as to what the money is invested into and the return performance. The legal and accounting professions should take some leadership here and de-register their members who are involved in investment advice, broking and arranging. As a professional advisor on interest rate and foreign exchange markets, I take great care that I am not seen to be giving any form of accounting or legal advice, which is outside my sphere of authority. I suspect it does not happen enough the other way. The other case was an Auckland businessman who enticed wealthy friends to back his ventures that all appear to have gone belly-up, owing millions. Whose responsibility is it to save fools from departing with their hard-earned money? Investor education is a real issue for New Zealand if investor trust and confidence is to return. The Securities Commission made a few noises a number of years ago about the need for it, but has done very little (no budget for it). The fund managers have a responsibility, as do the banks. Let’s hope the new Capital Markets Development taskforce that has been established will address this important issue. At the end of the day, I say “Caveat Emptor” and be damned! ------------------ *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com.