Spread it around, say advisers

In the wake of recent finance company collapses, New Zealand investors are seeking more professional investment help, but they are not being advised to stop investing in finance companies altogether.

Diversification was the message coming from the finance industry last week.

And this isn't just from financial advisers. Individual investors who have watched their friends take a beating because they put too much money into a single finance company are singing from the same songsheet.

"If you're going to invest $50,000 in finance companies, put $10,000 in five of them, don't put $50,000 in one of them," says one successful investor.

The uncertainty caused by the failures of National Finance 2000, Provincial Finance and Western Bay Finance could trigger a "golden period" for financial advisers as the public seeks professional advice before investing rather than making the decision by themselves, says Philip Macalister, publisher of financial website depositrates.co.nz.

Jeff Matthews, senior financial adviser at Spicers Wealth Management, agrees.

"There has been a big increase in inquiries coming through to us for advice. People are realising that not all finance companies are the same, and they have been taking undue risks. Most people have been investing in them without advice. The message is finally getting through that there is a trade-off between risk and return."

Industry sources say a couple of the collapsed companies had used unorthodox methods to do business. Their downfall was not because the sector itself was unstable.

"I don't think it was bad luck. I think you have to be honest, it was bad management and in some cases poor governance," says John Waller, the PricewaterhouseCoopers receiver who has been called in to assist in both the National and Provincial collapses. "They hit a wall of cash. If you have got a lot of cash, you have got to get it to work for you, and this caused them to make bad choices of business, which led to ill-considered lending and lending practices. I think they would all admit that."

Meanwhile, private investors are undoubtedly looking at forms of investment other than finance companies. Macalister, who also publishes NZ Property Investor magazine, says experienced local property investors are set to start buying again at Christmas, after staying out of the overheated market for the last couple of years. And others will follow.

Fund management is another sector likely to benefit from the current tremors in the finance company market.

"We have had two record months of new business, in particular from accountants and solicitors," says Kelvin Syms, managing director of Northplan, an investment company which has $1 billion of funds under management. Northplan, in its investment portfolio for customers, includes finance companies, but only those that lend on mortgage-backed securities, not on consumables. Before it selects fixed interest investments, it subjects the companies to a lengthy four-stage research process which includes an independent rating from a research firm.

Northplan also co-owns a small finance company, Boston Finance. Syms is hitting back at criticism from the media and from competitors of the finance company sector. In a newsletter to clients he says: "Whether you are choosing a motor car or a new solicitor, there are always going to be bad, average and extremely good versions of everything. For commentators to suggest that all finance companies are bad is quite frankly ridiculous. Ironically, the share brokers making such comments do not make comment on investors losing 90 per cent of their capital by investing in Feltex shares or a 33 per cent loss on Telecom shares since the start of this year."

PWC's John Waller is not telling investors to stop putting their money into finance companies. He sees the situation as a cyclical event, similar to property companies such as Landbase and RSL going under in the early 1990s.

"Fifteen or 16 years on, it's now happening in a different sector of the finance industry, and it is more associated with consumer finance, which is burgeoning," Waller says.

"There are some very good finance companies out there. The thing is for people to have an understanding about what the investment spread is. If people are not sure, then they should try to find somebody who knows, who can point them in the right direction. Financial planners also need to be inquiring."

New Zealand investors can be faulted for putting little effort into researching the companies they are about to pour thousands of dollars into.

"It seems that not a lot of people look at the fine print. They see that it is secured debenture stock and assume it must be all right," Waller says. "They see that it is secured, but they have no idea of the risk they are taking for that extra 2 per cent, in some cases. It does not justify that extra 2 per cent."

Not all small investors have been put off finance companies. There are some who have done their research and are happy sticking with their fixed interest investments.

Michael Thomas, 59, is keeping his money with Geneva Finance as part of a well diversified portfolio which also takes in property, a business concern and some shares.

Thomas says he likes Geneva because it is a transparent business which he can get a good handle on. He says he knows more about the company than any financial adviser could possibly know. He visits the company when he is in Auckland and knows the senior management. "It is very important to know the type of senior management. Geneva has been around for three and a half years but [that] does not bother me because I know that the managing director Glenn Walker [previously of Instant Finance] has been in the industry for 25 years. He has had a lifetime of experience.

"You have got to do due diligence. It's like entering into a relationship: you don't rush off with the first girl just because she is pretty. It has to be an ongoing thing, you don't just check them out once."

Thomas says he saw that Provincial was headed for trouble when he looked at its basic figures.

"Provincial had a $330 million portfolio and 85 staff, Geneva had $120 million portfolio with 260 staff." Provincial did not have enough people, so they had car salesmen negotiating loans, he adds.

The fact that Walker has his money in Geneva and well-known businessman Peter Francis is a major shareholder are also good indicators, Thomas says.

Geneva Finance chief executive Dennis Kelly says that around 90 per cent of his business comes from ma-and-pa Kiwi investors. He says he will reassure his investors about the stability of the company and the industry through continuing the regular meetings and seminars the company runs around the country.

Geneva Finance recently secured a $30 million line of funding from BoS International (Bank of Scotland) to complement its retail debenture programme. Geneva is one of the few New Zealand finance companies to be rated by international credit rating agency Standard & Poor's, which requested that it find an extra line of wholesale funding.

Kelly was concerned by the bad press the finance company sector was getting and advised investors to look at reputably rated companies and to consider the strength and experience of their senior management teams.

The reduction in money going into cash hungry finance companies, meanwhile, could be dangerous for the fates of other financiers. They told investors last week to watch out for liquidity levels in their companies. If everybody decides against rolling their investments over, this could send some to their knees.

"Companies are now learning they have to manage their liquidity. It is not as predictable as it was six months ago," says Waller.

He says firms which have been used to a 60 or 80 per cent rate of investment rollover can no longer rely on this. "If there is less money coming in, then there is less money to lend, less returns, profits are not as great, and it tightens the whole business up."

If investors are hoping that more regulation will protect them, they should think again.

"You can regulate and register dogs, but they will still come over and bite you, says Philip Macalister. However, he does expect the Reserve Bank to undertake some closer supervision and pressure for more disclosure. Waller is equally cynical. "Regulation ... has to be effective and ... any regulation has to be carefully considered, rather than knee jerk."