Money Matters: Should we be going for broker?

By MARY HOLM

Q. I was reading your column where, as you are wont to do, you advised how much better shares were over property. I would like to take issue with some of your comments.

Firstly, you say $1 invested in property in 1956 would be worth $25 in 1999.

However, if I had bought that property in 1956, I would have used 30c of my own money and 70c of the bank's. Assuming an interest-only loan for the 43 years, that 30 cents would now be worth $24.30.

If, using the same ratios, I had used $1 of my own money and bought property for $3.33, that $1 would now be worth $81 after allowing for the money still owed to the bank. And that, as you say, doesn't include rental income.

Also, in your share example you not only include dividends, but reinvested dividends.

If I continued to reinvest rental income as well as equity growth, the actual worth would be much higher.

Because property is considered to be "safe" by banks, they readily lend money to property owners. As the value of your property portfolio increases, the more money you can borrow to finance further property investments.

Except for high-flying share investors, borrowing money from the bank to invest in shares is nearby impossible, meaning effectively that it is more difficult to reinvest equity growth in shares.

Furthermore, many of the shares that were available in 1956 are no longer listed in 1999. Therefore, the basis by which $1 in the sharemarket becomes $207 is fundamentally flawed. You are effectively measuring the index over this period, but the make-up of that index changes every year. Land, on the other hand, remains fairly constant.

It is flawed to compare a property index with a share index, unless you measured the same shares year after year for 43 years. Then I would like to see the comparison.


A. Let's take your last point first.

There's nothing magic about constancy. We're looking at typical investors in shares and property, and the share investor's portfolio will change a lot over 43 years. While I don't advocate frequent share trading, the ease with which shares can be bought and sold is one of their beauties.

Don't forget, too, that many shares no longer traded didn't come a cropper. The companies were taken over, often at great profit to shareholders.

The only realistic way to do this sort of research is to use an index. And these days, you can invest in a share index fund, making the use of indexes even more appropriate.

I could go on to argue several other points. For instance, you seem to be overlooking the cost of interest when you discuss borrowing to invest in property.

I think, though, that there are two overriding issues when we make share/property comparisons.

The first is gearing, which makes a profitable investment even more profitable and a losing investment even worse.

You use gearing in your property example, but say it's "nearby impossible" to borrow for share investment.

Not true. If you've got reasonable income and equity in your home, it's pretty easy to get a revolving credit mortgage, flexible finance facility or whatever your bank calls a mortgage with a fluctuating balance.

Then, as long as you stay within your maximum loan amount, if you want to invest in shares you simply write a cheque.

It's a fairly risky thing to do. But then so is gearing to invest in property these days, with inflation low and interest rates high.

I'm not convinced that a single property is less of a risk than an investment in a broadly diversified international share fund.

To make a fair comparison, we must gear both shares and property, or neither.

The second issue is assumptions. While in most share/property comparisons, shares came out tops, that's not always the case.

The difference in results often stems from assumptions made about dividends, rental income, insurance, rates, maintenance costs, brokerage, commissions, taxes and so on, and about how they have changed or will change over time.

If we're forecasting profits, should we use just the last few years data, or is it too short to take account of cycles? If we go back further, though, we're getting into periods when inflation was much higher and the economy and demographics were pretty different from now. So are longer-term numbers meaningful?

Researchers must make many choices, all of which can be challenged.

Perhaps we just have to settle for the following: Property and shares can both be excellent or disastrous investments.

I point out the drawbacks of property investment only because many New Zealanders seem not to know them, or to ignore them.

As a nation, we're unreasonably positive about property and unreasonably negative about shares. I've got no axe to grind. I'm just trying to restore balance.

Q. Mary Holm's column two weeks ago dealt with the issue of ongoing fees charged by financial advisers. The article provides a useful opportunity to air this important issue.

Should financial advisers charge? This might seem like a silly question, but it isn't, for two reasons.

Firstly, many advisers receive initial and/or ongoing commission for the investments they arrange - and if so, the Investment Adviser (Disclosure) Act 1996 requires that this is disclosed, together with the amount or rate applying.

Where an adviser receives commission, this ultimately comes from your investments, which should naturally affect the size of any fee he or she might also charge.

Secondly, a wide range of people call themselves financial advisers, and there is no law stopping unqualified or inexperienced people from doing so. The same fee or commission may well be exorbitant in one case, but very reasonable in another.

So what is a "reasonable" fee? This is something the market can determine. As mentioned above, the law requires full disclosure of remuneration issues by advisers.


There we have it, some fairly straight talk from a financial adviser himself - Simon Hassan of Stewart, Hassan & Associates, who is on the board of the Financial Planners & Insurance Advisers Association.

In the end, I guess, people have to judge whether they get value for what they pay.

The trouble is that it's harder to tell what you're getting from a financial adviser than from a car salesperson. That means many people don't bother. It's worth bothering.

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