This article was published on 8 July 2006. Some information may be out of date.

Q&As

  • What to do about negligent adviser who recommended bad finance company investment.
  • Do high earners pay too much of the tax burden?
  • Parable about why the highest taxed get the biggest tax breaks.

QMy wife and I shifted from a small town to Tauranga, and at the same time sold commercial property because at our age (70+) we felt we should find something with less stress.

We were advised and approached a sharebroker here with whom we left $200,000 for him to invest in a conservative manner, hoping for income-only investment. This has proved over the last two years to be satisfactory, returning approximately 7 to 8 per cent.

However, on reading the Herald recently, I discovered a finance company in which we have invested $7,000 is now in receivership.

Although the investment matures in one month’s time I guess we sit and wait. We have also received in the mail information on another investment with a similar finance company advising us of its maturity and wanting re-investment or otherwise.

I feel disappointed that our broker, who made these investments originally, did not ring or write to us with advice and at least tell us what was happening. I have phoned him and left a message, with no return call to us.

My questions: Am I expecting too much? Is our investment of $200,000 not sufficient to warrant that expectation, or is our man not doing his job?

He also holds a small account at 5 per cent from which he draws his commission.

I would appreciate your advice on this.

AI think you are expecting too little. I would like to think that any adviser who has suggested clients invest in a finance company that gets into trouble would at the very least immediately contact all those clients, regardless of how much they have invested — and in any case you have invested plenty.

And it’s particularly poor that he doesn’t respond to your phone message.

I don’t know about your broker, of course, but there have been lots of stories lately of advisers steering their clients towards iffy finance companies because the advisers get large commissions for doing so.

I suggest you make an appointment to see your broker and ask him to explain how he picked your finance company investments and how he is rewarded for all the investments he has put you in.

If he’s reluctant to do that, or his explanation doesn’t satisfy you or it doesn’t ring true — or, worse still, he continues to not respond to your phone messages — you might even consider taking legal action.

Let me quote from a recent issue of Financial Alert magazine, in an editorial by Anthony Davies aimed at advisers: “If there is a major finance company failure and any of your clients lose money and decide to sue for being given poor advice, you will need to prove to the satisfaction of the court that your product recommendations and portfolio construction guidelines are backed up by a rational and defensible process.”

You might have a really good case, especially if you asked for conservative investments. On the other hand, you were hoping for a less stressful life when you moved to Tauranga, so perhaps a lawsuit would not be a good idea. After all, $7000 is not a huge chunk of your savings, thank goodness.

At least, though, move to another adviser — somebody you feel you can trust. And I suggest you get out of all your finance company investments as they mature.

I’m not saying that all such investments are bad. But several experts have been saying that many of them don’t pay enough interest to compensate for the risk investors take. And it’s hard even for advisers to tell which companies are financially strong.

Better still, take control of your money yourself and put it in bank term deposits. While the interest rates will be lower than from finance companies, you won’t be paying commissions to anyone, and you know your money will be safe.

If you want to go a little further up the risk/return scale, go into investment grade corporate bonds.

QLast weekend’s Money column, “Higher tax per head may be part of the price for our lifestyle”, does not justify the high tax burden for a small percentage of individual taxpayers.

Budget 2006: “Key Facts for Taxpayers”, illustrates that 12 per cent of individual income taxpayers paid tax in the 39 per cent tax rate. But altogether, those 363,000 individuals contributed 51 per cent of the total income tax revenue for 2005/2006. In comparison, 54 per cent (1.66 million) of individual income taxpayers earned less than $20,000.

I think population size is an insignificant influence on individual tax burden. The problem for New Zealand is our productivity per capita is too low, so we rely too much on our top earners to pay for our high standard of lifestyle.

AThe same sort of thing happens in every country that taxes wealthier people at higher rates — and that’s just about every developed country.

I’m in two minds about it. The rich continue to lead more comfortable lives than the poor, even after tax.

And while many wealthy people have worked harder than most to get there, luck almost always plays a part too — in their genes, talents, upbringing, education or just the breaks they have received. It’s hard to get too upset over the plight of the highly taxed.

On the other hand, taxing the wealthy heavily can harm more than the wealthy. The following letter touches on the proposed tax changes, which I promised not to mention this week. But the main point of the letter supports your argument.

QI’m a US citizen and have been seriously considering emigrating to New Zealand as an investor/entrepreneur. I’ve been reading about the proposed tax changes, especially those related to the taxation of unrealised capital gains, and must say that if imposed, that would probably be enough to scare me away.

Below is a tax parable that hopefully makes it a little easier for some to understand the consequences of tax policy. While the parable is not strictly analagous to the capital gains tax proposal, the last sentence is the key.

At some point, wealthier folks will no longer be there to tax, and the rest will be worse off as a result. Whether the wealthier folks move to Australia, or just don’t come to NZ, the outcome is not the best for your country.

The lesson of the free lunch:

Suppose that every day, ten men go out for lunch. Their total bill comes to $100. If they paid their bill the way Americans pay taxes, it would go something like this:

  • The first four men (the poorest) would pay nothing;
  • The fifth would pay $1;
  • The sixth would pay $3;
  • The seventh $7;
  • The eighth $12;
  • The ninth $18;
  • The tenth man (the richest) would pay $59.

That’s what they decided to do. The ten men seemed happy with the arrangement, until one day the restaurant owner said, “Since you are such good customers, I’m going to reduce the cost of your daily meal by $20.”

Now lunch for the ten cost $80. The first four men still ate free. But how would the other six divvy up the $20 windfall?”

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, the fifth and sixth men would be “paid” to eat their meal.

So the restaurant owner came up with a suggestion. The fifth man paid nothing, the sixth $2, the seventh $5, the eighth $9, the ninth $12, and the tenth $52. Each of the six was better off than before.

But once outside the restaurant, the men began to compare their savings. “I only got a dollar,” declared the sixth man. He pointed to the tenth. “But he got $7!”

“That’s true!” shouted the seventh man. “I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up.

The next day the tenth man didn’t show up for lunch, so the nine ate without him. But when it came time to pay the bill, they were $52 short!”

And that is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, and they just may not show up for lunch any more.

AThat story has been around for a while, but it’s worth reading again.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.