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Legal, Other

Arbiter for Financial Services Act – A Review

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 arbitrate

Currently the Arbiter for Financial Services Act is being finalised following a series of discussions between representatives of the government and the opposition. The Act, which will be coming into force in the coming months, will have an effect on any company that offers financial services from Malta. This act generally gives the authority to one person to settle a dispute between two or more parties which have an issue which is connected to financial services. The idea is to have a faster and more focused court-like setting where the Arbiter has the “power to mediate, investigate, and adjudicate complaints filed by a customer against a financial services provider.”  So this act is going to give quite a bit of power to just one person and the Board of Management which would be managed by such person.

The idea looks nice on paper, but how will this all work in practice?

Here I have 3 main reservations

1.      Independence of Arbiter

One of the first issues I am finding with this setup is that it is going to be quite difficult to find someone who has the competence required and at the same time is independent. The requirements to be appointed as an Arbiter are that the person should “possesses the necessary expertise in consumer related issues in respect of financial services, including a general understanding of law.” The draft Act also mentions some instances where a person cannot be considered as an Arbiter which again all look nice to have on paper.

So we are saying here that it has to be someone who has acquired an amount of knowledge and expertise in the financial services industry, specifically in consumer related issues. In my view this is not going to be an easy task since the issue of independence is going to be a problem for many potential candidates. Let us consider appointing someone who has been working with the regulator for an amount of years. Such a candidate would have been involved directly with consumer issues in the financial services industry which qualifies him/her for the post. However, if this person has never worked with a financial service provider or has not done so in a very long time, then that person would lack the knowledge and expertise of how things work in the field. 10, 15, 20 years of always hearing one side would not really allow that person to be independent.

What if we consider appointing a current or an-ex judge/magistrate who would possess the legal acumen to actually give a legal ruling – the problem here is finding one with expertise in financial services. Ok, let us consider finding a lawyer who is specialised in financial services. This may well be the best option however the issue of independence is going to come up more than once. Given the small size of the local industry, Malta’s financial services practitioners tend to use the services of a handful of legal firms which have expertise in this industry. So if an employee from such an entity was to be appointed as the arbiter it could well be the case that many a time such person would have a conflict of interest through his/her previous dealings with the financial services practitioner.

What about appointing someone who has been working in the industry in a senior position for many years and thus has the knowledge and expertise of dealing with clients, keeps up to date with financial services regulations and would have a deep knowledge of different financial services instruments. Two main problems here: i) Why would such a person leave his/her current position which is likely to be more financial rewarding and flexible? ii) How can such a person be independent when most financial practitioners know each other and may have done business together?

2.      Excessive Powers of the Arbiter

Another very troubling issue is the excessive powers being granted to this one person (or office) which may be beyond the competence of such person and quite possibly anti-constitutional. Here I am referring to the fact that the Arbiter will have the authority (according to this Act):

“to consider complaints which are being dealt with or which have already been dealt with by the Malta Financial Services Authority, and its recommendations, rulings, directives or decisions shall not be considered as a res judicata of the complainant’s case and the consideration of such a complaint by the Arbiter shall not be construed as going against the principles of natural justice”

This is by far the most dangerous clause that exists in this act. It is being said that even when a complainant and a financial service provider have come to a contractual agreement on a settlement, the Arbiter has the authority to supersede such agreement. This creates a very dangerous precedent whereby the legal stance of previously settled cases which have been contractually agreed to by both parties is put into question!

According to the lawyers present during the discussions, up until now it has always been the case that any dispute about the validity of a contract would have to be scrutinised in the Civil Courts. Thus this clause is giving a dangerous and unprecedented authority to one person who is only required to have “a general understanding of law”. So we went from a formal well established procedure in the civil courts to being judged by a person who generally knows the law!

This very dangerous clause, coupled with the fact that the Arbiter can decide on cases going back to 2004 (and not anything earlier than that date) makes one wonder the exact reasoning behind inserting such clauses. It begs the question:

Is this law being enacted in light of the La Valette Multi-Manager Property Fund incident?

One cannot help but wonder about the above question and at the same time keep in mind that at the end of the day the Government (which is pushing for the enactment of this law) is the largest shareholder in Bank of Valletta (BOV) with its 25.23% shareholding. Furthermore, BOV is a publicly listed company with its shares trading on the Malta Stock Exchange. So wouldn’t it be only logical to consider whether one should sell his shareholding in BOV if this Act is passed through parliament as it currently stands?

What does this mean for the Insurance industry? Companies within this sector are involved in many settlements on a regular basis – such is the nature of their business. So if an insurance company can no longer bank on the legal validity of the claims it has settled – how does it provision for this in the policies it issues? Again, Mapfre Middlesea Plc, GlobalCapital Plc and all the publicly listed banks are involved in the insurance industry to one degree or another – so should one also sell all his holdings in such companies if this Act remains unchanged?

In a nut shell, saying that this dangerous clause would open up a Pandora’s Box would be an understatement.

3.      Who really benefits?

At the end of the day, no matter what ruling the Arbiter gives in his hastily 90 day target time the right of appeal from that sentence cannot be removed. Thus the end result would most likely be that both claimants and service providers would end up worse off and the people that have most to gain from all this are the lawyers and consultants appointed by both parties. Interestingly enough, it had been proposed in the discussions about this Act that there should be a cap established on the fees that a person representing a complainant can charge. The proposal was to have a cap amounting to the higher of €500 or 0.5% of the net proceeds won on behalf of the complainant. This would serve to protect the complainant from ending up paying exorbitant legal and consulting fees. To date I am not aware that the Government has introduced this clause as it was stated that it needed to be studied further.

knowledgepower

The Bottom Line

Like I have said many times before, the best way to help consumers and protect them is to educate them. If consumers are better equipped to assess the products and proposals that service providers propose or recommend to them we will have a much better result. Increasing regulation ends up marginalising the small investors since they become uneconomical to service. The risk involved and the time involved to service the small investor would not make it viable to service them. So as a result they would end up only being offered the same few products and thus creating a concentration risk in those few products. This concept of educating investors has to flow both ways however, the industry and quite possibly to a certain degree the government should come up with ways of organising educational clinics, seminars, conferences, courses and other incentives about the subject to the investors. But from the other hand, the investors have to be make an effort to look for such learning opportunities and not simply play the fool that wants to shift all the responsibility to the service provider. In the words of many before me: “Knowledge is Power” and thus through more knowledge investors would possess the power (ability) to better decide on their financial matters with guidance from the financial practitioners.

 

 

 

 

 

 

Legal, Other

Regulating the Financial Services Industry – Finding a balance

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balance

Why Regulate?

I recently watched the movie “The Big Short” which is about a few traders who actually predicted that the US housing bubble was going to burst and that the collapse of the sub-prime mortgage market was inevitable. These traders used financial instruments (mainly credit default swaps) to bet against the market and the major banks – which as we all know now, was a very profitable thing to do in the end.

The reason I opened with a reference to this movie is not to get into the merits of how they profited from the situation but to highlight a point that struck me the most while watching it. In the move the actor Steve Carell plays hedge fund manager Mark Baum who appears to be on vendetta against the big Wall Street banks who he describes are nothing but crooks. At first the character thinks that the big banks do not have a clue what they are doing and that they are being naïve by not recognising the problem and continuing to deal in sub-prime mortgages which are literally worthless. But at the end he finally comes to the realisation – which now with the benefit of hindsight is quite obvious to see – that the big banks knew exactly what they were doing and what’s more, they knew that they would have to be bailed out since they were too big to fail. So they deliberately made as much profits as possible until they would reach the point of no return and have the tax payer bail them out.

This notion that the banks know that they are too valuable to the financial system and that bank failures would be devastating on any economy puts them in a particularly advantageous position. In more technical jargon we would say that it creates a moral hazard situation. This is the main reason why the financial sector is so highly regulated. Thus, many would agree, especially many small investors who do not trust the big banks and believe they need to be protected from them, that regulating the banks and other financial services practitioners is very important. The more regulated they are, the better they would argue.

But…

Could too much regulation actually leave investors worse off?

More specifically, could the small retail investors that the politicians and policy makers so heroically swear to protect against these big bad financial practitioners, end up worse off?

Let us start with reviewing a bit the EU investment services rules since in Malta we are subject to the same/similar regulations & directives. So in 2007 we saw the introduction of the Market in Financial Instruments Directive (MiFID) which introduced much more pro-consumer rules and put much more onus on the service providers. What this means is that investment service providers had to start recording much more data in order to ensure that they were abiding by the many more procedures and regulations that had been introduced. This in turn lead to much more forms to be filled in and checks to be put in place to ensure that the sales staff were actually adhering to the rules and not putting the company they work for at risk of breaching any of them.

On the whole this is obviously a good thing since it ensures further that the investment service providers are acting fair and responsible in carrying out their business. At the same time, this increased regulation comes at a cost in the form of time and money that investment services firms have to spend per transaction. Furthermore, such firms also have to assess the risk and reward of entering into transactions with clients. Are the various risks of selling this product to this client worth the compensation that the company is earning?

In most cases the highest risk is when dealing with the smaller less knowledgeable investor, who is also the same investor that will generate the lease return for the service provider. So it is quite common for investment firms to exclude certain investors from certain products based primarily on the higher risk such investors pose. This in turn will leave these investors with lesser choice and higher concentration risk since they will only be offered a small choice of investments. So regulations that had the aim of protecting investors could actually be leaving them worse off by excluding them unnecessarily from certain investments. What is even worse is that such investors, who are the ones who would need investment advice the most, could be shun away altogether from investment advice due to the higher risk of offering investment advice to them.

You may think that I am exaggerating a bit here – which firm would reject business just because a product is classified as complex and presents more risk to the investment service provider? Let us look at real examples of how this is actually happening. Any HSBC Bank Malta Plc (HSBC) customer had been informed that a few years ago the bank decided that it would only be offering execution only transactions and would absolutely not be offering investment advice. Furthermore, the same bank has recently informed its customers that it would no longer be allowing its customers to hold investments on their nominee accounts. That is to say that HSBC would no longer be holding the custody of clients’ investments and has actually written to clients to transfer their holding to other providers (which are competitors of the same bank).

Some may argue that this is a one off case and that it is a direct result of directives by HSBC’s parent company to reduce risk as much as possible across the many subsidiaries, especially in the smaller jurisdiction such as Malta. So let us look at another example – the subordinated bond issued by Bank of Valletta Plc (BOV) late last year which is basically a Contingent Convertible Bond (Coco). Due to the nature of the bond it was rightly so rated as a complex instrument by our regulator. Under MiFID rules such instruments must be accompanied by more paperwork to ensure that it would be appropriate for an investor based on such investor’s knowledge and experience.

What happened in practice? A bond which from a scale of 1 to 10 in its complexity would be rated at less than 1 in my view, was made subject to more scrutinising procedures by the listing authority. It had to be sold in two tranches – tranche 1 imposed a minimum of €5,000 which had to also be accompanied by investment advice, thus putting the highest level of onus on service providers, while tranche 2 imposed a minimum of €25,000 and had to be accompanied by an appropriateness test. Our regulator argued that due to the vast network of retail clients that such a bond would have appealed to, such clients needed to be protected even further than MiFID suggests. The result – many investment services providers including other banks simply did not bother with the issue. The bond was sold by a smaller amount of firms which got back logged in the paperwork and the issue had to be prolonged until all the work by the investment firms had been carried out. Looking at the trading of the same bond on the secondary market – virtually non-existent. I went into much more detail in a previous post which focused specifically on the bond issue. Here I simply wish to highlight the negative aspect of too much regulation.

Compliance

So how do you strike a balance?

I started the post by pointing out why regulation of this industry is such an important aspect. We then saw a few examples of how regulation could leave investors worse off by marginalising the smaller less knowledgeable ones. So how can regulators and policy makers stick a balance between these two opposing forces? In my view, the answer lies in being more pragmatic in the imposition of the rules and regulation governing investment services. The one size fits all approach of putting all complex instruments into the same basket is redundant and disruptive. While firms that are found guilty of negligence and misconduct should be properly dealt with, regulations should not be acting as an impediment to business.

Another very disruptive and damaging practice is having an ultra pro-investor approach when regulating investment services firms. As I have just stated, when found guilty of purposeful negligence and unethical behaviour the regulator should be given as much ammunition as possible to deal with such perpetrators. However, feeding the idea that if someone loses money when investing in a financial instrument they have a good chance of getting compensation creates a misconception that investment firms are guaranteeing every instrument that they sell. This is a very dangerous situation which will only lead to a negative situation for both the investors and the firms selling the investments.

Could there perhaps be a solution whereby staff that work with the regulator must spend a certain amount of time working with an investment service provider? Thus they would attain hand-on experience and would ultimately be able to implement the directives more effectively and efficiently. Moreover, this would have to be an ongoing exercise and not a one time thing. Just because someone worked in the industry 10 years ago and has been working for the regulator ever since does not qualify as still being in touch with reality.

On the other hand, should compliance officers and Money Laundering Reporting Officers (MLROs) be given training by the regulator on a regular basis for example? This would help to get the perspectives of both the regulator and the practitioners more in line. Here I am not talking about the usual boring courses that just present what is in the regulations. Anyone can read the regulations on their own and no presentation is needed for that. What I am speaking about here is offering real life examples of what the regulator is dealing with in order to create a more understanding environment between the regulator and the practitioners.

The Bottom Line

At the end of it all, it is always going to be a difficult task to find the ideal level of regulation. What is important is that both regulators and practitioners work towards the common goal and try to understand each other’s perspective. Both can learn from each other and both need each other whether they would like to admit it or not. Regulating by empowering is far more effective then regulating by imposing. Thus, I truly believe that more effort and resources need to be channelled towards the education of the investing public. After all education = power since by educating people you will empower them to be able to regulate the financial practitioners themselves.

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Teleworking – A Financial Perspective

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Telework

Teleworking refers to the work arrangement whereby employees work from home and do not physically commute to a central work location as is normally the case. This post will aim to highlight the financial aspect of this arrangement to argue why it makes financial sense to use such an arrangement.




First of all it must be understood that just because a company introduces a teleworking program it does not mean that employees who decide to use this option have to decide between always working from the usual workplace or always working from home. In fact a mixture of the two would be the most beneficial in many cases. Certain tasks would require an employee to visit the place of work by their very nature, such as when a face-to-face meeting with a client needs to be held. However a lot of other office work can be done more productively when the employee remains at home.

networked-home

The Benefits

Improved Productivity

The obvious benefit is the increase in productivity that would result when one does not need to leave the comfort of one’s home to work. Consider commuting time for example. If you consider that on average people in Malta take 30-45mins to commute from home to work and the same time back from work to home that means that on average a person would use up 1-1.5hrs per day just commuting. This means 5-7.5hrs per week. This does not include time used up for parking in both locations and preparation time to go out in the morning. So when you add this all up a person could save easily 20% of his time by working from home and dedicating those hours to his normal 40hr work week.

Less stress due to commuting would result in better productivity as well. It is no secret that stress is the cause of many other psychological and physiological illnesses such as eating disorders, insomnia and depression. By reducing the stress caused from commuting the individual would be able to be more focused on their work and produce better work in less time. Other stress factors related to the work place would also be reduced and would in turn improve productivity.

Reduced Costs

This is another important benefit. From an employer’s point of view, when less employees are physically present in the office less overheads are incurred. For example less electricity is consumed through a lesser use of electronic devices such as PC/laptops, heating/cooling devices and so on. From the point of view of the employee he/she would have higher electricity bills on a personal level since they are using their own space. However there would be the reduced costs in the form of transportation costs for example. Especially if an employee was used to eating out everyday during their lunch break they could easily now eat for less by eating from their own kitchen.

More Flexibility   

This is perhaps my favourite benefit. When one is working at his own pace it is much easier to work flexibly. So if the goal is to work 40hrs in a week or to get x amount of tasks done by this week, the individual can choose when best to work on those tasks. One may have to attend to a personal matter during the day that would occupy him/her between 10am and noon, which he can make up for at a different time. There is no restriction to when one can work on certain tasks. Of course there will be certain daily tasks that might need to be done by a specific time each day. However there will also be overall tasks that one might feel more comfortable working on at 9pm or on a Saturday afternoon.

This feature is perhaps the most beneficial for people with young children who would like to return to their job but cannot commit to the usual working times. Tied to the benefit of reduced costs and better productivity, employees with young children who would have to take leave days without much notice or sick leave due to their children feeling unwell could still work from home in such instances. Thus the employer does not lose a full work day and the employee can still meet his/her targets by working more flexibly.

This flexibility feature could also be used so that both parents could spend more time with their children. It is not only the mothers that could work remotely, but also the fathers could do so. If both parents are working from home there would be more family time and more participation from both parents in their children’s lives. Other setups could be used of course whereby either the parents work on alternative dates from home or just one works from home when the other needs to go to the work place.

More Free Time

From the point of view of the employee, time saved from commuting to work and the added benefit of working more flexibly would free up time for other things. One could use such time to practice a sport, go to the gym at off-peak hours, take up a new hobby or simply spend more quality time with their family at times when they would have otherwise been at the workplace. Another possibility is to pursue other career enhancing initiatives such as pursuing further studies or doing something that would generate additional income.

the-pros-and-cons-of-teleworking

The Requirements

Of course it must be recognised that not all jobs could be done remotely. For example you would not expect a pilot to try to work remotely or a chef to cook from home. But in today’s age many people have office jobs which could in fact easily be done remotely. Even teachers could easily give lectures remotely with the help of some simple technology – so one should not assume that his/her job could not be done remotely, but should brainstorm on some form of compromise that could work.

Life is not black and white and there will rarely ever be a definitive no or yes response to doing something. Most of the time even office jobs require the employee to meet clients face-to-face so it might be the case that a combination of remote and on the job working could be used. One should not exclude having non-physical meetings with clients such as through conference software such as Skype. This might actually be preferred by certain clients who are also usually quite busy and could appreciate the benefit of not having to leave their workplace.

There are certain requirements that must be put in place in order to have a good teleworking programme:

Use of Technology

One of the first things any entity considering teleworking should consider is the upgrade or better use of its software. The obvious choice here is a form of cloud technology whereby all hardware is setup in a remote data centre. This is good for business continuity and it adds more layers of security by adding additional login barriers that would make it less likely for hackers to access. A secure remote connection setup must be established and all files and virtual spaces that the employee would normally need access to should be made available to them whether they are working from home or from the workplace.

Technology can also be used to address another major concern of employers. The usual complaint when I discuss this subject with managers and employers is that they would not have direct oversight on what their employees are actually doing. First of all it must be pointed out that just because an employee is working a few meters away in the same building does not mean that they are not slacking off. No manager or employer can afford to be checking up on their employees at all time, regardless of where the employee is working from. So in my view, this argument is quite flawed. Secondly, believe it or not one can invest in software that tracks the progress of employees. So whether the employee is working form an office, from the beach or from their own home the software will track their progress on the tasks assigned to them.

Definitive Tasks and Procedures  

In order for the whole operation to work well there should be a definitive course of action set in writing. If it is for daily tasks this process is easy since a simple procedures manual could be drawn up explaining what tasks the employee is responsible for doing. So called “How to” lists also help and these add to business continuity since if an employee needs to be temporarily or permanently replaced their daily tasks would be documented and could more easily be taken over by someone else.

In the case of tasks that are specific to a project, such as an IT software development project, the tasks of each employee need to be clearly marked. The tracking software can then be configured around this plan to keep better track of each employee’s progress. In most cases such detailed plans are already used and thus the basis is already set.

Clear Consequences and Responsibility

Responsibility for ones actions form the point of view of the employees is the key to any successful teleworking setup. Employees need to be knowledgeable, responsible and act fairly in order for such a setup to be possible. Furthermore, failure for one to meet his/her targets should have clearly defined consequences and need to be respected. Besides doing the work, such work also has to be up to standard so the employee must still ensure that they can work from a suitable environment. A home office would be the ideal setup in most cases. Furthermore the employee needs to ensure the security of the data they are accessing so that no unauthorised person can also access it accidentally for instance.

The Bottom Line

I hope this post has highlighted the possibilities that one could apply to their own work situation. Of course the initiative should not only be taken up by employers and managers but also by the employees themselves. One should assess their own situation and consider whether such a setup could work in their own situation. Many a time the solution is not necessarily a straight forward one and a combination of different setups could be the ideal solution.

KD

 

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Buy to Let, a Bubble in the making?

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house_rent

With historically low interest rates the attractiveness of the property market, and more specifically the “Buy to Let” sector has increased significantly, and this for a number of reasons:

  • Low interest rates means low yielding alternative fixed income investments such as bonds and the various types of bank accounts;
  • Low interest rates means that it is cheaper to finance the purchase of the property through a bank loan (even though technically these should be considered as business loans rather than home loans);
  • There seems to be no form of regulation on the property market with estate agencies advertising buy-to-let rates as investment products, without any form of warnings;
  • The inherent historical obsession of the local investor with the property market and the attitude that “land always appreciates” – I guess they have not heard of the 2007/09 financial crisis in which the property market was the key source of all the turmoil?!
  • The influx of foreign workers who re-locate to Malta as the demand for certain jobs that might not be fully catered for by the local work force has increased significantly. Such workers would typically be specialised IT developers who would more likely be looking to rent, at least in the first few years.
  • The increase in marital separations and divorce has also led to a demand for rental properties as proceedings can take a while to be concluded and it would involve some form of division of assets that would make it more affordable to rent a property as opposed to buying one.

First-time-Buy-to-Let

What are the risks?

Although buying a property for rental income is not a bad thing in itself, there still are risks involved in such an investment. First of all, I am always sceptical of “investments” that are not regulated. Since property investing does not fall under the definition of a financial instrument it is not regulated by the very investor-centric regulations that financial instruments are. What this means is that as an investor you are not protected and the person selling the property to you has no obligation to explain the risks involved in investing into the property market. He/she doesn’t even need to know about the risks

Another risk of buying to let is that property investing typically takes up a large portion of one’s portfolio of assets. We all know how the advice is always to spread your risk by diversifying into different investments. If a person has for example €150,000 invested into a property for rental purposes and then has €20,000 in other investments, such an investor has a high concentration risk whereby 88% of his investments are in one single investment. In the same logic that one should never buy into one single investment when considering financial instruments, one should not have such a high concentration into property.

By its very nature, property is an illiquid asset, meaning it cannot easily be converted into cash. Even if one is lucky and manages to sell his property in say 3 months, there typically will only be a promise of sale first and then 6 months to a year later the contract will be done which could be subject to other things such as development approval, approval of a bank loan and so forth. If on the other hand an investor has a Malta Government Stock (MGS) and wants to sell €1mln in one day he will get his money in 3 working days.

The hidden costs are also a major factor to keep in mind. Since property as an investment is not regulated there is no obligation to mention all the costs from beforehand:

  • The initial costs in buying a property are typically a commission if a property dealer is used (not an agency, those are normally paid by the seller). There is then a tax to be paid on purchase of a  property. There are the notary fees to be paid for research and drafting of the contract. There are then the bank fees if a loan is being taken out to finance the project.
  • The on going costs – if an agency is going to be used in order to find tenants (which is the most convenient option), then the agency would take its commission for doing its work. If you are renting out a furnished property which is typically the case you not only need insurance on the property but also insurance on the content (furniture, fixtures and fittings). If your property is an apartment part of a block you also have the annual maintenance fee to be paid (for maintenance and upkeep of the common areas). There is of course the ongoing typical maintenance costs involved in keeping any property in good form such as painting and plastering from time to time and so on.

So when you add all the costs together you quickly realise that the advertised 4-6% rental income is just a gross figure and not the real net return. This is besides the fact that like other investment income the income from renting is subject to 15% withholding tax as well.

Another risk is the interest rate risk that exists. Here we have two factors in play.

  1. One factor is the current cheap  mortgages attributable to the current low interest rates. Some “investors” who are buying property with the aim or renting it out are not factoring in the event that interest rates could start rising and with them the cost of maintaining their bank loan. As interest rates rise the monthly payment needed to pay the mortgage on the property goes up and it might very well go up to the point were many would not consider it viable to keep renting out the property. In such a situation there will be a rush to sell properties. 
  2. The other factor is when you consider the income of renting out a property (with all the hassle that brings along with it) compared to the income from a regular bond or bank deposit.  As interest rates start to rise the difference starts to narrow and could even end up reversed whereby one could get a better interest on financial instruments as opposed to rental income. This scenario would also lead to a rush to sell property and hence a fall in the price of such property.

A final risk to consider is the dependence on foreign occupants for certain sectors of the rental market. Many rental properties around the Sliema, St. Julians, Gzira and Ta’ Xbiex area are occupied by foreigners form the IT, Gaming or Financial Services sectors. These tend to be employed by foreign companies that have been attracted to Malta mainly for the advantageous tax setup for non-resident shareholders. Imagine what would happen if the EU had to pressure Malta to change such tax setups and a number of these foreign companies had to relocate elsewhere!

housing-bubble-large

Are we witnessing a bubble in the making?

When you have a situation that a lot of investors are switching to buying property in order to rent them, you quickly start to build up more supply of rental properties. This, coupled with all the reasons listed above as to why the demand for buy-to-let is going up, could end up creating a situation where property values go up in value too high, too fast. At the end, you end up with a situation where prices have to be corrected and you have a fall in the asset value.

Although I do not think that we have entered this phase yet, history teaches us that we are slowly heading in this direction. I am not talking about 20 years ago history, I am talking about a few years ago when there was a big drive for many people to knock down their house and build a number of apartments. All of a sudden ever Tom Dick and Harry became a contractor – at first it was quite a lucrative venture, eventually however the demand reached its limits and the supply outweighed it.

The Bottom Line

Like any other investment, investing into a buy-to-let property has to be taken in the context of one’s total portfolio. One should not over expose him/herself just to get into this market. On the other hand, if it is affordable, an investment into the property market is considered a good addition as it will not move in the exact same direction as other investments and can lead to more diversification.

Just like not all bonds are the same, not all shares are the same and so no, not all property is the same. Location, property size and other factors will have an effect on the rent-ability and potential saleability of any property one might consider. So advice from a professional is always recommended.

Furthermore, one should note that there are other ways of entering this market without actually buying property. There are many investments issued by property renting firms which one could invest indirectly into this market. One could also add different investments from different geographical locations and different sectors of the rental market. This could be done much cheaper and provide for much better diversification of one’s risk than actually buying property directly.

KD

 

 

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Do I need an Investment Advisor?

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Investing

Many may wonder whether they should use an investment advisor or if they should simply invest on their own through more direct channels. This post will seek to give the pros and cons of both methods and show when one method might be better than the other. The aim is to go beyond the logical advantage of consulting with a person who has more knowledge in the subject. Are there any other advantages?


First of all it must be pointed out that there are many different types of investments and all have their different characteristics with respect to how they work, what risks they have and what potential returns they could produce. As a basic rule, the less complex the product the more one can invest on his own and use what is known as an Execution Only service. Basically this means that the investor simply uses an intermediary to execute his desired deal, without the intermediary giving any financial advice on the product in question.

From a legal perspective, financial advisors are only allowed to trade on an execution only basis when dealing in what are known as non-complex instruments. These are essentially investment products that are easy to understand, such as a direct bond, a UCITS Fund (as are many bond funds), a direct share or a bank account. When dealing with more complex products such as a derivative for which the price will depend upon the price of another instrument, then execution only cannot be used. So as an investor you can be rest assured that if you are unknowingly dealing in a complex instrument your financial advisor would point this out and would need to ask you certain questions to ascertain your capability of understanding the product, your financial situation and your risk appetite/invest objectives.

Would I save money by buying direct?

Not really. In Malta the usual practice is that clients are not charged for advice given and hence there is no direct cost involved if an investor would like to speak to an advisor before investing into a product. Furthermore, should a financial advisor give advice there are certain legal obligations relating to information gathering that such advisor would be bound to. Therefore, as an investor you can be more confident that you are making the right decision by investing into a product after speaking to an advisor since by doing so you would have more investor protection.

Are there any drawbacks to receiving advice?

As just pointed out, when an advisor gives financial advice, such advisor is more duty bound towards the investor. As a result the advisor would need to ask much more questions to attain more knowledge about the investor than when simply doing an execution only transaction. Therefore a drawback would be that it would take much more time and it would involve divulging much more information to the advisor when seeking advice. Questions would need to be asked about your income, your assets, your financial obligations and liabilities (example loans and their repayments). Further questions about your past investments and your knowledge in the particular product would also need to be made. Furthermore, the advisor would need to ascertain that your financial objections are in line with the product the advisor would be recommending to you.

investement-advisor

Can I get information without getting advice?

Yes! Just because an investor has spoken to a financial advisor it does not mean that the investor has received financial advice. An advisor could have simply given information and not advice. Advice is something particular to an investor, it is based on the particular circumstances of the investor, it is a personal recommendation. If one simply asks an advisor for information on bond funds and the advisor explains 2 or 3 bond funds to the investor – that is not classified as advice. This means that the investor would not be required to give the advisor all his personal financial details, but it would also mean that the investor has less investor protection.

Therefore, as I described earlier, it all depends on the complexity of the product that the investor is seeking to invest in. If the investor simply wants to buy a Malta government bond which can easily be understood and is certain of his/her investment, then there is no need for financial advice. On the other hand, if the investor has a sum of money that he/she would like to be spread over many instruments and such investor also has different time horizons and objectives for his/her money – then at that point professional financial advice would be the best course of action. Even if the products recommended are non-complex products, the financial advisor would know how to use different products to meet different aims and cover different risks.

The Bottom Line

One has to keep in mind that his/her investments need to be considered as one whole portfolio and the overall performance of the entire portfolio should be considered. A professional investment advisor can take this holistic view only if he/she has as much knowledge as possible about the investor and hence it is important for investors seeking advice to give as much relevant information as possible to their advisor. Due to this last point it is very important to find a financial advisor that is experienced, knowledgeable, of good repute and that one trusts. Luckily there are many advisors in Malta that fit this profile. It is always important to ensure that whoever you decide to trust with your money is actually part of a licensed institution and is actually licensed himself/herself to give investment advice.

Happy Investing,

KD