Financial markets, products and economic environment
What the exam tests
This domain tests financial literacy: asset classes and products, how the New Zealand economy and interest rates affect them, and the risks a recommendation must address.
Core rules
- Asset classes: cash, fixed interest, equities, property and alternatives. Expected return rises with risk, but diversification reduces unsystematic risk; correlation matters.
- Key risks: market/volatility, credit, liquidity, inflation, currency, interest-rate and concentration risk. Volatility is not the same as permanent loss.
- NZ products include KiwiSaver (default and selected schemes, conservative to aggressive funds), managed funds, direct shares, bonds, term deposits, mortgages (fixed, floating, offset), life, trauma, TPD, income protection and health insurance.
- The RBNZ sets the OCR, reviewing it about seven times a year. OCR changes flow into wholesale rates, term deposit and mortgage rates, and the NZD. Bond prices move inversely to yields. Inflation erodes real returns: real return is approximately nominal return minus inflation.
- The business cycle, unemployment, migration, commodity prices and global markets all feed into advice conversations.
Worked example
A client has $50,000 in a one-year term deposit maturing in a month. The adviser expects the OCR to fall. Falling rates would likely reduce term deposit reinvestment rates but support existing bond prices; a longer-duration bond fund carries more price risk if rates rise instead. The adviser checks the client's three-year horizon and need for access, then discusses a ladder of maturities rather than forecasting a single rate path. The reasoning, not the forecast, is what the file records.
Traps
Saying "high risk means high return" as a guarantee; ignoring inflation; using past performance as a forecast; confusing KiwiSaver fund names; assuming the OCR directly sets mortgage rates; forgetting currency risk on offshore investments.