They are hard to resist aren't they - all those offers of 8%, 9%, 10% and more per annum! Our newspapers are full of ads from finance companies offering you high interest on your savings. And maybe some of you reading this article have taken the plunge and have lump sums locked away with them. They certainly are great rates, but how safe is your money if it's not in a bank?
No-one can say for sure, but ask those who lost their savings when Provincial Finance or National Finance 2000 failed recently, and they'll tell you what they think. I don't think it will make for a happy conversation.
With all the recent publicity over failed finance companies, you may be starting to look more closely at the safety and credit rating of whatever type of organisation you have your savings with. You certainly should be.
A credit rating - which is essentially a credit check on a financial institution - is a good idea, but for them to work effectively there are numerous questions to be asked and extra information you need to seek out. Two of the most important are: what do rating systems actually mean; and, how do you know what ratings or rankings to trust?
In the banking industry, independent, international rating agencies Standard and Poor's and Moody's set the benchmark. To be rated by these agencies, financial institutions must meet strict operational and financial criteria. Few finance companies have achieved this.
Rabobank Group - which includes RaboPlus - is the only banking group in New Zealand to have a AAA credit rating from Standard & Poor's and Moody's. This is the highest available and reflects the bank's financial security and ability to keep your money safe.
We're extremely proud of our AAA Standard and Poor's credit rating, and wear that badge with confidence.
The Rabobank Group has also been rated twice (in 2004 and 2005) by Global Finance Magazine as one of the world's safest banks.
Personally, I like the security of knowing that the cash portion of my investment portfolio is in the safest of hands with RaboPlus. It's even more satisfying knowing I get market-leading on-call and term deposit rates alongside that security meaning I don't have to sacrifice returns for risk.
In New Zealand there are a few ratings agencies, as well as one or two industry commentators, who apply their own ratings and rankings to both banks and finance companies. Don't let these give you a false sense of security. The difficulty with these is that investors need to read all the information about them to understand what they are measuring and how. Often this is not easily available or comparable.
I firmly believe it would be better if banks and finance companies were all independently rated against the same criteria and had those ratings represented the same way.
Only then would investors be able to easily compare them and really see the difference between the financial security of a bank and a finance company.
And only then would you get a feel for how safe your money is with finance companies. Unfortunately very few meet the standards that banks do and this would be clearly visible.
Industry professionals also believe banks and finance companies should be commonly and independently rated. Andrew Dinsdale, Chairman of KPMG Banking Group, said in his latest Financial Institutions Performance Survey: "We strongly support the use of an internationally recognised and accepted credit rating standard, for example, Standard & Poor's or Moody's. That way, there can be no doubt about what each credit rating means, and comparison of credit ratings between financial institutions will be much easier. Investors can then judge for themselves the level of security offered and the quality attaching to their investments.*" *Source: KPMG Financial Institutions Performance Survey 2006
I urge New Zealand savers to heed his advice when making investment decisions - and lessen the risk of your hard-earned cash disappearing.
With Standard and Poor's the rating scale starts at AAA and moves down to D. Anything above BBB- is considered investment grade and from BB+ downwards is speculative. So while a B+ mark in your varsity paper on finance is a good pass, it isn't such a flash S&P rating.
As previously mentioned, other ratings systems created by local market commentators have different meanings behind them. A finance company receiving a AAA rating from a local rater, is not necessarily comparable to a bank that has been awarded a AAA by Standard and Poors'.
Whatever rating system you are looking at, it is important to understand what that rating is telling you and I just don't believe this is currently easy to do.
Generally with rating scales there is a cut off point where ratings above a certain level are considered investment grade. Anything below this point is colloquially known as "junk", sub-investment grade or speculative.
Buyer beware is my recommendation. Make sure you investigate the finance company that's offering you 10%, and also find out who gave it a rating or ranking, and on what basis. If it looks too good to be true, it probably is.
RaboPlus launched in New Zealand in February 2006 and offers market leading on-call and term deposit rates, no transaction fees, and importantly, no strings attached.
You won't see a list of conditions next to our Savings Account or Term Deposit interest rates. No 'up to's', no 'conditions', no 'if you do this you get that, and if you don't do that, you get this'.
RaboPlus has been a roaring success in New Zealand. In just six months, the newest entrant into the New Zealand online banking arena has attracted almost half a billion dollars in deposits. It's where all the smart money is going.
RaboPlus has received an outstanding response from New Zealand savers and investors. At a time when there is so much caution around online banking and security, we are thrilled to see the RaboPlus offering is obviously trusted and popular.
RaboPlus also has the highest standards for online security.
Maarten Kleintjes, National Manager of the NZ Police e-crime Laboratory says: "RaboPlus' online security measures are amongst the best available today.
"We are encouraged that a new entrant to New Zealand's banking scene is raising the bar on the importance of ensuring that access to the account and every transaction a customer makes is secure. After all, at stake here is often someone's lifelong savings, and banks need to provide the best security possible at all times."