New Zealand deserves a level (default) playing field

NZ Funds recently launched a free COVID-19 KiwiSaver hotline supported by independent advisers throughout the country. The phone line is open to clients of any KiwiSaver provider and promises no sales or products, just generic KiwiSaver advice. Since its launch, the phone line has been inundated with calls from anxious investors whose savings are with large state-appointed default managers (whether or not their savings are in default funds). This raises the question: How did New Zealand end up with so many KiwiSaver  members “owned” by so few managers; and is that model consistent with good customer outcomes?

One of the features of KiwiSaver, that helped get it across the line in Parliament, was that it would not be compulsory. The compromise was, and still is, that new employees are invested by default and need to opt out. While a compulsory savings regime – like most of  the Western world has – would have put New Zealand in a better position today, the opt-out scheme was nonetheless a success in that a larger number of people chose to remain invested. 

As New Zealand was decades late in establishing a government-sponsored superannuation savings regime, financial literacy in New Zealand was low. To safeguard millions of first time investors who did not actively select a manager and fund, the state placed their  investments in a default fund. Default funds were required to own at least 80% in cash and bonds, and up to 20% in growth assets, an excellent starting point for first time investors.

The Government selected six managers in 2006 to manage default funds for a period of seven years. These were: ASB, AMP, ING, Mercer, National Mutual (AXA) and Tower. In total, two Australian-owned financial conglomerates, one American, one Dutch and one French. And only one New Zealand-owned company, Tower.

The default providers were selected for their ability to meet a number of criteria including security and organisational credibility, organisational capability, proposed design of their default KiwiSaver scheme, administration capability, fee levels and investment capability.

While admirable, these sentiments and criteria may have missed the mark. ING was sold to ANZ, a transaction which coincided with large losses in its structured credit funds. AXA packed up shop and returned to France, selling its business to AMP NZ (which, following an unreserved apology to the regulator for failures in regulatory disclosure by AMP Australia, may now be for sale itself). Meanwhile, Tower decided funds management was no longer a core business, and sold to Fisher Funds, which in turn was sold to TSB Bank.

Since then, the default providers have been expanded to include two more large Australian-owned banks (BNZ and Westpac) and New Zealand’s own Kiwibank. Funds management is not the primary driver of any of these companies’ bottom line. Grosvenor is the only default provider that is a New Zealand-owned funds management specialist. 

KiwiSaver managers have to meet a high standard of governance (determined by the FMA) to become a Managed Investment Scheme licence holder. Despite this, only six – and now nine – of all 23 licensed KiwiSaver managers are able to be default managers. It is  time that all licensed managers be given the opportunity but not the obligation to be default providers.

The FMA’s purpose is to promote a fair, efficient and transparent market that results in good customer outcomes. State-determined monopolies are rarely associated with good long-term client outcomes. MBIE has sought feedback in preparing for a review of New  Zealand’s default system. If a manager is good enough to be a licensed KiwiSaver manager, then it should be good enough to manage default funds, if it wishes to. This would give other deserving New Zealand-owned managers like: Summer, Simplicity, Generate, Juno, Milford and NZ Funds, the opportunity to do so. It would also help level the KiwiSaver playing field and go a long way toward achieving better customer outcomes.

 

Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature.

Is regulated financial advice of value?

In 1989, to keep me out of trouble, my parents sent me to school in Berlin. To their horror, shortly after I arrived, the Berlin Wall fell. One of my more vivid memories is of visiting my first East German supermarket with only one brand of anything on the shelf. One brand of baked beans, one brand of soap, no shampoo.

One of the great things about a free market, is choice.

The choice of organic beans, budget beans, New Zealand beans or imported beans. Of course no one wants to eat poisoned beans, or expired beans, so rules and regulation are essential. The system breaks down when the choice and preferences of any one group are imposed on many.

Many New Zealanders do not realise that they have a choice between two fundamentally different types of KiwiSaver schemes: those that come with advice and those that do not. In general, those that provide more charge more and those that provide less, well, charge less.

Who can be an adviser?

Anyone can call themselves an adviser, but when it comes to giving KiwiSaver advice you must be either a Registered Financial Adviser (RFA) or an Authorised Financial Adviser (AFA). Both require training and are subject to regulatory oversight. RFAs may give class advice, akin to general information about a product, while AFAs are able to take a client’s personal circumstances into account and customise their recommendations.

What constitutes advice?

At one end of the spectrum advice helps educate investors about the benefits of KiwiSaver, such as how to access the annual member tax credit of $521 or how to take a contribution holiday. All schemes provide this information, but how it is delivered varies widely from scheme to scheme.

Moving along the advice spectrum at one end, is advice from RFAs which can help match clients with an investment which is appropriate to their age and stage. At the other end, AFAs alone are able to help clients tackle more challenging questions such as: What are the options for my retirement? How much of that will be met through home equity and how much through KiwiSaver and what contribution rate is therefore required?

What is the value of advice?

Unfortunately, due to the relatively late adoption of a universal retirement savings scheme, research on the benefits of advice in New Zealand is scarce. However, in more mature markets such as the United States there is a wealth of knowledge based on over a generation of experience in saving for retirement.

These studies have found, amongst other things, that unadvised clients are likely to be overinvested in a single asset (undiversified) or not invested in growth assets at all (non-participating) (Calvet; Campbell and Sodini, 2007).

Advised clients, on the other hand, earn higher returns after fees mainly because their asset allocation is better over the investment lifetime (Foerster, Linnainmaa, Melzer, Previtero, 2014).

As a consequence, research shows financially planned clients accumulate nearly 250% more retirement savings than those without a financial plan (“The Future of Retirement” HSBC 2011). Little wonder then that a survey in 2014 by IRI, which was also written up in Forbes Magazine on 28 August 2014, noted that baby boomers with a financial adviser are twice as likely to be confident about their retirement than those without an adviser.

How are advisers remunerated?

10 of the 27 KiwiSaver schemes in New Zealand (37%), are structured for advisers to be able to work with scheme members, either through an upfront planning payment, or through an annual payment, or both.

In most cases the cost of advice is funded by the manager out of its management revenues. Through facilitating advice to accompany their product, these schemes offer a fundamentally different service.

There is of course no value in clients paying for something they do not want, or worse, want but do not receive. Unfortunately there are examples of both in our small market. It would however be helpful for both the Commission for Financial Capability and FMA to distinguish between “advised” and “non-advised” schemes when categorising the options available for New Zealanders in online tools like Sorted and the “KiwiSaver Tracker”.