KiwiSaver

Investors need a better way of understanding how risky a KiwiSaver fund really is, one adviser says.

Jon-Paul Hale, of Willowgrove Consulting, said the FMA's KiwiSaver Tracker was potentially confusing for users because the way funds are assessed meant that balanced options could sometimes be placed in the same basket as growth or conservative funds.

When he used the tool recently, two bank growth KiwiSaver funds displayed among a comparison of balanced funds.

The FMA said it was because the funds were reported on based on their actual asset allocation, not the target allocation.

Hale said that could mean an investor would choose such a fund thinking it was less risky than other growth funds, then find it returned to its target allocation and became more volatile than expected.

But a spokesman for the FMA said it was comfortable with the approach, and it was disclosed appropriately.

“When we launched the Tracker, we explicitly stated that ‘The information in the KiwiSaver tracker about fees and return is an important factor in considering your investment, but it is not sufficient information to make an investment decision’.

“The FMA is satisfied that the tool does what it was designed to do, which is to complement the other independent sources of KiwiSaver analysis and allow investors to look carefully at who is managing their funds and what the results and costs are.”

Aaron Gilbert, head of the finance department at AUT, said strategically altering asset allocations was an important tool for chasing returns in active management.

“Where this becomes a problem is when you have arbitrary decisions about what is balanced and growth, for instance. You need some threshold, but you will get edge cases where small changes could see them move between categories."

Sometimes a balanced fund and a growth fund could have more similar risk profiles than two growth funds, he said.

"The categories themselves are broad, two growth funds could have different amounts of risk associated with them but both be growth funds.

"There is an issue with using such crude tools as risk types, especially when asset allocations change, either actively by choice or passively due to different returns from different assets.  It is an inherent weakness of that way of categorising, but short of getting people to understand more sophisticated measures it is what it is."

An Auckland AFA who launched a roboadvice offer this year has amassed $1 million under management.

Clive Fernandes, who owns and runs National Capital, was given a robo exemption at the end of January.

His roboadvice platform offers KiwiSaver advice, with a small group of providers.

Schemes are shortlisted using the FundSource performance tables and FundSource star ratings.

National Capital then uses Morningstar's quarterly KiwiSaver surveys to determine if the fees charged are reasonable. The highest-rated fund is then recommended.

Fernandes said $1m was a “small but significant milestone” and most of it had happened in the last month or so.

“Based on that, I see good growth going forward for the rest of the year. We are of course, still in the stage of learning and refining the model – and so have been throttling marketing efforts and growth intentionally.

"As a company, we are growing and should have our first few employees and interns hired in the next few months."

He said most clients were individuals approaching National Capital directly.

“At the current moment our business model is B2C, but once we have built our reputation and brand, we may offer our robo-advice platform to other advisers.”

Fernandes said it would not be long before every financial advice firm had to have digital capability.

“Of course, there will always be the 1% of advisories serving a diminishing cohort of clients who don't want a bar of digital and still want to drive for an hour to have a cup of tea with their adviser, but for economic reasons at least, it makes sense to look to the future.”

Advisers would have to differentiate themselves in other ways, he said, such as by mastering behavioural finance to boost investor returns by stopping clients making inappropriate decisions.

“ Delving into the study of behavioural finance can help advisers gain greater lifetime returns for their clients and build a strong relationship with them. It will also help the behaviourally focused adviser to have a point of difference, not only from the coming roboadvice threat, but also the other advisers in the market.”

 

KiwiSaver could be part of the solution to provide financial advice to older New Zealanders who do not have large amounts of money to invest, adviser Martin Hawes says.

Hawes is also chair of the investment committee of the Forsyth Barr KiwiSaver scheme, Summer, and is on the board of variable annuity provider Lifetime.

He said it was hard for people “in the middle”, who might have $100,000 to $200,000 saved, to get personalised advice.

Many financial advisers found it hard to achieve diversification with smaller sums and those people tended to default to invest in term deposits that proved insufficient.

Suggesting that people read up on the principles of investment was no substitute, he said, because while it was possible to master the concepts most people found it much more difficult to apply it to their own situations.

But he said, now that the law is being changed to allow people over 65 to join KiwiSaver and move between funds, it could provide an option.

He said it would be a “readymade, attractively priced” fund for retirees that would be perfectly liquid because they could draw on their money whenever they needed to.

Many providers allow for a set amount of withdrawal on a regular basis.

“I think that’s going to work really well for people,” Hawes said.

He said it would be particularly efficient for KiwiSaver schemes that had financial advisers working alongside.

“KiwiSaver may be a pretty good solution for these people.”

Hawes said there was a huge need for financial advisers. Many Baby Boomers were finding, now matter how hard they found it to grow their wealth in the first place, using that wealth to generate a stream of sustainable income was the hardest thing they had encountered in the financial world.

Hawes said it was likely that the new advice environment would mean the end of “one-man band” advice firms. But he said that would not be an issue so long as independent advisers were able to band together in small groups to continue to offer a service.

“We are thrilled that from next year all KiwiSaver providers will be required to join NZ Funds in projecting member balances at retirement”, says Geoff Motion. NZ Funds first included retirement savings projections in 2018.

“When we entered the KiwiSaver market in 2011, we drew on our then twenty-year heritage of managing New Zealanders wealth to shape the service we offered. We initially called it a service, because we have learned the hard way that sharp products rarely deliver clients what they hope”, says Motion.

Motion points to the fact that NZ Funds KiwiSaver Scheme member balances are now 1.5x the national average.* “To the best of our ability, as it’s a difficult thing to attribute properly, we do not think this isbecause our clients are wealthier. Neither is it due to returns, while clients have earned above average returns after fees by our assessment, that has made very little difference.

The biggest factor says Motion is that as 96% of NZ Funds KiwiSaver Scheme members are working with a financial adviser, they have been encouraged to save at higher than minimal rates and feel connected to their KiwiSaver.

The concept of projecting retirement savings several years ago is a dumbed down version of what every client who joins the NZ Funds KiwiSaver Scheme receives in financial planning technology. “Interestingly, when we first provided statements with retirement savings projections to members it was well received, as it reminded them why they should continue contributing, and in fact consider raising their contribution rates, so we think the new regulations will be good for everyone in the industry”.

NZ Funds has, what it believes is market-leading technology here, enabling its members to increase their contribution rates in a paperless, purely digital, way.

 

* NZ Funds KiwiSaver Scheme average member balance $29,791 KiwiSaver industry average member balance $19,246. Source: Workplace Savings New Zealand 31 March 2019.