KiwiSaver

As the end of the decade draws closer, independent advisers face a dual threat: further regulation and lower returns.

While considerable debate surrounds the introduction of the new rules for financial advisers, returns may prove the bigger threat to incomes. How advisers and managers navigate these dual threats will likely determine who the industry’s winners and losers will be.

Low returns are an insidious threat. Investors, and their advisers, have enjoyed a great run. Since the end of the Global Financial Crisis in March 2009, investors have enjoyed strong investment returns, both here and internationally. The NZX50 Index has risen 317%, while the global share market (MSCI ACWI Index) has returned 245%. During the same period (March 2009 to August 2018) New Zealand and international interest rates have fallen, generating capital gains for long-term bond holders.

Share and bond valuations indicate that both asset classes are now between 1.3 and 2.4 standard deviations above their long-term average. Put simply, both bonds and shares are expensive. The corollary of a decade of above average returns is that advisers will need to navigate a period of below average returns. NZ Funds, with the help of US Strategist Barry B Bannister of Stifel Nicolaus, estimate 10-year equity returns will average 2%, less than the 14% enjoyed over the last decade.

Unfortunately, while valuation is a reliable predictor of long-term returns, it is of little use in timing markets or in predicting what form returns will be delivered over the coming decade. Below average long-term returns come in two forms. Markets can either deliver weak returns though a decade-long sideways movement, creating a war of attrition during which clients slowly lose faith and seek out alternative asset classes like cash and property. Investment advisers in the United States faced just such a period between 1976 and 1982, while New Zealanders experienced a similar decade following the 1987 crash.

The alternative is that markets will continue to rally strongly, only to slump later, giving up most of or all the decade’s gains. Many advisers will remember the vintage of clients who invested in global shares during the strong rally that preceded the 2000 equity market peak and who by 2010, despite enduring a rollercoaster of volatility, had earned nothing more than the return of their capital. Little wonder that during this period advisers and managers sought to maintain client returns through alternative forms of investments – such as infrastructure, private equity, structured credit and finance company debentures – with mixed results.

In the past New Zealand equities have provided something of a safe haven. During the period  2000 to 2009 when global equities delivered an annualised loss of 0.5%, New Zealand shares outperformed most other developed countries, delivering an annualised return of 7.1%. This strong return was almost entirely due to the high dividends paid by New Zealand companies at that time.

Fortunately (or unfortunately), New Zealand shares’ outperformance has continued. From 2010 to August 2018 New Zealand shares have risen 222%, outpacing global shares by 94% over the same period. Today, New Zealand shares trade at a premium to global shares, implying the average New Zealand business will outperform the average American company. Even if this were to occur, overall valuations in both countries still imply low returns for a decade.

The upside for advisers is that financial advice will have a larger impact on long-term client wealth than over the previous decade. When New Zealand equities are compounding at 14% a year, clients can more than double their wealth every six years, and multiply it over sevenfold every 15 years. Whether clients save at 3%, 6% or 9% makes little difference. However, when returns compound at 2, 3 or 4% a more aggressive savings strategy becomes the only way to meaningfully increase clients’ wealth over the same time frame.

Further, with the return of volatility, clients are more likely to need counselling as markets crash and rebound. Similarly, ensuring clients own a well-diversified portfolio and have not become overextended in one asset class, as they are prone to do when DIY investing, will rise in importance.

Another strategy for advisers, to add value to their client base, is to plan to provide clients with a broader range of financial services. Following the introduction of a similar licensing requirement in Australia, many advisers moved from selling only one financial product to offering a “triple stack” of services, and in particular: mortgages, insurance and retirement saving advice.

Irrespective of how advisers tackle the coming decade, valuations suggest they have an important role to play. Perhaps it is fitting that the final word goes to financial engineer of the last decade, Ben Bernanke: “Smart financial planning, such as budgeting, saving for emergencies and preparing for retirement, can help households enjoy better lives while weathering financial shocks”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Lang is Chief Investment Officer at NZ Funds.
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme.

The Financial Markets Authority says the results of a recent KiwiSaver risk quiz show financial advisers have a role to play in the sector.

More than 11,000 people took the KiwiSaver quiz which was created as the FMA’s contribution to the Sorted Money Week. The quiz will remain on the FMA’s website as part of its investor resources.

From that, 17% of people who took the quiz got the question “Funds with lots of shares and property have more ups and downs than funds investing mostly in cash and bonds” wrong. The answer is true.

The question which saw the highest percentage of incorrect answers was question  six: “Choosing a low risk fund means you can stop worrying about market ups and downs.” A quarter of people who took the quiz got this question incorrect. The FMA said the answer s false.

More than nine out of ten people got the other questions right.

Simone Robbers, FMA acting director of external communications and investor capability said, “It was great to see so many people who took the quiz understood the need to continue investing through any downturn and the risk of switching to a low-risk fund when markets are choppy.

“One of the things we want people to take away from the quiz is funds with lots of shares and property like growth funds will be more volatile than investments in bonds or cash, but will tend to deliver better returns over the long-term.

“Investors should also understand that even a low-risk fund is not a no-risk fund, with the value of any investment being impacted by market movements.”

A spokesman for the FMA said it showed advisers had a role to play in behing proactive in their discussions about market movements making sure clients or members are in the right type of fund for their needs before storms hit, rather than after.

“Advisers and providers can also add real value by helping their clients or members make an objective decision if they seek help during a period of major market volatility.

“The returns data we receive shows that most AFAs advise very few clients about KiwiSaver. There is a real opportunity for them to do more to support KiwiSaver members make better decisions.”

Financial advisers who raised concerns about KiwiSaver have been told a review of default provider arrangements will consider those issues – but not until next year.

A group of AFAs, headed by John Cliffe, wrote to Commerce Minister Kris Faafoi, Finance Minister Grant Robertson, Reserve Bank Governor Adrian Orr and FMA chief executive Rob Everett.

The advisers want all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

They said banks had been the big winners out of the retirement savings scheme.

In response, Faafoi said he agreed KiwiSaver was essential to improve New Zealanders’ wellbeing in retirement and it was crucial to get the settings right.

“Next year the Minister of Finance and I will start a review of the default provider arrangements, recognising that the current appointments expire in 2012. The review will include consideration of the default provider settings and will enable us to consider many aspects, including the points you have raised.”

NZ First’s KiwiFund Bill, which would have had a working group set up to investigate a government-owned and run KiwiSaver provider, has been withdrawn.

But its backer, Fletcher Tabuteau, will be involved in the review of default funds, which may indicate the idea has not been as completely abandoned as some have suggested.

Cliffe said he expected the review to be the subject of greater focus over the coming year.

NZ Funds has launched a new pension transfer service with a difference: its nationwide UK pension transfer team are offering to do the transfer advice and processing free of charge, before passing the client back to their adviser to be advised within the context of their usual ongoing advice relationship.

“Just over a year ago we identified two problems in the pension transfer market. First, while almost all advisers have clients with international investments in their client base, the process of advising on UK pension transfers is so complicated and tedious, their advisers were often unable to help those clients,” NZ Funds Principal David van Schaardenburg says.

“Second, when clients were transferred there were a limited number of available investment solutions, many being based on either antiquated schemes or schemes managed by financial advisers, not licensed fund managers. This has come about in part due to the UK’s HMRC deregistering KiwiSaver schemes as QROPs in 2015. A number of the schemes still registered as QROPs also charge significant front-end fees and exit fees. Furthermore some profit from taking hefty currency margins when converting client funds from Sterling to Kiwi. It feels a bit like the fund industry was in the 80’s. Some who do offer a modern Superannuation Scheme to transfer to do not provide a transfer service, leaving it up to the adviser to navigate the complexities and administration of the pension transfer process.”

With the launch of NZ Funds’ UK Pension Transfer Service, to complement the modern cost-effective Superannuation Scheme it launched a year ago, the manager has overcome both points of pain. Advisers can now pass their client on to one of NZ Funds pension transfer team, who will process the transfer (free of charge) and then pass the client back to the adviser. The adviser can then set their remuneration for advising the clients in the usual way such as evaluating client risk profile, their optimal asset allocation, sustainable savings and withdrawal rates plus navigating changes in clients’ financial objectives or circumstances.

Funds transferred from UK pensions are managed through the NZ Funds Managed Superannuation Scheme which now has a strong one-year investment track record. The Growth Strategy delivered a 14.7% return over the last 12 months, and 16.4% since inception as at 31 July 2018¹. The Scheme also has a choice between adviser directed asset allocation or automated annual lifecycle rebalancing. The lifecycle technology is based on the same proven process used by the NZ Funds KiwiSaver Scheme.

“Feedback to date has been very encouraging. In addition to NZ Funds’ seven nationwide offices, a number of independent advisers have already signed up to the service with several dealer groups now undertaking due diligence on our transfer service,” van Schaardenburg says.

“What is more exciting in our view is that the service has been able to add value from day one to complement the other important international investment transfer service we provide to advisers and their clients being transfers from Australian Superannuation Schemes.”

A recent NZ Herald story on 2 August 2018; “Sneaky life insurance fees catches out Kiwi woman…” highlighted an insidious problem with many Australian Superannuation programs. In Australia, life insurance is often built into the superannuation schemes. You need to opt out to not have it. This type of group insurance has a number of benefits such as lower premiums and in some cases the fact that it will cover pre-existing conditions. However, the insurance coverage will often end when you are no longer an Australian resident. Despite this we’ve found Super providers who have continued to charge clients the insurance premiums even after being advised of member relocation to New Zealand. Through our Australian Super Transfer Service, we have been able to negotiate a refund of premiums, backdated to when the client left Australia.

Many New Zealanders (and recent immigrants) put off the decision to transfer. After all, retirement is still years away and the money should snowball until then. Or so the thinking goes. Sadly, when it comes to UK pension transfers the cost of procrastination can be prohibitive. After an initial four year exemption period, returning New Zealanders and immigrants accrue a New Zealand tax liability each year just under 5% of the final pension transfer value. By way of example, a person who puts off transferring for 15 years from return/arrival could lose up to 16%² of the value of their savings in tax.

By educating accountants, lawyers and financial advisers throughout the country on how to transfer cost effectively, and by eliminating these points of pain, we are seeing a rising flow of clients reducing or eliminating costs and taxes that might otherwise have accrued. “It is great to be delivering value to advisers and their clients and getting two sets of positive feedback” van Schaardenburg says. “It really is a case of helping New Zealanders (including the newer ones) to make better financial decisions”.

 

¹ Growth Strategy inception date, 25 January 2017. Returns are post fees, pre-tax. Past performance is no indicator of future performance.

² Assumes GBP/NZD exchange rate 0.52, the Schedule method as the calculation option, the client has other income over $70,000 in the assessable tax year.