KiwiSaver

KiwiSaver may have played a key part in saving an ailing advice industry, claims one industry commentator. But another says it may give advisers false hope of big money in the future.

Ten years on from the introduction of the scheme, most industry commentators said it had been a positive development for financial advisers.

David Boyle, who is now at the Commission for Financial Capability but was working as head of KiwiSaver distribution at ING when the scheme launched, said his team spent a lot of time upskilling advisers at the beginning.

If the retirement savings scheme had not entered the market when it had, the outlook for advisers could have been quite different, he said.

“Before KiwiSaver managed funds were looking pretty dire. We went through bad times through the credit crunch but then KiwiSaver came on and it saved the managed fund industry. It was a door for advisers to build a customer base to get them started.”

He said there was now a group of advisers who had started up relationships with employers and taken on their employees as clients. They were able to build a good core business from that work, he said.

“A good number of advisers looked at is as a long-term opportunity and a good way to get started.”

He said it was true that most advisers did not make much money from advising on the scheme yet.

But he said as balances grew and more people reached the stage where they wanted to get an income from it, there would be more need for advice. It was a good “door-opener” to introduce people to the concept of contributing small amounts over time to a growing savings pot, he said.

Fred Dodds, chief executive of the IFA, agreed. “I do think KiwiSaver has been good for those advisers who have been prepared to do the work.”

He said his first encounter with KiwiSaver was while working with Tower, which was an early default provider.

He said whether advisers were working in insurance or investment, it made sense to have KiwiSaver as part of the conversation.

“Why on earth would you not have them as a KiwiSaver client? It’s a locked-in financial services product that will live with people for decades. Forget the trail on the money, that might vanish as years go down the track, but it’s one of the main contact points [to check in regularly with clients] how good is that?”

Rod Severn, chief executive of the PAA, agreed KiwiSaver was rewarding to advisers as part of an overall proposition.  

He said every adviser who was capable of offering financial advice on KiwiSaver should be able to do so.

But adviser Liz Koh was less sure. She said a trail commission of 0.2% would not pay much to the advisers who dealt with it, and it required a lot of upfront work to set people up with the right fund.

She said advisers who were hoping to put in hard work now for a payoff in future might be disappointed. Many people opted to leave their money in KiwiSaver when they retired, she said.

“There are some advisers who say ‘take your money out and give it to me to invest’, so they can make fees out of them but I have an ethical problem with that. Some people, especially if their balances are small, are better to leave it in KiwiSaver.”

Financial advisers play an important role in helping people on lower incomes navigate retirement savings, AMP’s general manager in New Zealand says.

Blair Vernon said KiwiSaver could be improved to better cater for those who were not high earners.

He said he regularly spoke to people earning about $50,000 or less a year, who were facing enough of a financial challenge that it was not feasible to save for retirement. 

He said, while it was easy for the financial services sector to say that it should be possible for everyone to save 3% of their incomes, in some cases that was a significant amount and not the right decision to make.

Vernon said it was worth considering whether those earners should be given the option of saving 1% or 2% of their income, too.

“We need to be realistic about that.”

He said thought should also be given to whether the member tax credit should be reduced for higher-income earners, to allow more of that incentive money to be given to low-income KiwiSaver members.  Each KiwiSaver member can receive up to $521 a year from the Government if they contribute $1042. The Government used to match it dollar-for-dollar.

“The changes made to water down the member tax credit have a much bigger impact on people with that level of earning,” Vernon said.

He said sharing out the incentives in favour of low-income earners would make KiwiSaver more compelling for those earning less and would have an impact on their long-term outcomes.

It would probably be missed less by those earning more, he said.

“If you’re earning more than $2000 a week and you didn’t get that $521 form the Government but you knew it was going to someone on a more moderate income, would that be a tragedy?”

He said there was also a challenge among middle-income earners who could afford to save but chose not to because they prioritised other spending. “They’re making a conscious choice to consumer today veruss looking after tomorrow. Sometimes they’re not thinking all that through.”

That was where advisers could help, he said.

“Advice is code for a bit of coaching. Sometime you need that to get perspective.”

He said advisers could help not just with the technicalities of KiwiSaver but helping people understand what they were doing with their money and what they could do better.

Vernon said financial capability was a sliding scale and some people would be more capable while others were less, but they would all benefit from coaching.  “Advice and the role of advisers is fundamental.”

Access to financial advice is a key KiwiSaver benefit that will help New Zealanders achieve the best possible retirement outcome, Booster’s joint chief executive says, as a new provider takes an aggressive swing at the big guys.

New low-fee KiwiSaver provider Simplicity has launched a calculator on its website that is designed to allow members of other KiwiSaver schemes to check how much they are paying in fees.

“Many KiwiSaver managers obscure the fees they charge, leaving their members thinking the only cost they pay is an annual membership or administration fee. That’s often less than 20% of the real cost,” founder Sam Stubbs said.

He was angry that some providers had chosen to wait another year to start disclosing their fees in dollar terms. He said default providers in particular had an obligation to be open about what they charged.

Providers have until 2018 to meet the new disclosure requirements. Some had argued they needed time to make the required system changes.

Stubbs said that was disappointing. “It’s obfuscation at best and hiding fees at worst.”

But David Beattie, chief investment officer and joint chief executive at Booster, said Simplicity was putting too much emphasis on fees.

He said KiwiSaver should not be seen as another commodity product to be bought for the lowest price.

Each provider would have its point of difference and the onus was on them to show the value they offered members, he said.

“Our value proposition is based around giving people access to advice… New Zealand is poorly served in terms of access to advice.”

He said nearly half Booster’s fee went to advisers to support ongoing service of their clients.

Someone with $20,000 in Booster KiwiSaver might pay $100 a year for access to an adviser whenever they needed one, he said. “There is no way they are going to pay for that directly if it was removed from the equation.”

He said, even if clients were willing to pay, what advisers could offer for $100 would be limited, and roboadvice “can only go so far. Who will hold their hand when the next downturn happens?”

But having an adviser on hand meant KiwiSaver members had someone to turn to when the market hit volatility or when they had concerns about their investment. “That’s when advisers really come into their own. It’s frustrating to see such a huge emphasis on fees.”

He said members should focus on comparing their net result after fees were removed

The Government has missed a chance to improve New Zealanders’ retirement investment outcomes, Morningstar research shows.

Morningstar has released a new report Mind the Gap, which shows the difference in individual investors’ outcomes compared to the asset class as a whole.

It calculates fund returns using asset-weighted calculations as opposed to time-weighted returns and takes into account all monthly inflows and redemptions and their compounding effects over time, as well as measuring the experience of a typical dollar invested.

Over the 10 years ended 2016, the average US investor in diversified equity funds had a 4.36% return, but the average diversified equity fund returned 5.15%. In bonds, the average investor received a 2.99% return, versus 3.72% for the average bond fund.

The report found investors with automatic investment plans did better than their peers with more investment freedom, wherever they were in the world.

Morningstar said that was because people tended to buy and sell at the wrong time.

Director of manager research ratings, Asia-Pacific, Chris Douglas, said the same findings could be expected to apply to New Zealand investors, too.

“For investors in regular contribution super schemes versus open-ended funds, whether they invest when they want to, there is a better experience when you are investing in systematic processes because it’s regular saving and you’re not trying to time the market. It takes all the emotion out of the exercise.”

Douglas took issue with the Government’s decision not to follow the Retirement Commissioner’s suggestion to increase KiwiSaver minimum contribution rates. 

Diane Maxwell wanted the minimum employer and employee contribution rate increased from 3% to 4% and optional levels up to 10% added.

In response, Commerce Minister Jacqui Dean said there was limited evidence this would raise savings rates.

But Douglas disagreed. He said it would have been a good first step and was a missed opportunity to give investors protection from the behavioural factors that blunted returns.

Beyond that, he said people should choose an investment strategy and follow it in a disciplined way, without getting caught up in short-term market movements.

Another report analysed the transaction behaviour and investment outcomes of a million Australian Sunsuper members between 2012 and 2016.

Members in the default Sunsuper lifecycle investment option had returns of about 8.3%.

There was a much wider range of returns in the funds invested in diversified balanced strategies and self-directed investments.

In the self-directed group, in which members choose up to 10 individual options from a list of 21 diversified and single-class options, the best return over the period was 8.4%.

Downside returns for the lifecycle group were 8.1% but dropped to 5.9% and 5.1%, respectively, for the diversified balanced and self-directed options.

Paul Murphy, senior manager superannuation policy at Vanguard Australia, told Morningstar the findings were a bit surprising but a strong endorsement of the default strategy and choice architecture of the MySuper framework.

He said very few people had extreme allocations such as 100% cash or 100% equities. “This contrasts with the findings in the latest iteration of the US study, where around 6% held concentrated asset exposures–though this has been trending down significantly, falling from 20% over the last decade.”