KiwiSaver

Fund managers charging high fees for their products have kept a lid on what advisers can earn, Simplicity’s managing director said as the provider launched its first non-KiwiSaver funds.

Simplicity has unveiled plans to branch out into the wider investment funds sector.

Its KiwiSaver scheme, launched last year, has $100 million under management.

The funds will operate on the same basis. Each fund will have 7000 investments in 23 countries and be fully hedged to the New Zealand dollar.

Overseas investments will be managed by Vanguard.  There will be conservative, balanced and growth options.

Fees are 0.31% plus $30 a year for each fund. Stubbs said that was between 50% and 75% cheaper than the average diversified investment fund in the market.

“A Kiwi with $50,000 invested in our growth fund over 10 years could be more than $10,000 better off than the average fund, all other things being equal,” he said.

“Fees for KiwiSaver funds are already way too high, and managed investment schemes are even worse. Some are just outrageous, reflecting old ways of managing money and sales tactics which belong in the last century,” he said.

“For too long fund managers have taken too much of a slice and advisers too little.”

He said advisers could hold Simplicity up as an example when talking to other managers.

“They could go to their existing suppliers and say ‘what are you charging more than this for, this is what it can be provided for’. It will be a useful low benchmark and a useful product for clients.”

Simplicity will not take direct investments from non-individuals, so any trusts or companies that want to invest will need to do so through an adviser via a wrap platform.

He said there could be interest from the small institutional market. “It’s very adviser-friendly. Advisers who want to get a really low-cost manager and add their advice on top – because that’s what they are experts at – will find it easier. And the number is less eye-watering for the client.

“The problem advisers have had is that managers have been taking too much of the fee but this is starting to change that.”

Stubbs said it was possible to offer low fees because Simplicity did not pay trail commissions or run an expensive head office.  He said the breakeven for Simplicity’s KiwiSaver was between $300m and $500m FUM.

Stubbs said one in five of Simplicity’s KiwiSaver members had asked for an option that allowed them to withdraw money at any time.

The minimum investment will be $10,000 and the funds open for deposits on April 3.

Former deputy prime minister and finance minister Sir Michael Cullen says the need for an annuity provider to help KiwiSaver members manage their lump sums on retirement is another sign of the scheme’s success.

He recently joined the board of the Retirement Income Group (RIG).

RIG manages New Zealand’s only variable annuity, Lifetime Retirement Income.

Sir Michael said annuity providers had not made much cut-through in New Zealand and the products that had been available to New Zealanders were not seen as attractive.

But he said as the KiwiSaver balances built up it raised issues about what options would be available to members at retirement. “Being capital rich in retirement is not much use if you are not able to live off it,” he said.

He said Lifetime seemed to offer a viable option for the long-term.

Sir Michael said, when KiwiSaver was first developed, it had not been predicted that such large numbers of New Zealanders would join.

“The success of KiwiSaver has made these second or third-order issues more important. [Another is] are we bringing fees down quickly enough.”

New Zealand was well positioned for an income product, he said.

He said Australia was pondering the problem of a retirement benefit that was heavily income and asset-tested and a compulsory savings scheme had was lump sum orientated, which gave people the incentive to blow their lump sums so they could qualify for the pension.

“New Zealand Super is not asset tested so we don’t face that incentive for misaligned behaviour,” he said.

KiwiSaver was not the only scheme that was likely to deliver lump sums that would need to be manged, he said.

People who had joined the Government Superannuation Fund in the 1980s would start to retire over the next decades and could need help managing that money, he said.

Sir Michael said Lifetime was a good option because people who withdrew their money early could still access any remaining capital without penalty, and a guarantee would cover longevity risk.

KiwiSaver provider Simplicity’s managing director Sam Stubbs says his funds’ first reported performance data are like “winning a bronze medal in your first event” despite a poor showing from its conservative fund.

Morningstar has released its KiwiSaver survey for the December quarter.

Kiwi Wealth’s growth fund was a standout performer, thanks in part to its allocation to international assets.

But the new, low-fee market entrant also had an early win. It was the best performing growth fund in the quarter, returning 1.9% after fees and before tax.

The Kiwi Wealth KiwiSaver Growth, which Morningstar classifies as a multi-sector aggressive fund, returned 4.35% over the same period.

Stubbs said the result should surprise some of Simplicity’s actively managed competitors.

“They are supposed to outperform the market and index tracking funds like ours, by picking winners. In most cases this hasn’t happened. This is particularly embarrassing in the last quarter, when there was lots of volatility, and markets that should be favourable to stock pickers.”

Melville Jessup Weaver also produced data, which put Simplicity in the middle of the pack for balanced funds, second-worst – to Fisher Funds – among the conservative and third-highest among the growth funds.

MJW has a bigger group of funds in its growth classification than Morningstar’s and ranks Kiwi Wealth in the same category.

Stubbs said the growth fund was Simplicity’s “flagship” product, and 75% of its members were in it.

He said the poor performance of bonds had dragged down the conservative fund.

“Overall the business is going very well. After five months we have over 3200 members, $85,000,000 funds under management, are saving members $750,000 in fees annually, and are donating $35,000 to charity.”

Over the five years to the end of 2016, Morningstar found ANZ OneAnswer KiwiSaver Growth, Milford KiwiSaver Balanced, and Aon Russell Lifepoints had been the top-performing options in their respective categories.
 

Government is making it easier for earthquake-affected KiwiSaver members to withdraw their money if they suffer financial hardship – but one adviser is warning it is not a good idea.

Commerce Minister Paul Goldsmith announced this week that he had asked KiwiSaver scheme supervisors to expedite requests for early withdrawals for earthquake-affected people.

“I also emphasised to KiwiSaver supervisors that when assessing financial hardship applications, they should take into account the effects of the earthquake on their member’s assets, ability to work, income and expenses,” he said.

“Supervisors have agreed to this approach. They will work with KiwiSaver providers to ensure affected members can go through the withdrawal process as quickly and flexibly as possible.”

Financial adviser Hannah McQueen said the idea was dangerous.

“The Government needs to support the earthquake victims and regions with some kind of package from the Government,” she said.

“The reality is that a lot of these victims might not even qualify for a pension in the future because there will not be enough money to give a pension. 

“I think it would be inappropriate for the Government to say that people can access their KiwiSaver and screw up their retirement, without also saying that the pension entitlement needs to be addressed to reflect the fact we are living longer than ever before, which means that either the entitlement will drop, cease or be delayed.  Perhaps this will fast-track a long overdue conversation around our country and where it is going financially.  There is not an unlimited source of money.”

She said there was a bigger problem to confront, in that many New Zealanders were under-prepared for anything unexpected.

“We get bailed out in the wrong way, time and time again and the lessons that should be learned, don’t get learned and we continue to be allowed to be apathetic around money.”

She said anyone in KiwiSaver could already access their funds in cases of true hardship.

“The definition of hardship is tight, and it needs to be.  By default, some of the victims of this earthquake will eventually qualify for this,” she said.

“We are trying to change the way that Kiwis deal with money, see money, plan for life and retirement.  Currently there is too little connection between life’s choices and the financial impact.  Everyone will get a mack truck event at some point and everyone needs to be prepared for this.  And when it hits, work out the best way to move past it, to ensure you can still have the financial future you want.”