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”.

Kiwi Wealth is reducing its annual management fee for its conservative KiwiSaver fund from 1% to 0.83%.

The move is one of several changes to Kiwi Wealth’s fee structure for its KiwiSaver cash, conservative, balanced and growth funds. 

The fee reductions will result in estimated cumulative savings of approximately $2.5 million per year for the majority of Kiwi Wealth’s KiwiSaver Scheme members.

Joe Bishop, Kiwi Wealth general manager customer, product and innovation, said it was the right thing to do.

“The fees charged for our conservative fund hadn’t changed since Gareth Morgan Investments was originally acquired in 2012.  With sufficient scale and with greater efficiencies, the time was right to reduce our fees.

“In addition to a good rate of return, our members get to enjoy the benefits of the Kiwi Wealth KiwiSaver Scheme, which include their money being responsibly invested, access to quality financial advice and our industry-leading retirement incoming planning tools.

“We will be assessing the fee structure for every fund, every year.  Our promise to our members is that we will only charge a fair fee for managing their money and maximising potential returns.”

Fees overall have also been reduced for Kiwi Wealth’s growth, balanced and conservative funds by 0.02, 0.06 and 0.18 percentage points respectively.  The annual minimum fee of $50 has been reduced to $40 across all KiwiSaver funds managed by Kiwi Wealth.

 

Advisers can use new behavioural research to glean tips on how to drive new connections with clients and deepen existing ones, the Financial Markets Authority says.

It has released the results of the second phase of its KiwiSaver trial, run in conjunction with the Ministry of Business, Innovation and Employment and ANZ.

It focused on getting action from KiwiSaver members who were turning 56 and in the ANZ Lifetimes KiwiSaver fund.

The aim was to see if behavioural prompts would make them more likely to take financial advice, make an active choice and which fund they were in, or increase their contributions.

The trial had two phases, from June to October 2017 and January to July 2018.

The second phase found that a revised version of a letter sent in the first trial made members more likely to use online tools – but still no one contacted the advice service.

Follow-up phone calls were more successful, encouraging members to talk to an adviser.

Scott McMurray, FMA acting director of external communications and investor capability said there were clear messages for financial advisers from the research.

"A few simple things can make a reasonable difference."

While many AFAs saw KiwiSaver as a challenge, there was a big opportunity that would increase with time.

Making it easy for people to access information and advice would make them more likely to engage, he said.

If they could click on an emailed link they were more likely to follow through than if they were required to take part in a more complicated process.

But he said something as simple as picking up the phone at the right time in a client's life could help.

People seemed more open to advice conversations around significant milestone birthdays.

McMurray said a theme from the research was that people felt they lacked the time to talk to an adviser, they worried they would not be confident in the conversation, and were not sure of the value that would be offered.

But those who did get financial advice were much more confident about their financial prospects and had better outcomes.

McMurray said advisers needed to clearly demonstrate the value they could bring.

There would always be demand for advice, he said.

The Tax Working Group’s recommended tweaks to KiwiSaver are proof that any capital gains tax shouldn’t touch shares, retirement policy researchers say.

The group released its final report last week, recommending a broad capital gains tax across all investment assets, including shares and business IP.

It would mean fund managers would have to apply a capital gains tax to Australasian shares bought and sold by their funds.

The group tried to offset the impact of that by making KiwiSaver more appealing to low-income people – suggesting a refund of the employer contribution tax credit for low-income earners, a reduction in the two lowest KiwiSaver PIE rates and increasing the rate at which the $520 member tax credit is earnt.

But Susan St John, director of the Retirement Policy Research Centre, said the group  should not recommend tinkering with retirement savings policies to solve the problems a CGT might create.

She said it indicated that there were reasons to doubt the wisdom of any CGT regime that included shares.

St John said there were issues with all the suggestions, but the worst was the tax rate adjustments for the KiwiSaver PIE rates.

It would be a great pity to introduce these selective tax incentives with no analysis as to their impact or effect. One obvious problem is that to constrain the lower PIE rates to KiwiSaver alone would mean that people would potentially have two PIE rates. There would be inevitable pressure to extend the favourable treatment to all PIE schemes which would be very expensive and compound the inequity between PIE and non-PIE saving.

“None of these suggestions has been analysed for its distributional or gender effects. Retirement income policy should be left to the experts in retirement income policy,” said Claire Dale, research fellow at the centre.