Inland Revenue is moving to help make sure investors, including KiwiSavers, get on the correct prescribed investor tax rate (PIR).

Updated estimates show around 550,000 people have underpaid tax on their investments (including KiwiSaver) with an average of $80 to $90 owing per person for the 2019 tax year, says Inland Revenue deputy commissioner, Sharon Thompson.

“This suggests to us that people need support to make sure they choose the right PIR,” she said. “With our new system in place, we’re working on a range of initiatives to help them.

“From mid-July 2019, we’ll begin proactively contacting customers who are on an incorrect PIR to let them know they need to change it to avoid paying too little or too much tax in the future. They can then contact their investment provider to change their rate.

“And in the future, we’ll contact customers during the year if we identify they are using an incorrect PIR. This will be an on-going process to ensure that customers can get things right from the start.

“Because our new system groups together all the income people have, including wage and salary and investments, we can now see if people are on the right investment tax rate relative to their income level.

“In the past our old system did not do this automatically and we relied on people and their investment providers to make sure they were on the right rate.”

Thompson said IR estimated there were another 950,000 people on a PIR that was too high and had overpaid by an average of $44. Current legislation does not allow for refund of overpayment.

She reiterated Inland Revenue’s decision not to go back over previous years to reassess and recover investment tax that may have been under or over paid.

Thompson said trying to go back over past years and determine incorrect payments based on wrong PIRs would have required significant work not just for Inland Revenue but for individual taxpayers and financial institutions.

“So we made a business decision to look forward and not go back. We’ll be working on how we help people to get their PIR right for the future rather than trying to identify errors people may have made in previous years.

“For the 2019 tax year, an estimated $42 million was overpaid. Current estimates show between $45 and $50 million of investment tax was underpaid, and that will be recovered,” she said.

“But these figures are changing as IR’s new system continues to receive information.”

Few KiwiSaver providers are offering online advice, research firm SuperRatings has found.

Last year, 83% of schemes provided formal education material.

But SuperRatings' research showed, when class advice was delivered by KiwiSaver providers to clients, it was usually in person.

SuperRatings said the Australian experience had shown using a range of channels, including videos and webinars, improved outcomes, but New Zealand providers were focused on a smaller number of channels.

Almost 90% said they delivered their class advice through external client visits, and the same number did so in person in their offices.

Just over 80% said they offered class advice over the phone but only 39% over the internet.

“We believe this is a continued opportunity for many schemes, as it can be made available when other traditional channels are closed,” SuperRatings said.

SuperRatings said 83% of schemes provided class advice on contributions, which should make them well positioned to engage with members about the new contribution options.

“Whilst the scope of this opportunity will vary between providers, it demonstrates the need for providers to tailor their offerings to key cohorts to ensure member outcomes are improved over time. SuperRatings remains supportive of well-structured and efficiently operated outbound call teams, which can support greater engagement at key milestones. Our research indicates 83% of schemes maintain an outbound call team, with these focussing on education, welcome calls and retention.

"In a market where membership growth is slowing, while member expectations continue to rise, the need for providers to demonstrate the value for money of their offerings is greater than ever. Optimising Net Benefit to members, which considers returns less all recurring fees, coupled with well-rounded engagement and education programs, will ensure that member outcomes are improved over time.

"In light of a continuously evolving regulatory landscape, we encourage schemes to closely monitor the outcomes they are delivering to their members through engagement strategies"

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.”