The role of financial advice in KiwiSaver

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KiwiSaver opens up great opportunities for financial advisors, and it also brings its share of responsibilities.

Friday, November 9th 2007, 4:30PM

The following is a speech Finance Minister Michael Cullen gave to the FundSource conference on the role of advisers in KiwiSaver.

Just last week I heard Gabrielle Donnell from FundSource describe KiwiSaver as one of the "most significant changes the New Zealand managed funds industry has yet experienced". It is a change that opens up great opportunities for financial advisors, and it also brings its share of responsibilities. I'd like to discuss these opportunities and responsibilities today.

But first, let me recap why KiwiSaver is so important to New Zealanders.

Last month a Business Roundtable-funded report came out dismissing New Zealand's widely accepted savings problem. It made bizarre statements about the significance of the so-called informal economy, including unsubstantiated claims that this unmeasured informal economy is making a contribution to a higher savings rate.

The report was nothing more than an attack on the Labour-led government's successful KiwiSaver policy using outdated dogma that only a small quarter of the far right will still publicly profess. It espouses a view that is contradicted by the OECD, Reserve Bank and Treasury, all of which have expressed concerns about household savings levels.

The truth is that New Zealand's savings problem is real and it is serious. Just a few days ago, the World Economic Forum's Global Competitiveness Index ranked New Zealand a very poor 108th out of 131 countries for our national savings rate. We continue to spend more than we earn, we have strong evidence that retirement savings over and above superannuation are paltry, and our Current Account Deficit now stands at 8.2 per cent of GDP.

We simply must increase our levels of household savings. Our household savings record remains very poor by international comparison. On one measure the typical New Zealand household last year spent $1.15 for every dollar earned.

We are seeing a wide and increasing gap between a few households who have enough to provide for their retirement - and the rest. When household savings were last surveyed, only fifteen per cent of individuals and seventeen percent of couples in the $15 - $50,000 income bracket had superannuation assets.

Those low to middle income families with no financial assets - that is, most of them - know they need to save if they are to have something to look forward to in their retirement. Three quarters of household wealth is tied up in housing and less than ten percent in life, superannuation and managed funds. Owning your own home is a very good thing, but it should not be relied on to replace other saving. A Treasury study shows that most people will not save enough by paying off their home alone.

If we want to have a better standard of living in retirement than New Zealand Superannuation alone, we need to save more.

More saving also helps the strength of the economy generally. Saving builds the wealth of New Zealanders and helps build the pool of assets needed for business investment.

Saving will help us own more of our own businesses and it will produce deeper capital markets that provide the oil for a well-functioning business sector.

If we save more, we consume less, so we will also reduce inflationary pressure, and take pressure off interest rates. Lower interest rates in turn help to take pressure off the dollar, helping to increase our exports and reduce imports.

So increasing the level of household savings is a priority for the health of our economy.

The Labour-led government brought in KiwiSaver to help tackle New Zealand's savings problem. One of KiwiSaver's great advantages is that it makes saving simple and affordable, and it is clear that people are jumping at the opportunity to save for a better standard of living in retirement. During the weekend I had the pleasure of announcing that in just four months over a quarter of a million New Zealanders have signed up to a KiwiSaver scheme. It is off to an absolute flyer.

There is no doubting the ongoing significance that KiwiSaver will have in shaping saving and employment in New Zealand. It affects the responsibilities of every employer in the country. It should be considered thoroughly by every employee in the country. In fact, it should be given serious thought by every New Zealander under the age of entitlement for superannuation.

We have made KiwiSaver straightforward and easy to join, but financial decisions are not always straightforward and easy to make. Believe me - as Minister of Finance, I know.

The decision to be in our out of KiwiSaver is a very important one for a person's financial future. That is why we have been very up-front in recommending that people contact a professional financial advisor to discuss whether joining a KiwiSaver scheme is the right choice for them.

Financial advice was a big issue when the KiwiSaver Bill was being considered by the Finance and Expenditure Committee last year. Employers and the financial services industry had legitimate concerns that employees would turn to their bosses for financial advice about KiwiSaver. There was a worry for employers that providing advice could get them caught up in the investment advisors and securities legislation, as well as complicate the employer-employee relationship.

We took those concerns on board. The KiwiSaver information packs for employees state explicitly that neither employers nor Inland Revenue can give financial advice about whether an individual should be a KiwiSaver scheme member. People are told to seek the advice of a financial advisor to help make that decision.

I think it's a fair assumption that a growing number of people will be seeking help from financial advisors in the coming months. This will be driven by two main factors.

First, more KiwiSaver scheme providers are entering the market all the time, and we can expect a ramping up of promotional activity as providers compete to attract KiwiSaver members. Anecdotal evidence suggests most providers did "soft launches" because they didn't want to stress their systems in the early days of KiwiSaver. Now that those systems have had time to be bedded in, we are sure to see some major advertising campaigns roll out.

Second, you will no doubt be aware that the proposed phase-in of compulsory employer contributions is scheduled to begin from April 2008. Employer contributions will start at one per cent, rising to four per cent of gross salary by 2011 - partly offset by a tax credit. This incentive will make KiwiSaver an even more attractive means of saving for a better standard of living in retirement, so we can anticipate a surge of interest as next April draws closer.

KiwiSaver is at a point where there is a growing list of providers, the schemes on offer are becoming more differentiated, compulsory employer contributions are just around the corner, the enrolment figure has already broken through the quarter million mark, and interest in joining is set to swell. All of this represents a massive opportunity for financial advisors.

Much of the demand for financial advice will be coming from employers. Although KiwiSaver started back in July this year, no doubt there are several businesses that will seek to benefit from professional help on implementation issues. Proposed changes to KiwiSaver are still being scrutinised by the Finance and Expenditure Committee. Once the changes are passed into law later this year, employers will need to know the details and what the impacts will be on how they operate their business.

There are many important decisions that employers have to make about KiwiSaver. For example, businesses have to decide if they want to nominate a preferred scheme for new employees and those who choose to opt in via their employer. Financial advisors can help employers to make sense of the marketing material and other information targeted at them by KiwiSaver providers.

A key area where financial advisors can have a role is advising what employers should do with any existing workplace superannuation schemes they have in place. Employers will be seeking guidance on whether their existing schemes should be replaced, be offered unchanged alongside KiwiSaver, or have a KiwiSaver-compliant section added to them.

Another important matter where employers will be seeking financial advice is on how KiwiSaver fits in with total remuneration. We have already seen companies such as Air New Zealand decide to offer the full four per cent employer contribution now rather than wait until 2011. Many other companies are also considering what their approach to KiwiSaver should be if they want to attract and retain skilled staff in a competitive labour market.

These are all weighty issues for employers to work through, and there is great opportunity for financial advisors to provide the specialist expertise on KiwiSaver that many businesses will be seeking. That expertise will also be in strong demand by individuals. While the Labour-led government has made KiwiSaver an attractive and easy way to save for retirement, it is important that the decision to join is a well-informed choice.

Financial advisors can help individuals take a good look at their personal finances and decide if KiwiSaver is right for them. Everyone's financial circumstances are different, and of course circumstances change over time. Diverting four or eight per cent of total salary or wages into KiwiSaver may not be the optimal financial choice for every person at every stage of their life. That is why I think we have got the design right by having automatic enrolment with the ability to opt out and take contributions holidays. A compulsory scheme would replace this practical flexibility with blunt broad prescriptions. What allowing choice means, however, is that many people would be wise to get financial advice so they are making a decision with their eyes open.

Beyond the decision to join KiwiSaver, financial advisors have a role in helping people decide what level of risk is appropriate for them. All else being equal, a sensible degree of risk for an 18 year old joining KiwiSaver is going to be a lot different to what is prudent for someone just a few years shy of retirement.

Once risk tolerance is sorted, people may still need help deciding between the many different KiwiSaver schemes out there. A big influence in many people's choice is likely to be how providers approach responsible investment.

Back in May Cabinet decided that KiwiSaver schemes will be required to disclose their approach to responsible investment from 1 April 2008. We want New Zealanders enrolled in KiwiSaver to have full confidence in the environmental and social credentials of the investments made on their behalf.

Growing numbers of shareholders worldwide want to ensure that their investments do not support activities or practices they do not approve of. Many are also taking that a step further and want their investments to support activities and practices they do approve of.

KiwiSaver providers will have to disclose in their investment statements whether their investment policies and procedures take into account responsible investment criteria - including environmental, social and governance considerations. If they do, they must tell members where they can obtain further information on the extent to which they take responsible investment into account.

I think there is a useful role for financial advisors to help people understand the responsible investment information released by providers. As I said, it is important for people to have confidence in the investment decisions made on their behalf.

I'd like to emphasise that advice on KiwiSaver is just one element of a wider part that financial advisors can play in helping people to manage their finances. The simple fact is New Zealanders need to improve their financial literacy. In March 2006 the Labour-led government committed more than $5.5 million over three years for a financial education programme to help New Zealanders make informed decisions about savings. There is a great deal that financial advisors can do - and are doing - to lift the level of our financial knowledge.

I have talked a lot about the opportunities KiwiSaver has opened up for financial advisors, but I would like to finish by discussing some of the responsibilities.

Some financial advisors have been in the press recently, and not for the best of reasons. Perhaps it is more accurate to say commission salespeople posing as financial advisors. As Andrew Gawith from Infometrics wrote in the Dominion Post two months ago, "there are salesmen masquerading as advisors out there pushing KiwiSaver schemes in return for a commission. The quality and suitability of the scheme for an individual is likely to take a back seat to the existence and size of commissions."

I am not saying that there is anything intrinsically wrong with commission-based sales. What I am saying is that any financial advice offered to a client has to be sound and it has to be transparent.

The Retirement Commission provides a very good checklist for people asking for financial advice, and much of it covers information that a responsible financial advisor should provide up-front as a matter of course. The checklist suggests a number of questions to financial advisors, including:

• Do you, or anyone associated with you, have a financial interest in giving me this advice?
• Are there any restrictions in the type of advice you can give me?
• What products can't you advise me about?
• What organisations do you have a relationship with, and what is the nature of that relationship?
• What are your qualifications and experience as a financial advisor?

Getting satisfactory answers to these questions is no guarantee of good financial advice on KiwiSaver, but it will at least provide assurance about the advisor's professional credibility. The issue of credibility within the industry is particularly important when government policy is encouraging people to seek professional financial advice.

Most of you will be aware that the government is planning on introducing registration and competency requirements for financial advisors. We are aiming to introduce the Financial Advisors Bill into the House by the end of this year.

In closing, I would like to applaud our hosts FundSource for its role in enriching the knowledge base of the financial advisor industry. The information it provides fund managers and financial intermediaries leads to a better standard of professional financial advice, and ultimately to better-informed decisions about KiwiSaver by employers and the public.

KiwiSaver has opened up an avenue of opportunities for financial advisors. I encourage you all to be a trusted source of assistance to businesses seeking to do the right thing for their staff, and individuals seeking to do the right thing for their future.

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