KiwiSaver mismatch a 'massive challenge' for advisers
New data showing 60% of KiwiSaver money is invested in fixed interest shows a huge challenge ahead for advisers and the government, a fund manager says.
Thursday, March 1st 2012, 9:25AM 
4 Comments
by Niko Kloeten
KiwiSaver has continued its rapid growth, doubling in funds under management from $5.6 billion in March 2010 to $11.3 billion in December 2011, according to the latest Reserve Bank statistics for the fund management industry.
The scheme is the only part of the $67.5 billion industry in New Zealand that is growing, and it is rapidly catching up in size to other superannuation funds, which were down slightly to $18.5 billion in the December quarter.
However, the figures also confirm concerns by both fund managers and financial advisers about KiwiSaver asset allocation being too conservative for many investors.
Just under 60% ($6.7 billion) of the $11.3 billion in KiwiSaver is invested in fixed interest products, $4.7 billion of which is invested in New Zealand including $1.1 billion (nearly 10% of total FUM) in deposits.
By comparison, other superannuation funds have a lower allocation to fixed interest (46.3%), with $4 billion of the $8.6 billion invested in New Zealand fixed interest products and under $600 million (3%) in deposits.
NZ Funds Management chief executive Richard James said the high exposure to fixed interest products reflected the "relatively passive nature" of the decisions that have been made around by KiwiSaver members about where to invest, with large numbers in default schemes.
"It's a massive massive challenge for the government and for advisers because there's around a million people who are yet to make a real decision about their capital - it's a very big issue.
"A large proportion of our country's superannuation is earning cash less frictional costs, which is not a good outcome for anybody except maybe those getting paid the frictional costs. It's not good for the investors and it's certainly not good for New Zealand."
James also warned that fixed interest isn't a "risk-less" investment, particularly if inflation goes up.
"They might get lucky to an extent, and the default choice over the last few years has been the best performer but that's unlikely to continue."
He said the over-exposure to fixed interest is even more acute when the young age of many KiwiSaver members is taken into account.
"If you use the adage of 100 minus your age to work out how much exposure you have to growth assets, it would seem we have a hell of a lot of very old people, but in reality the opposite is true.
"These young people have the potential to take some significant, well-managed risks to maximise their retirement outcome."
Niko Kloeten can be contacted at niko@goodreturns.co.nz
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But what I don't get is this - "how can an AFA actually provide advice to a KiwiSaver member economically".
If the average Kiwisaver account is $5,000, and the typical trail is 20 basis points, how can an AFA meet all the requirements of the new regulations for the $10 p.a. trail.
Don't tell me that the KiwiSaver member will just have to pay a fee, because surveys tell us almost no-one wants to pay an explicit fee for advice.
All insights gratefully received...
PS I was amazed to hear John Body from Onepath/ANZ at the recent Onepath seminar say words to the effect of "one of the unintended consequences of the new regime is that advice will be less accessible to the ordinary Kiwi." These weren't his exact words but this is the sense of what I heard him to say.
I agree with the comment "one of the unintended consequences of the new regime is that advice will be less accessible to the ordinary Kiwi." However if this admission did indeed come from a KiwiSaver banker then I expect the FMA to immediately launch an enquiry into what service that Bank is providing it’s KiwiSaver clients.
I’m also not really surprised such a comment may have come from a KiwiSaver banker, because in my experience, retail KiwiSavers generally only receive a class service. The statutes expectation is KiwiSavers should each receive a personalised service. I believe the Financial Advisers Act clearly backs this view FAA Part 2 s 15.
As an AFA I simply can’t provide a personalised service for merely a 20 basis point trail. Moreover I can’t understand how some AFAs can have 100’s or 1000’s of KiwiSaver clients who have each received a personalised service.
The facts are; the banks are clearly going to dominate the KiwiSaver space; the banks do not have the capacity or the will and simply can’t afford to provide a personalised service for each KiwiSaver they have on their books; KiwiSavers do not want to pay a fee for advice.
The conundrum is, KiwiSavers need personalised advice, they don’t want to pay for it, the KiwiSaver managers don’t want to pay for it, AFAs do not want to do it for free. The result will be a large number of KiwiSavers reaching retirement with a lot less than they ought to have accumulated.
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KiwiSaver is not a wholesale super fund, it is made up of individual investors.
At present, until the member says otherwise, the funds are invested conservatively.
What is wrong with that?