Getting to Know: Peter Neilson
Peter Neilson was the chair of the Financial Services Council until insurers quit in revolt over a report into insurance commissions, and was the Associate Minister of Finance during the sharemarket crash. Here, he talks about why advisers should be more like surgeons.
Friday, August 18th 2017, 11:00AM 
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by Susan Edmunds
Who are you and what do you do?
I am an economist and Chairman of the Simplicity Trust which “owns” the new, not-for-profit, low-fee, passively-managed investor and KiwiSaver provider called Simplicity. Earlier, I was the CEO of the Financial Services Council. I am currently the Managing Director of Thoroughbred Consulting Limited, undertaking projects for public sector and private sector clients.
How did you become involved with financial services?
I suppose it was when I opened my ASB savings account at Glen Taylor Primary School in Auckland. I later became immersed in the financial services sector when I was appointed by David Lange as the Associate Minister of Finance in 1987, just a few weeks before the sharemarket crash.
Roger Douglas asked me to take day-to-day responsibility for the financial services sector, the Government-owned financial institutions and monetary policy. It was a baptism of fire, as the financial sector was having to adapt rapidly to both deregulation and the impact of the sharemarket crash.
During the next three years, I supervised the sale of State Insurance and the policy development and legislation for introducing flexible inflation targeting and our operationally independent Reserve Bank. The New Zealand model for monetary policy was subsequently taken up by more than 20 other countries.
I also drove the reform of the Trust Banks to facilitate trust bank amalgamations and the splitting of their boards to undertake, separately, the commercial and charitable trust bank functions. The Trust Bank reform resulted in both more profitable trust banks and much greater funding being available for distribution to communities across New Zealand.
In 1988-89, I supervised the review of disaster insurance, which made earthquake cover for businesses voluntary and applied all the accumulated Earthquake and War Damage reserves to underwrite the disaster cover for the homes with fire cover in New Zealand. By having homes remain compulsorily covered for earthquakes, if they had fire insurance, allowing private sector insurance providers to compete and increasing EQC’s level of reinsurance cover, we were better prepared for the Christchurch earthquakes and our homeowners were better protected than in any other country facing such earthquakes.
There are few things in life that can match the satisfaction of being a member of a reforming Government able to deliver for New Zealanders.
If there is one thing you would like to change about the financial advice industry, what would it be?
I would like the finance advice industry to become truly independent, professional and be rewarded and respected as such.
Some years ago, after persistent lower back problems, I visited an orthopedic surgeon to advise me on what I should do. A true professional, after examining me and my MRI scan, he recommended I lose weight and go to a gym specialising in back strengthening exercises. This was rather than performing surgery for which he would have earned a large fee, but which was unlikely to relieve my condition. The surgeon clearly put my interests first. I paid a fee for the professional consultation that recognised and rewarded his training and experience. Based on his advice, I changed my diet and exercise regime, lost the weight and so I now rarely have back issues. I would like to see providers offer value, no-commission products so that truly independent advisers can charge an up- front fee to the client for their genuinely client-centric advice.
What’s the best advice you have ever received?
Do what is right even if it makes you unpopular in the short-term, because in the long-term, you will have to live with yourself. It will also make for far fewer embarrassing future conversations with your grandchildren when they ask you what you personally did about inequality, sexism, racism and climate change.
What could financial advisers learn from other industries?
I think we can all learn from the industry disrupters. Any industry like financial advice, earning high margins, is vulnerable to disruption from a lower cost, online new entrant. We complain people don’t buy our products, but many of the products, as currently distributed, are simply not value for money.
The financial services sector is about to see the biggest transformation since the deregulation of the 1980s. Personal insurance products where only 50% of the premium costs are returned in claims paid are unsustainable in a truly competitive marketplace. When half the premium cost goes to paying distribution (commissions) and manufacturing costs, it is only a matter of time before new entrants transform the industry. Typical current investment management fees are also unsustainable, which is why Simplicity as a lower-fee entrant has been able to achieve $200m in FUM within a year of start-up, even with minimal paid advertising.
What do you think the FMA has done well? What could it do better?
What have been the benefits of regulation? The most outrageous crooks have or are being removed from the industry.
Most of our potential customers still face offers they can hardly understand and opaque pricing. It is an outrage that, 10 years after the introduction of KiwiSaver, many providers still do not now tell their members the total dollar amount they are paying in fees. Who would accept a system where your pay slip only revealed your net pay and not the total dollar amount of income tax that had been deducted?
Similarly, insurance customers do not know what proportion of claims are declined by each provider, nor the proportion of premiums returned in claims paid out. These are not the practices of an industry confident it is providing value for money.
The industry has invested in systems and training that have improved the customer experience. There has unfortunately been only a modest improvement in confidence in the industry, given the scale of the investments made in new practices.
What do you think were your biggest successes at FSC?
A CEO only can act with the support of the Board so it is always a collective effort. While I was there, the Board supported efforts to reposition the FSC so it was seen as talking on behalf of KiwiSavers and the insured, rather than only about the self-interest of the industry. I think the research funded by the members was influential in helping the public and decision-makers to better understand the financial insecurity of most New Zealanders and what could be done about it.
The projects were able to highlight the potential of KiwiSaver to provide many more New Zealanders with a comfortable retirement, using KiwiSaver savings to supplement National Superannuation and with helping them to own their own accommodation debt-free by retirement. The research was also able to reveal the degree of underinsurance in New Zealand; in particular, the vulnerability of many if they have a serious sickness that prevents them working for longer than the period their sick leave covers. Most New Zealanders still assume they are likely to suffer an accident or sickness that will prevent them earning an income. In fact, long-term sickness preventing employment is far more likely, so while everyone is covered for accidents by ACC, most people in employment don’t have income protection cover.
What could have been done better?
We were unable to collectively find solutions for industry issues, where the remedy could possibly negatively impact on any group of members' current business model. Some membership-based organisations aspire to become strategic and proactive, but most default to being reactive and defensive, because it is always easier to stick to only the issues where all members share a common interest. Those type of organisations end up talking mainly about themselves and having very limited impact on decision-makers or the wider public,
What role should FSC play under the new advice legislation?
That is a decision for the FSC members.
Do you support Financial Advice NZ?
Yes, a united and well-resourced body advocating for genuinely independent financial advisers is good for the industry and New Zealand.
What is needed to encourage more New Zealanders to take out insurance? (If anything?)
Firstly, more New Zealanders need to understand their dependents' vulnerability in the case of extended illness or premature death. We need products which are easier for clients to understand. We need also to address the affordability issues that arise from the current high upfront commission-based distribution models.
If these are not addressed, there will eventually be a ban on commissions or, for most people, life and income protection insurance will be bundled into KiwiSaver.
Are you a KiwiSaver member?
Yes, with Simplicity of course, and saving nearly $1,000 a year in fees compared with my previous provider.
If so, what’s your investment strategy?
I am in the Simplicity Growth Fund. Like most New Zealanders of my age and income, I am overweight in real estate, underweight in equities and overweight in New Zealand located assets. I consider my income from employment and pension entitlements are relatively low risk so I need to take on more risk with much greater exposure to New Zealand and overseas equities. A KiwiSaver Growth fund with a heavy equities weighting helps achieve that.
Outside of work what do you do?
I read a lot, mainly non-fiction; write policy papers on issues like climate change; and breed thoroughbred racehorses.
I was lucky enough to breed a Champion Steeplechaser, Cuchulainn, who won the Grand National Steeplechase from the very first mare I purchased. My mother said if I fell off the Farmers Department store, I would fall into a new suit. I should have stopped breeding horses then but, having confused luck with skill, I went on to breed many more horses in New Zealand, Australia and Kentucky. I have bred some nice horses since, but none that went on to became a Champion.
What would you say if one of your kids told you they wanted to be a financial adviser?
I would encourage them, as it is a great way to help people achieve financial security. I would suggest they take up a fee-for-service approach, genuinely identifying the needs of their clients and recommending the” best of breed” no-commission products that are now becoming available, such as the Simplicity managed funds.
I look forward to the day when there are value, no-commission products available from most providers.
What’s one thing people may be surprised to know about you?
Despite having been an MP for a Wellington electorate, I was actually brought up in Glendowie in Auckland. My grandfather arrived in Auckland in 1927, and set up a successful business at the beginning of the Great Depression. My father was born in Auckland, but was raised in England after my grandmother returned to the UK. In the late 1950s, my father returned to New Zealand and worked on the construction of the Auckland Harbour Bridge. He was a professional boxer in the UK around the time I was born.
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