Advisers wouldn't get away with it

Financial adviser Alistair Bean said he signed a letter calling for action on KiwiSaver because there was “a definite rort” that had occurred – and if it had been financial advisers involved they would have been accused of mistreating their clients.

Wednesday, July 18th 2018, 6:00AM

by Susan Edmunds

A group of AFAs wrote to the Financial Markets Authority chief executive, Reserve Bank governor, Commerce Minister Kris Faafoi and Finance Minister Grant Robertson.

It is made up of John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland, Michael Lay, John McLean, John Milner, Tony Walker and John Wood.

They said all default funds needed to become balanced options, the IRD needed to be required to give default managers accurate tax rates for members and members should have to be switched out in 12 months, among other requirements.

The group also wants explicit identification and disclosure of conflicts to members.

It estimates $1.5 billion of KiwiSaver funds are invested in securities issued by Australian-owned banks and insurance companies.

The group said the real winners in the scheme were Australian-owned banks, which had been able to invest the default funds in their own and each other’s securities.

As at March 2018 this amounted to 31% of the ASB’s default fund, 30% of ANZ, 31% of BNZ, 27% of Westpac and 34% of AMP. If a balanced fund option for default funds was implemented, the exposure to Australian-owned bank securities would decrease by approximately $1 billion. The banks charge KiwiSaver members management fees for investing their funds in this way.

Bean said managers were charging “a fee on a fee on a fee”. “If I’m a fund manager and I have KiwiSaver money coming in, then I choose to use my own fund, then charge a management fee, then charge a fee on that, there’s a real conflict of interest. Have they really put the client interest first, or their own?”

He said if KiwiSaver were being administered by a small number of AFAs they would be accused of fraud.

The money could be put into international investments with higher returns and similar ratings, he said.

“Balanced” KiwiSaver funds were too New Zealand-centric, he said.

Susan St John, at the University of Auckland Retirement Policy and Research Centre, backed the advisers.

“The idea that providers owned by banks can invest in themselves is untenable and should be prohibited as self-investment," she said.

“However, being too prescriptive - such as by banning particular investments, runs the danger of the Financial Markets Authority, as regulator, seeming to know best in a changing environment."

But David Beattie, chief investment officer of Booster said there was a line for managers to walk as they balanced seeking the best return for clients and committed to providing funds to their own organisation.

But he said it was not clear there was a conflict.

If banks were not allowed to be default schemes, a similar chunk of KiwiSaver money would be in bank funds because of the make-up of the New Zealand market.

A bigger problem was the lack of accurate tax rates and conservative default funds, he said.

“We have received the letter and are considering the points it raises. We welcome any contribution to discussions on how outcomes can be improved for default KiwiSaver members,” a spokesman for the FMA said.

Commerce Minister Kris Faafoi said default providers would be reviewed in 2019.

"The market has moved on from the time of the original default appointments, our level of participation in KiwiSaver and the KiwiSaver funds under management have grown – so it is appropriate to go back to the market and see what the options are.

"I am not going to pre-empt the review however – with my colleagues we have a number of aspects to consider and we will evaluate all the options and conduct a robust process with the aim of creating the most value for people."

He said FSLAB would require anyone giving financial advice to put their clients' interests ahead of their own.

"This bill is with committee and has a due date of report back of 31 July.

"Parliamentary process and scheduling allowing, I aim for the bill to be passed this year, so that industry will have certainty and a level playing field, and consumers interests will be better protected."

Tags: Alistair Bean Booster David Beattie KiwiSaver