Talk Money with Tony Field – October 14, 2015

(File)
(File)

New Zealanders are being too passive about the potential returns from their KiwiSaver investments, according to a new report from professional services firm KPMG.

Its New Zealand Funds Management Industry Update 2015 contains analysis from research firm Morningstar.

Morningstar says there is an unnecessarily high concentration of KiwiSaver money invested in conservative funds. Morningstar says that is mostly because people who join a default provider are placed in a conservative fund. They can opt to choose their own level of risk, but many do not.

On June 30 of this year, 32.3 percent of KiwiSaver money on the Morningstar database sat in conservative or cash funds.

Morningstar analyst Elliot Smith says this is not typical of the demographics of KiwiSavers.

"We believe this is a major flaw," he says.

Morningstar says the two largest KiwiSaver providers, ANZ and ASB, have differing views on the importance of this issue. It says this is reflected in their fund flows.

Forty-six percent of ANZ's KiwiSaver money was in conservative or cash funds three years ago. That has been reduced to 26 percent.

ASB had 66 percent in conservative and cash funds three years ago, whereas now the figure is 57 percent.

There are three main types of KiwiSaver funds – conservative, balanced and growth.

Growth funds have more exposure to shares, while conservative funds have more exposure to fixed-interest investments like bonds and cash. Balanced funds are a mix of both. Growth assets produce a better long-term return but can be more volatile in the short-term.

"As a rule of thumb, if you are aged between 25-40 you should be more disposed to a growth fund; as you have plenty of time to earn at a higher level and recover should the market fall," says KPMG's John Kensington. "If you are a little older, you might lean toward a balanced or growth fund.

"People who should be in a conservative fund are those who are nearing retirement age and wanting certainty around their capital - but even then, they might want to split their risk."

I'm aware of research showing many people don't know what sort of fund they are in. If you don't know it is worth contacting your provider to ask them to explain what type of fund you are in and whether it is appropriate for your age and risk profile.

The Commission for Financial Capability's David Boyle writes that "making sure a member is in the right fund is paramount".

"Not the right provider – the right fund. Default members will be in a conservative fund, which means that over the long term they will generally experience a lower return.

"A cynic might say that Kiwisaver providers are intentionally trying to get members to move over to more growth-orientated funds so they can charge more," he adds.

He believes that "managers should end up reducing their fees over time".

"Members who have a long-term horizon and are not going to be using their KiwiSaver balance for their first home, need to have more funds allocated more to growth-type options."

Mr Boyle says, "Compared to most other retail managed funds, KiwiSaver management fees are generally lower and should reduce even further as total funds grow under management. Despite rising compliance costs, I expect fees to decrease over the next five years."

Mr Smith also looks at fees and addresses an issue that many people do not think about – the more you pay in fees the less you will generate in returns.

"Higher fees erode performance outcomes."

He says providers are paying more attention to fees and they are falling across the industry.

Another complication has been that various managers' report their fees in different ways. The Financial Markets Authority is implementing changes that should soon make it easier for investors to compare fees between managers.

KPMG's report addresses another issue for many KiwiSaver members – advice.

Obtaining specific advice has been complicated by the Financial Advisers Act. It requires that specific advice can only be given on an individual's entire financial position. This means people who just want some advice about KiwiSaver might struggle to get it.

Back in 2013 ANZ Wealth and The Council for Financial Capability reported that only 15 percent of people had consulted a financial adviser in the past year.

"If we look at the two million-plus members of KiwiSaver, 1.95 million of them haven't used an adviser," says ANZ Wealth's John Body.

For people wanting general advice on investing a good starting point is the Sorted website.

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