Seek information or advice when facing KiwiSaver's many choices.
I’ll start this month’s column with a question — does the vast range of breakfast cereal in the supermarket lead us to make an informed choice when it comes to our breakfast diet? In my case it only succeeds in leaving me standing blocking the supermarket aisle as I quizzically read the ingredients labels.
Perhaps it is a by-product of our consumer society, but I suspect that we have been conditioned to think that more choice is better. I am not sure that this is always the case.
I started to think about this issue recently when I heard that there were now 30 KiwiSaver providers offering in excess of 240 different KiwiSaver funds to the New Zealand consumer.
Various analytical tools have been developed which allow you to compare KiwiSaver funds on such measures as performance and costs.
These tools may be a starting point, but they are based on historical data and can lead to flawed hindsight based conclusions. For instance, recent top performance may have been driven by narrow exposure to a single asset class that has just enjoyed its ‘day in the sun’ and given the cyclical nature of markets is unlikely to enjoy such returns going forward. Lower costs can be achieved using index funds – however index investing does expose you to the potential of market bubbles which, if they deflate, can create significant volatility
The answer to making the most of the choices available to us is, just like the breakfast cereal decision, to become better informed. Informed about; your goals and objectives, your risk profile, investment markets, asset class performance, management styles and techniques, costs and services. Clearly there is a lot to understand and apply.
The situation is further complicated by the fact that many of these factors change over time. For example, our willingness, and capacity, to take investment risk tends to reduce as we age. Similarly, management styles and techniques need to adapt as investment markets move through their cycles. As a consequence, any investment solution you select needs to evolve to accommodate these changes.
The need for advice: In light of my occupation, it is perhaps no big surprise that I am an advocate for using a financial adviser. However, given the complexity of the issues involved in developing a sound financial strategy I believe that it is becoming increasingly difficult to ‘go it alone’.
The cost of advice: The question here is, at what point is it worth seeking professional assistance? I don’t believe that there is a simple answer to this question. You could set a threshold and say that the cost of advice should not exceed a certain percentage of the capital being managed. However, I sometimes see quite complex financial planning situations where the adviser has added considerable value to a relatively modest client situation. So, relating the advice cost directly to the size of the capital sum might not always be appropriate.
The cost of not getting advice: The New Zealand KiwiSaver environment is an example where the majority of members have not received advice. Commentators and Government agencies have expressed concern that this lack of advice means that many member accounts are not at all aligned with the members age and risk profile. In each case the individual is either not having their capital working hard enough for them, through being too conservative, or they could be taking too much risk as they approach retirement and potentially jeopardising their retirement lifestyle. As KiwiSaver balances progressively build the implications for unadvised clients will only grow in significance. As a solution to this lack of advice a few KiwiSaver providers have created systems that link the clients age with a specific investment mix. This means that a younger client starts with an asset allocation that is more growth focused. The system then progressively brings them ‘in to land’ at retirement with a more conservative mix of investments.
This would seem to be a simple way to address the lack of personalised advice.
A review of Australian based superannuation providers that follow a similar process shows that this approach leads to better client outcomes than using either a self-selected or simple diversified fund solution1.
So, as I reflect on the breakfast cereal dilemma, I suspect that if I am going to be serious about making the right choice then I should consult a trained dietitian or, at the very least, learn more about nutrition.
I suggest that the situation is not too different with your investments; either become better informed yourself or seek qualified professional advice.
1. Does less equal more when it comes to choice in super?, Paul Murphy, Vangard Research & Commentary, 20 December 2017.
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
First published in the Otago Daily Times on 14 May 2018.
