Rumours had been circulating for a while that Gareth Morgan’s KiwiSaver business was on the market. Today we learnt that Kiwibank was the successful buyer of this business plus the other funds management and advice offerings from GMI.

The deal looks like a good one for Kiwibank – depending how much they paid for it. It may too have some pluses for advisers in the short term.

Both brands push their New Zealand owned pedigree strongly. They too like to pitch themselves as standing up for the average Kiwi. Kiwibank’s proposition is about lowering the cost of banking for New Zealanders, while Morgan is pretty big on the philantrophy (think Happy Feat and the Blanket Man) as well as pushing issues like fishing.

It’s smart for Kiwibank as it allows it to get into the KiwiSaver game. The recent 4^th annual ASSET Magazine KiwiSaver survey showed that banks are winning this game hands down. When they focus on a product they can make big gains.

Kiwibank as a relative late comer to the KiwiSaver business was a laggard. Just 15,000 customers and $50 million under management. In our survey it ranked number 18 while GMI was up at sixth spot.

One of the curious things is that Kiwibank will continue to run its KiwiSaver business as is and will offer GMI separately. Over time you would expect them to come together but that isn’t on the agenda short term.

With KiwiSaver being a category one product there is a need for AFAs. While the bank builds its advisory force there is an opportunity for other advisers to talk to the GMI members.

Where things don’t fit is fees. The two organisations are oil and water. Kiwibank trumpeted its low fee structure at launch while GMI is one of the more expensive. Take administration fees for example. Kiwibank is $1 a month or $12 a year, while GMI is $50 a year.

Likewise the fee analysis in the KiwiSaver survey shows each provider is at opposite ends of the scale.

The other potential opportunity for advisers is that each organisation appears to target different demographics. GMI’s annual member balance is around $10,000 while Kiwibank is around $3500. That would suggest GMI scheme members aren’t natural Kiwibank customers.

The deal was big news for the start of the year and potentially it heralds more rationalisation in the overcrowded KiwiSaver provider market.

The Green Party released its KiwiSaver policy yesterday which has all the hallmarks of a nice idea but probably not that realistic.

The crux of the plan is to introduce a seventh default fund to the mix, which they call the Public Option, and have the money managed by the NZ Superannuation Fund. In addition to this the administration would be provided by either Kiwibank or Inland Revenue.

The details of the policy are a little scant at the moment. However it appears to be predicated on the NZ Superannuation Funds’ performance and Kiwibank’s track record in challenging the big Australian banks on price.

The policy sounds good and resonates with this view that KiwiSaver fees are too high. Co-leader Russel Norman says “KiwiSavers’ nest eggs will be significantly higher, up to $142,000 higher in some cases ($64,000 in today’s dollars).”

The issue of fees is certainly something which all the main political parties want to look at. Our view is that yes working out how much people pay in fees is difficult. Yes they are an important part of how much an investor really makes. And there is lots of variation.

The NZ Superannuation Fund does a good job in managing money but one has to remember it has a mandate to die for. It essentially has one client and it has a long-term investment strategy where there are no draw downs for years. Commercial fund managers on the other hand have to deal with day-to-day redemptions and new clients. Investors are chasing short term returns and will move managers or investments if they aren’t delivered.

If people were to get access to the NZ Superannuation managers then they should also be made to lock their money in for a long period of time. Maybe even until they are 65.

Otherwise the managers won’t be able to continue with the strategy they use.

Having Kiwibank or IRD managing the administration is an interesting one too. Kiwibank already has is on scheme and probably isn’t that interested in being administrators and earning discounted fees. Likewise there is an emerging view IRD should be doing more with KiwiSaver. As we reported here there is a view it should manage hardship requests.

Such a move certainly takes IRD away from its core job of managing the tax system.

I’ve said it before and yesterday’s savings policy announcement from Labour demonstrates it again.

Labour understands savings issues far more than National.

Its package is potentially a circuit breaker for this year’s election and will get people talking.

Raising the age of entitlement for NZ Super is a no-brainer. It has to happen. Good on Phil Goff and the Labour Party for being prepared to address this issue.

Sure the increases it talks about are pretty small, but at least it is starting the process off and that is the hardest part.

John Key’s pledge to resign rather than change the entitlement is one of the most stupid policy things he has ever said.

Making KiwiSaver compulsory isn’t as clear cut. You would think that fund managers and the savings industry will be rushing to party vote Labour. After all such a move helps to underpin their businesses and for advisers it’s a huge plus as regulation has made it harder for new competitors to set up shop.

I must admit the comments former finance minister Michael Cullen used to make about compulsory super still echo with me.

His line was that compulsory super was the state going too far and interfering with people’s rights and decisions.

Again an odd comment from someone on the left of politics.

He is right, but then there are bigger issues and trends to consider.

With trends New Zealand for years has bucked what you could say are the international norms around savings policies. That is all changing now and compulsory super is part of the big package.

Unfortunately the government has some idea that we should be getting closer and closer to Australia on savings issues. Compulsory super is one of those things that is likely to happen over time anyway.

It is, though, frustrating that this is more tinkering with KiwiSaver. It was inevitable that politicians just wouldn’t leave it alone.

There are many other parts to Labour’s policy worth exploring, and we will do that later.

The funny thing is that many of the things it is campaigning on you would expect to see from a more conservative party than Labour.

A comment I read yesterday summed it up.

“Holy cow – now I’m really confused. I’m as right-leaning as they come, but now I’m wondering whether I should consider voting Labour?! Raising the retirement age is so obviously needed it’s not funny, and a capital gains tax makes a lot of sense.”

I suspect those comments will be shared by many others in the savings industry today too.

Earlier this week we reported that a number of KiwiSaver funds had missed their deadline to prepare and send their annual reports to members.

It has transpired that there is a common thread amongst the schemes that missed filing. That theme is the company which provides registry and accounting services to the providers. Yes another three letter name starting with A – AON.

We’ve been told that AON told the providers that everything was okay and “all would be to hand and filed on time after us being on their backs for three months.”

“Only two weeks before the due date we had another urgent meeting with AON and were told that they had received the resignation of the “accountant” who was the problem and had a marvellous plan of how they would meet the deadline. And they didn’t.”

Six months to prepare annual reports is heaps of times.

Trustee Bryan Connor told delegates at the Workplace Savings Conference recently that members should have more current information on their funds.

While some might argue members aren’t particularly interested in the annual reports they do contain good information.

Tardiness like we are seeing that moment does nothing to engender public confidence in the providers.

A good question is what sort of punishment, if any, should the regulators dish out? After all the NZX publicly censures and halts trading in companies that miss deadlines. Shouldn’t the same happen here?

The inequity would be that it is not the providers’ fault, rather the company that provides the registry and accounting service to the providers.

But they do have two of their own KiwiSaver funds.

Too many advisers remain fixated on the outmoded income or growth bias when constructing portfolios.

This is short-sighted and leaves the client losing out on returns they could achieve in many economic cycles, as well as living less comfortably than they could.

There is only one optimal way to construct a portfolio – to maximise Total Returns (within a given risk profile).

Then all one needs to do is manage drawings as an annuity, keeping the portfolio in line with future financial planning.

The objective is to put the investor’s needs first.

The individual’s cost-of-living does not change with the fluctuations of a portfolio’s ability to produce income, and nor should it.

Those still trying to construct a portfolio looking for income investments to match clients’ cost-of-living are doing their clients a disservice.

They may also be subjecting the client to more taxes than is necessary.

Part of this misguided mode of constructing portfolios comes from old trusts that were structured with ‘Income’ benefits to surviving partners and residual ‘Capital’ to other beneficiaries.

We all know the court cases of this misguided approach when trustees focused excessively on the surviving partner not taking sufficient account of capital beneficiaries’ rights – and hence not growing capital to even modestly keep pace with inflation.
‘Income’ and ‘Capital’ beneficiaries’ interests must be, and can be balanced.

Another reason for some advisers not pursuing total returns may be that they do not manage the cash component of their clients’ portfolios very well. Cash is an asset class.

Beyond receiving interest, coupons, dividends and distribution, a cash component to a portfolio is essential to facilitate rebalancing and re-investing.

People giving free advice in the mainstream media have recently bewailed a perceived ‘gap’ exists in New Zealand with few annuity funds available for people to utilise when they get to the age they can pull money out of their KiwiSaver scheme savings.

A balanced fund is just such a scheme and can readily be utilised to meet cashing-up KiwiSaver’s required expenditure in retirement.

Also consider, that annuities (and I am sure there will be a plethora of them in New Zealand shortly as the insurance companies look to make a buck) consist of an underlying pool akin to balanced fund, one from which the insurance company pays out the regular annuity and pockets the remaining portfolio for itself as the profit.

Of course the annuity does spread the risk that an investor will outlive drawings from their own portfolio, by packaging their odds with another poor devil who dies early and misses out on both income and capital.

But this can be countered by really good financial advice, calculating and fostering sufficient client savings (portfolio) to outlast their lifetime of drawings.

Investors with a good level of savings will be more efficiently served to go for the self managed balance portfolio or fund approach.

A warning – don’t get glassy-eyed when the avaricious insurance companies come to town with their glossily packaged, ‘new’ annuity products.

You can be sure their actuaries will have worked out a handsome profit. Doing what is best for clients may be managing the portfolio for Total Returns, keeping residual capital for the client’s estate. Added value for your clients is a fee well-earned.

You may have seen recent reports that, in response to complaints received, FMA has stopped a KiwiSaver provider’s unregistered sales rep from engaging in unacceptable sales practices.  The rep’s activities raised three concerns.

First, the rep was in breach of the FSP Act for being unregistered.

Second, his actions caused the KiwiSaver provider he represented to be in breach of the Securities Act.  This is because of his modus operandi – which included calling out to people, enticing them with a monetary reward to join the Scheme – an unauthorised advertisement under the Securities Act.

Third, he failed to provide a copy of the Scheme’s Investment Statement and so again caused the KiwiSaver provider to breach the Securities Act. His relationship with the KiwiSaver provider was eventually (after a second warning) terminated.

The aspect of this enforcement experience that I want to talk about in the context of the new financial advisers regime is the responsibility of product providers for their distribution channel.  Providers have a both a legal and a moral responsibility to protect their customers.

As a minimum we expect all product providers to ensure their advisers are registered (unless they are a QFE in which case they don’t need to) and providing compliant disclosure statements.  We expect them to know about the advice practices of those offering their products and to be satisfied that they meet robust care, diligence and skill standards.  We expect them to ensure that the Investment Statement is provided and to check for any misleading, deceptive or confusing conduct, including advertising.  We expect them to take any complaints seriously and refer serious conduct matters to FMA.

Providers unsure of their legal responsibilities for those acting on their behalf should refer to sections 5I and 20F of the Financial Advisers Act and, if necessary, take legal advice.  If they are still unsure of how far their liability extends we would advise they err on the side of prudence.

As responsible corporate citizens they also have a moral responsibility to set a high benchmark for customer protection.  Their brand and reputation is at stake.  Under the new Financial Markets Authority Act, FMA can issue warning statements including about unacceptable selling and distribution practices being used by distributors of, for example, particular KiwiSaver schemes.

The success of KiwiSaver is crucial to New Zealanders’ confidence to invest.  FMA is very focused on ensuring appropriate and compliant advice practices and will act decisively to curtail unacceptable modus operandi by individuals and firms.

Mel Hewitson

So this was a savings and investment Budget.

Lots of attention has been focused on the KiwiSaver changes and quite rightly. It’s one of the most successful products the country has ever seen and has $8 billion of funds invested in it.

The government is proposing to cut the member tax credit in half, which is what I predicted last week.

What’s more worrying is that employers are the losers. They lose the tax-free status of their contributions and they will be forced to increase their contribution rate from April 2013.

These changes aren’t going to be popular with the 1.7 million KiwiSaver members or with employers. I wonder whether the government has underestimated the backlash they will generate, especially from the business sector which is a core constituency group.

What interests me is how several other changes will impact on investors. The government wants to partially privatise state assets; it wants to have an earthquake bond and it plans an inflation indexed bond.

I have spoken to a number of people since the February 22 earthquake arguing that the government should have quickly put together a bond to help fund the rebuild of Christchurch. It is an excellent funding idea and if done earlier could well have been sold offshore, particularly to investors who were sympathetic to what happened in Christchurch.

Index-linked bonds are useful too. There is a view emerging that there are growing risks of strong inflation growth coming.

Deepening capital markets and getting more New Zealanders investing is a good thing. But what we really need to do is wean people off fixed interest investments and into growth assets.

Unfortunately there is nothing in the Budget which does that. You could argue listing bits of state assets on the NZX falls into this category.

The reality is the companies suggested aren’t really growth stories. They are income plays and reinforce the fixed interest addiction.

One thing I was hoping for was a rearranging of PIE tax rates to slightly advantage PIE funds for all investors over other forms of investing.

That hasn’t happened but is something which would have been worthwhile.

Overall the Budget moves KiwiSaver more towards being a true workplace savings scheme. The next thing will be ever increasing compulsory contribution rates. It’s a plus that the government talked about resuming contributions to the NZ Superannuation Fund, but it missed the target in some areas. It will also, I predict, be a hard sell for the government.

National governments seem to have a genetic disorder when it comes to savings schemes. They just don’t seem to get them and always make changes – often to the public’s detriment.

Schemes like KiwiSaver need certainty to continue to have investor confidence. KiwiSaver has been one of the most successful products ever launched in New Zealand. It has 1.7 million customers already and has been embraced by citizens.

It’s been embraced because of its simplicity, as well as for the $1,000 kick start. To a lesser degree the $20 a week “tax credit” has also been a selling point.

People will lose confidence in the scheme if this, or any other government, continues to meddle with it. As member balances grow the reaction to meddling will become stronger.

I take a view the government has to think about investing and retirement savings over the long term and has to take account of the economic cycles.

We know cycles happen and this should have been thought about at the design stages. What happens when the economy is bottoming out?

With the NZ Superannuation Fund National has acted a little like a typical mum and dad investor and done all the wrong things. The best time to be investing in the markets is when they are at the bottom yet they stopped contributing the NZ Super Fund.

In the past year it made returns of more than 20%.

Now we are told that KiwiSaver in its current format is unaffordable. That isn’t something which has been agreed on.

Again the government needs to think long term. KiwiSaver is about building up a pool of capital for the economy.

Key’s arguments about the member tax credit not being real savings is incorrect.

All this talk of cutting the member tax credit isn’t going to make a huge different to the government’s finances. Currently it costs around $800 million a year. If the MTC is cut by half that only equals about one week of what the government says it has to borrow. The stark reality is that there are far less productive things the government funds which should be cut ahead of KiwiSaver.

Overall it’s a ballsy move from the government. In an election year it is taking away money from 1.7 million people and putting more costs onto businesses.

Whether it is right or not; it quite possibly will become a circuit breaker for the election.

We’d been waiting for a big KiwiSaver deal and now we have it. Fisher has landed the Huljich business.

This is probably no surprise as many had speculated Huljich was only in the game for the short term. Meanwhile Fisher has been acquisitive picking up other books including the First New Zealand KiwiSaver business.

So far there has been little explanation of the deal so it’s worth having a look at it.

I suspect one of the biggest drivers around Huljich’s decision to sell is adviser regulation. To sell or give advice on KiwiSaver one has to be an AFA.

Huljich, like Fidelity, managed to build significant KiwiSaver client bases by using insurance advisers and mortgage brokers to sign up members. These people are no longer able to provide that service.

We have produced an in-depth report and analysis on KiwiSaver managers based on last year’s figures. One of the findings is that Huljich and Fidelity were top performers when it came to increasing membership numbers.

(The report is available on a subscription basis. For details email philip@goodreturns.co.nz or call 07-3491920).

However, both firms also featured at the other end of the table when it came to average members balances.

Fisher, meanwhile, had the eighth highest average member balance and that position would have subsequently been reinforced by its FNZC buy. (FNZC was third highest, albeit a small number of members).

One of the challenges for Fisher will be to manage what has become a large, and very diverse membership base.

Coming back to the reason for the Huljich sale I would guess that adviser regulation means that it has, to all intents and purposes, lost its distribution force. Added to this Huljich had used Mike Pero Mortgages, NZF and Dorchester to sell its products. The first two ended the arrangement earlier this year and it is unclear what Dorchester are doing.

How Fisher will manage all these clients will be interesting to watch too. Its model has been very much around direct distribution and they do little with advisers.

One clue to this is that Fisher has set up a QFE. This maybe the start of a plan to build its own tied distribution force to sign up and manage clients.

I thought it was worth having a go at trying to defend Peter Huljich. As readers will know the Securities Commission laid criminal charges against Peter Huljich and Huljich Wealth Management (HWM) for allegedly misrepresenting its KiwiSaver funds to the public.

Since this story broke there has been plenty about it including a comprehensive statement from Huljich about what happened. This is detailed elsewhere on Good Returns.

As part of the background Huljich has acknowledged there was a mistake, stepped aside from his role and offered make ups to its KiwiSaver members.

Now the Securities Commission lays criminal charges against him which, if proven, could result in time behind bars.

The so-called victims of this alleged crime haven’t lost money and have been told that if they are unhappy about HWM they can switch to another of the many KiwiSaver providers in the market place – for free.

Here’s the bit I don’t understand – why is the Securities Commission taking this action when there are plenty of other potential cases where investors were deliberately misled; are real victims as they lost money and are now suffering. Secondly, did Huljich really top up the funds without anyone else associated with the business knowing?

I don’t know if Huljich set out to deliberately mislead investors, and unless there is some smoking gun then it would be hard to secure a conviction.

Likewise it is incredibly difficult to believe the Huljich took the actions he did and no one else knew anything about it or raised any objections.

The directors who signed off the accounts should be included in any criminal proceedings the Securities Commission pursues.

So too should Trustees Executors which is both the trustee for the fund, and the fund administrator.

With this latter role the company must have known what happened and approved it. If it had doubts it should have walked across the room and raised it with trustee.

Looking at the 3^rd Annual ASSET Magazine KiwiSaver survey it is clear that HWM has done well signing up members.

Indeed our analysis of data shows that HWM was one of the most successful managers in the year to March 31 at signing up new members and had the highest growth in FUM at a whopping 625%.

Yes, justice has to be seen to be done, but again why this case when there are plenty of others where there are actual victims? Is the commission just after a high profile scalp to look good?

You can see why I didn’t follow my father, grandfather and uncle into the legal profession!