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Fund classification could trip up investors: Adviser

Investors need a better way of understanding how risky a KiwiSaver fund really is, one adviser says.

Friday, June 14th 2019, 6:00AM 1 Comment

Jon-Paul Hale, of Willowgrove Consulting, said the FMA's KiwiSaver Tracker was potentially confusing for users because the way funds are assessed meant that balanced options could sometimes be placed in the same basket as growth or conservative funds.

When he used the tool recently, two bank growth KiwiSaver funds displayed among a comparison of balanced funds.

The FMA said it was because the funds were reported on based on their actual asset allocation, not the target allocation.

Hale said that could mean an investor would choose such a fund thinking it was less risky than other growth funds, then find it returned to its target allocation and became more volatile than expected.

But a spokesman for the FMA said it was comfortable with the approach, and it was disclosed appropriately.

“When we launched the Tracker, we explicitly stated that ‘The information in the KiwiSaver tracker about fees and return is an important factor in considering your investment, but it is not sufficient information to make an investment decision’.

“The FMA is satisfied that the tool does what it was designed to do, which is to complement the other independent sources of KiwiSaver analysis and allow investors to look carefully at who is managing their funds and what the results and costs are.”

Aaron Gilbert, head of the finance department at AUT, said strategically altering asset allocations was an important tool for chasing returns in active management.

“Where this becomes a problem is when you have arbitrary decisions about what is balanced and growth, for instance. You need some threshold, but you will get edge cases where small changes could see them move between categories."

Sometimes a balanced fund and a growth fund could have more similar risk profiles than two growth funds, he said.

"The categories themselves are broad, two growth funds could have different amounts of risk associated with them but both be growth funds.

"There is an issue with using such crude tools as risk types, especially when asset allocations change, either actively by choice or passively due to different returns from different assets.  It is an inherent weakness of that way of categorising, but short of getting people to understand more sophisticated measures it is what it is."

Tags: FMA KiwiSaver

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Comments from our readers

On 15 June 2019 at 10:25 am JPHale said:
And while the FMA and Mr Gilbert have valid points, we know consumer behaviour often results in unintended outcomes.

We know consumers don't read disclaimers we also know that they don't seek advice either. The long forgotten finance company collapses is evidence of this. 90% of that issue did not have an adviser involved.

The weakness of the FMA tool, and others like it, is those funds that are fringe with their allocation behave in ways like this. And it is the consumer on the site going oh that one is green and selecting it over a comparable yellow one and then finding that the presentation was an anomaly with a restructure of the allocation. It puts them at a disadvantage, potentially a significant one.

It's fine with the non FMA ones, people expect an aspect of sales, with the FMA one they expect it to be more reflective of the consumer perspective as they are the regulator and should be above potentially misleading the public.

And yes, we have significant lack of financial literacy with the NZ consumer, we know it, yet we still insist of making it harder than it should be for them.

The harsh reality outside the ivory towers of educated financial services people is the average consumer buys on the back of relatively little information that is often driven by colour selection.

And for many they may find those comments offensive, at the same time it is the reality for a majority of the population. Through no fault of their own other than they haven't been exposed to it or taught anything about it.

And the rather short-sighted expectation of consumers checking their KiwiSaver regularly is quite misplaced, most don't give it a second thought, set and forget or for a good portion joined and never thought or followed up about it.

We need to build our tools to enable consumers to help themselves, not snooker them with the fringes.

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