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Why three young 'uns became advisers MDRT: A life changing phone call GRTV: Tools to grow advice

SUMMER | 2023/24 | WWW.GOODRETURNS.CO.NZ

Sweet 16 and growing up Experts Wishlist for the future

Kernel KiwiSaver Plan on the Ascent Low fee, digitally led and expertly crafted funds

The Role of KiwiSaver Advice Written by Dean Anderson, Founder and CE of Kernel

It’s no secret that KiwiSaver plays an increasingly

important role in Kiwis’ ability to retire on their terms. After all, it’s likely to be our second largest asset at retirement, after property. With over 3 million members, New Zealand’s collective KiwiSaver assets have reached $100 billion, twice the amount recorded in 2018. The Financial Markets Authority (FMA) recently projected that these savings could grow to over $2 trillion by 2070. A figure that highlights the scale and influence KiwiSaver will having in shaping the future of New Zealand. As KiwiSaver continues to grow, it's anticipated there will be a rise in political intervention in shaping its structure. The recent election serves as a pertinent illustration, showcasing instances where political rivals suggested policies that tamper with the fundamental purpose of KiwiSaver. Financial advisers must ensure there is a strong voice advocating for the interests of New Zealanders. This collective effort is crucial in ensuring that any policy interventions align with the needs of end customers. Your role as impartial experts makes your voice indispensable in shaping policies that serve the best interests of the public.

2 | ASSET SUMMER | 2023/24

As KiwiSaver account balances continue to grow, it's becoming more common to see balances in the hundreds of thousands, reiterating how crucial it is for members to access reliable and impartial financial advice. This guidance should go beyond merely structuring KiwiSaver investments to align with clients’ objectives; it also needs to involve thoughtful considerations on how this capital will be utilised during retirement. With a significant portion of the 724,000 members aged 55+, including 214,000 individuals over 65, financial advisers need to ensure they have the tools and processes to effectively integrate KiwiSaver into their comprehensive suite of financial planning services. Fortunately, a significant number of independent financial advisers are actively involved in this discussion. According to our recent adviser survey, 82.5% of advisers indicated that they currently offer advice on KiwiSaver or have intentions to do so. This comes as no surprise, considering the high calibre of our independent financial planning industry, which frequently adopts a holistic approach. Certainly, a common argument among those yet to venture into KiwiSaver advice revolves around the balance of time and return. The effort required for providing advice, coupled with compliance costs, often does not align with the potential income achievable through delivering impartial guidance. This is especially notable since, historically, the space has been occupied by ‘free’ KiwiSaver advice, supported by a trail commission model. Given the FMA’s expressed dissatisfaction with the trail model in their Value For Money assessments, there’s the possibility that fee and servicing models related to KiwiSaver will need to undergo transformation. For advisers contemplating the future, the strategic use of technology and collaboration with a variety of reputable providers can enhance the productivity and profitability of KiwiSaver advice, all while ensuring exceptional value for customers.

The Impact of Fees As with all investments, a small fee can make a big difference to your client’s underlying return, particularly as this compounds over time. The graph below shows the impact an additional 0.75% in annual management fees can make on a $100,000 balance invested over 20 years, at an average return of 7% per annum.

Choose between three diversified funds Catering to all time horizons, these funds have an annual management fee of 0.25%.

The investor who chose a fund with a fee of 0.25% p.a. versus 1% p.a. would be left with an additional $51,569 at the end of the 20-year period.

Portfolio Value from investing $100,000 over 20 years $400,000

$368,072.73

$350,000

$316,504.18

$300,000 $250,000

High Growth Fund A diversified, high-risk fund suitable for those working towards long-term goals 5+ years away.

$200,000 $150,000 $100,000 $50,000

0.25% annual fees

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1% annual fees*

*1% is the average annual fee of the KiwiSaver growth category.

Balanced Fund

Why the Kernel KiwiSaver Plan? With a mix of index and active investment strategies, the Kernel KiwiSaver Plan has been designed with all the details in mind.

A diversified, higher-risk fund suitable for those working towards medium-term goals 3+ years away.

Opt to keep it simple with our three diversified funds or fully customise a bespoke portfolio for your client using our full range of funds. This customisation enables advisers to properly align and manage their clients' KiwiSaver assets in conjunction with their wider asset base. With a tailored platform and registration process for advisers and advised clients, we have adapted our offering to suit your requirements. With Kernel, you can manage your clients’ KiwiSaver portfolio on their behalf, with ease.

Cash Plus Fund A diversified low-risk fund suitable for those working towards short-term goals within 3 years.

Unlock your clients’ retirement savings with the Kernel KiwiSaver Plan today. Contact us at 0800 537 635 or advisers@ kernelwealth.co.nz This information is not investment advice. Past performance is no indicator of future returns. Kernel has taken reasonable steps to ensure that the information in this document is accurate and up to date. Kernel does not accept responsibility for any error or omission for any loss resulting from the use of this information, except to the extent required by law. For more information on the risks and features of the fund, please refer to the Product Disclosure Statement at www.kernelwealth.co.nz

Or customise your clients’ KiwiSaver portolios using a mix of Kernel funds Choose between both index funds and actively managed funds. Annual fund management fees range from 0.25% - 0.45% depending on the fund. WWW.GOODRETURNS.CO.NZ | 3

Contents | ASSET Summer

KiwiSaver Special KiwiSaver turned 16 last year and it’s time the scheme was reviewed. ASSET brought together senior figures from leading KiwiSaver providers to discuss potential changes.

Meet The Advisers of the Future ASSET profiles three advisers who have graduated from Fidelity Life’s Career Connect programme.

UP FRONT

FEATURES

EDITORIAL Sweet 16.

NEWS Advisers' mental health improving; Defunct FAP news $8mill; Amplifi CEO departs.

PEOPLE Ballantyne’s replacement at Partners Life; Things are happening at ANZ Investments. “Haakie” takes leave from Cigna while Southern Cross appoints new head of sales. Plus, a quick round up of other key moves. GRTV Kernel’s Dean Anderson shares the results of an adviser survey. Technology is the key to the future.

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KIWISAVER ROUND TABLE In this bumper feature we explore KiwiSaver and discuss ideas to improve the scheme. NEW ADVISERS Meet the advisers of the future. ASSET profiles three advisers who have graduated from Fidelity Life’s Career Connect programme.

REGULARS 12

MDRT Wealth and health crisis forges new purpose for this adviser.

RUSSELL HUTCHINSON Russell Hutchinson argues the case for and against replacement business and comes up with a verdict.

INVESTMENT COMMENTARY David van Schaardenburg asks: Are we getting better at KiwiSaver?

OPINION Steve Wright asks if advisers and FAPs are doing enough to meet new regulatory standards. In this article he explores risks advisers may not be aware of.

THE GOOD RETURNS TOP 15 For something special here are the most read News, Insurance and KiwiSaver stories over 2023.

Changed your address? Make sure you don't miss an issue by changing your address. Go to: tarawera.co.nz/coa

UP FRONT | EDITORIAL

Sweet 16 T his issue is our annual KiwiSaver Special featuring our Round Table. I sort of think of it as Sweet Sixteen. Sixteen is a coming of age time in life and, possibly, it encapsulates KiwiSaver. It’s come along way and is about to go into the next phase or maturity – or growing up. A theme which became loud and clear in the past 12 months is that KiwiSaver deserves a decent review. Not tinkering but a proper review, and hopefully non-partisan, about how to make the scheme better. The previous government had a review on its work plan but never started on it, probably due to things like Covid. Our new government seems to only want to tinker with KiwiSaver. The policies National campaigned on really were very poor options and had nothing to do with improving the scheme. You will find our Round Table discussion interesting and some of the ideas which were put forward deserve further consideration. For proper change and improvements the industry needs to come together and lead a change programme – essentially do the work government and officials should do. Making KiwiSaver great is not just about the savings industry it is also about New Zealand’s economic strength. You need to look no further than to Australia to see the impact a large savings pool can have on the economy.

28 and counting

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Contributors

ASSET is published by Tarawera Publishing Ltd (TPL). TPL also publishes online money management magazine Good Returns GoodReturns.co.nz and TMM – The Mortgage Mag.

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Publisher

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Design

Michelle Veysey

Last year was a challenging one for financial services across the board whether it was investments, life insurance or home loans. How 2024 will pan out is anyone’s guess. Linkedin told me the other day I was celebrating 28 years since setting up Tarawera Publishing. I’ve seen lots of change and that is certainly happening in the financial advice market. Talking to advisers they are feeling much more comfortable now the latest set of regulations have bedded in. While many of the old hands have hung up their shingle it is pleasant to see that new blood is coming into the industry. In this issue we profile three young insurance advisers who have graduated from Fidelity Life’s Career Connect programme. I hope you have all had a good break over the summer, taken time out to recharge your batteries and ready to have a cracker 2024.

Philip Macalister Publisher

Russell Hutchinson, David Van Schaardenburg, Andrea Malcolm, Jenni McManus, Steve Wright Jing Tao P: 07 349 1920 E: subscriptions@tarawera.co.nz

Disclaimer

All articles in ASSET are for information purposes only, the content is intended to be of a general nature, does not take into account any person’s specific circumstances, and is not financial, legal, or other advice. It is recommended you seek advice from a suitable expert before taking any action in relation to anything contained in this magazine.

Any reproduction without prior written permission is strictly prohibited. ISSN 1175-9585

WWW.GOODRETURNS.CO.NZ | 5

UP FRONT | NEWS

Advisers' mental health improves but still concerning The mental health and wellbeing of financial advisers has improved, but there are still worrying issues. AIA has repeated its Wellbeing survey of advisers it first did in 2021. Overall, the mental health risk of advisers was 6.6% lower than in 2021. While that is good news, worryingly advisers are twice as stressed as the average New Zealand worker. A publication from the Mental Health Foundation in 2022, cited data from Statistics NZ showing one in five workers in New Zealand reported being stressed by work ‘always or often’. “This suggests that the number of financial advisers experiencing stress most of the time at work, is two times higher than the average worker in New Zealand.” Although the overall wellbeing of financial advisers showed signs of improvement since 2021, stress remains a concerning factor. Interestingly the main cause of stress has moved from government regulation in 2021 (as advisers prepared for the new licencing regime)

to compliance. Regulation was the highest cause of stress for advisers in 2021 at 61%. However, this year the main pressure point for advisers was compliance, with 50% rating it as ‘highly’ or ‘very highly’ stressful. “Compared to previous research, we’re noticing a real sense of anxiety which has shifted away from the unknown and towards the fear of making a mistake. This comes as regulation, compliance, and auditing remains front of mind for advisers,” AIA chief partnership distribution officer Sharron Botica says. While there has been improvement since 2021, the impact of stress on advisers’ health and wellbeing remains a concern. The biggest impact was experiencing sleep issues (41%), followed by the risk of taking stress leave (19%), seeking medical support (17%), and using alcohol to manage stress (15%). Human Performance Researcher, Adam Fraser, who led the study says using alcohol to manage stress does not work. “Alcohol does not help anything. It has no positive effect at all.” Advisers coping well are managing their

stress by turning to others for support, including product manufacturers (58.0%), industry peers (57.9%), as well as groups and FAPs (53.1%). Others are tackling stress by adopting good wellbeing habits, such as improving their ability to draw boundaries around work-fromhome (increased by 7%), and showing more consideration to self-development in their role (increased by 4%). Fraser was surprised that product providers rated so highly in providing support to advisers as in Australia the result was much lower at 28%. AIA head of IFA and group distribution, Anna Schubert, described the result as “coparenting.” Everyone had to come together and get behind advisers as they went through regulatory changes, she says. Fraser noted that advisers have an incredibly varied load of work tasks. Emails, administration and phone calls account for nearly 40% of the workload. “One of the sad things is that advice is only 12% of your time.” Yet giving advice is what energises advisers. A

KEY SOURCES OF STRESS

Source: AIA NZ Adviser Wellbeing Research study

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FRED OHLSSON

Amplifi Group managing director departs

Amplifi, the parent of Mint Asset Management, has done a reshuffle following the departure of its managing director. Former ANZ executive Fred Ohlsson stepped down this month as managing director of Amplifi Group, to take up a new role outside of the fund and wealth management sector. Amplifi was created two years ago as the parent company of Mint Asset Management and with the goal of creating "New Zealand’s pre-eminent independent wealth management group of companies." "Amplifi Group will provide New Zealand individuals and organisations access to high-

value services and best-of-breed investment products. The group, which houses Mint Asset Management, will continue to grow organically and through acquisitions," the company said at its formation. During his time at Amplifi Ohlsson has started building an independent wealth management business, Sage Wealth Management. It initially acquired Nelson-based Totara Wealth Management and last year bought Prosperity Partners. The company said in a statement it will "maintain its focus on organically growing Sage through future acquisitions of independent adviser businesses that fit strategically within

the group." Mint remains the core priority of the group. It has invested "significant resources and capability" in its investment team and proposition over the past two years, with the most recent being the recruitment of Matthew Hanchet as head of retail distribution, who replaced David Boyle. Mint founder and chief executive Rebecca Thomas will now lead the wealth management side of the business under Amplifi as well as being Mint CEO. Long-time chief operating officer Simon Haworth has been promoted to general manager of Mint to support Thomas’s leadership of the business. A

Shuttered FAP owes around $8 million The liquidator of deregistered insurance advice firm Foundation Advice Ltd, estimates it owes around $8 million. Auckland-based Foundation Advice offered advice on life and health insurance. It was put into liquidation in October last year by the Auckland High Court following an application by Inland Revenue for unpaid GST. The Official Assignee was appointed as liquidator.

In the first liquidator’s report filed on the Companies Office website, the Official Assignee says Foundation Advice had an insurance book of business agreements with several insurance companies, entitling it to receive commissions for various insurance products. The liquidator will contact these companies to assess the value of the FAP’s book of business to see whether it can be sold for the benefit of creditors. Liabilities listed in the report are employee claims of $1.1 million, unsecured creditor claims

of $6 million and the IRD claim of $1 million. A progress report will be completed in the next six months. The Financial Markets Authority (FMA) gave Foundation Advice a transitional FAP licence in March 2021 followed by a full licence in October 2022. But it was deregistered from the financial services provider register on November 6 for not being a member of an approved dispute resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. A

WWW.GOODRETURNS.CO.NZ | 7

UP FRONT | PEOPLE

privileged to join a team committed to making a difference for customers and the community, driving growth while delivering value for the parent, Dai-ichi Life.” He has been with Manulife for eight years; prior to that he was with ANZ in Australia and Hong Kong for two years. Earlier in his career spent 11 years with the Australian Army as an army officer.

PARTNERS NAMES NEW CEO TO REPLACE NAOMI BALLANTYNE

Michael Weston will take over leading Partners Life from early March. He comes to Partners Life directly from his role as Asia, Head of Strategy and Transformation for Manulife, based in Hong Kong. Partners Life chairman Jim Minto says “Michael’s extensive background in financial services operational, transformational, and strategy roles, coupled with his in-depth knowledge of multiple international markets makes him an ideal candidate to continue Partners Life’s journey of using intelligent innovation and excellent execution to deliver outstanding customer and stakeholder value.” Naomi Ballantyne believes that Weston will fit perfectly into the Partners Life culture of kindness and restlessness that she believes epitomises Partners Life. “Michael will have an outstanding executive team around and behind him, who are excited to help him move Partners Life into its next phase of growth. I feel extremely content that Partners Life and all of its people will be in very good hands with Michael at the helm and I can’t wait to watch their progress from the retirement side-lines.” Weston, who is originally Australian, and his Kiwi wife are excited to be ‘’coming home’’ to New Zealand and to Partners Life. “I am honoured to have been appointed as the new CEO. I admire Naomi’s contribution to the insurance industry and the incredible foundation built by her and the team at Partners Life. I am 8 | ASSET SUMMER | 2023/24

PAUL GREGORY

Partners has chosen to make an external appointment to fill the chief executive role being vacated by founder and managing director Naomi Ballantyne.

position the business for growth. "To ensure we stay competitive and continue to meet the changing needs of our customers, our business model needs to continue to adapt and evolve," Mackenzie says. Gregory will be a member of the investment management leadership team and report to the CIO. “I have known Paul for a long time given we worked together for the Guardians of the NZ Superannuation Fund," Mackenzie says. "He has deep expertise building and maintaining strong investment partnerships as a critical part of delivering customer outcomes."

PAUL GREGORY TO LEAVE FMA Another former NZ Superannuation staffer joins ANZ Investments in a senior role. Paul Gregory is leaving the Financial Markets Authority to become the new head of investment partnerships for ANZ Investments, reporting to the chief investment officer. ANZ's new CIO is George Crosby and both he and Gregory worked at NZ Super, as did ANZ Investments managing director Fiona Mackenzie At the FMA Gregory led the regulatory approach to the retail investment management sector including KiwiSaver and, currently as the executive director, response and enforcement, for tackling misconduct across the financial sector. In keeping with the FMA’s standard conflicts of interest protocols, Gregory has stood down, effectively immediately, from involvement in any regulatory work of the FMA. Executive director for evaluation and oversight, and general counsel, Liam Mason, takes on Gregory's role in an acting capacity. As head of investment partnerships, Gregory will be accountable for building strong and enduring investment partnerships with ANZ's external global partners, both current and future. ANZ is working through how possible partnerships with two global firms could help it deliver customer outcomes and

DAVID HAAK

NAOMI BALLANTYNE

PARTNERS NEW CEO; ANZ BULKS UP INVESTMENT TEAM; HAAKIE ON THE MOVE

HAAKIE TO MOVE ON Well-known Chubb general manager - distribution, David Haak, is moving on. “Haakie” is well-known to advisers after a long career at Sovereign and now three years of service at Chubb. He originally joined Chubb (formerly Cigna) as a consultant for three months, but made the decision to stay on. Chief executive Gail Costa says he has been "an invaluable member of our leadership team ever since. “He’s significantly contributed to our success, drawing on his 30-plus years of industry experience to help firmly establish our business as a mainstream provider of life insurance." "Under his leadership, we've seen substantial growth in the business we do with you all - a major contributor to us having a 15% market share of new business last quarter. "While we'll miss him, we wholeheartedly support his decision and wish him the very best as he moves his focus to governance roles." The company will soon start a search for a successor to fill the general

SOUTHERN CROSS FILLS SALES ROLE

Kiwibank, and overseeing the Unite Against Covid-19 public engagement programme. “At Southern Cross, Regan is wellknown for his critical thinking and strategic approach. He has the vital mix of skills and experience to lead our sales and marketing team to continued success and drive our member centric strategy,” chief executive Nick Astwick says. “Regan has been instrumental, alongside his team, in developing the Southern Cross brand and has played a significant role in introducing our member wellbeing benefits, including Raise counselling or wellbeing coaching, CareHQ online GP consultations, and MedPro health checks.”

OTHER MOVERS

Southern Cross names its new chief sales and marketing officer. Southern Cross names its new chief sales and marketing officer. Southern Cross Health Insurance has appointed Regan Savage to the role of chief sales and marketing officer, replacing Kerry Boielle, who will join TSB as its new chief executive. Savage is an internal appointment. He joined Southern Cross three years ago as head of marketing, following senior leadership roles at Trade Me and

In other people news Shannon Murphy has left Harbour Asset Management and joined Forsyth Barr. Her new role will be very similar to the previous one but will be focussed on ForBar advisers rather than independent financial advisers. Harbour do not plan to replace her as its portfolio managers spend a lot of time on the road doing presentations. Aaron Gascoigne, who previously represented PM Capital in New Zealand then moved for Forsyth Barr has now

SHANNON MURPHY

manager – distribution role. "In the interim, we’ll be working closely with Haakie to ensure smooth transition over the next three months," Costa says. Haakie says: "While I’m not out the door yet, I’d like to say how much of an honour it’s been to work for this company. I’ve thoroughly enjoyed the last three years and have really fed off the passion, energy and experience that Gail and the whole Chubb Life team bring to our industry. "I’ll continue to act in governance roles and therefore won’t be leaving the industry entirely, but it’s time for me to step away from the frontline and focus more on my family.

joined mortgage group Vega. One of Trustees Executors senior managers, Robert Sloan, has joined Shift. Sloan was general counsel at TE and active in developing a stewartship code in New Zealand. Shift was established in 2017 and designed to be a disruptive force in legal services. Its focus is to provide expertise, advice, and capability when and how its clients need it. It also allows its consultants, work in challenging and rewarding senior project roles whilst having the flexibility to control their hours to work in with their lifestyle. A

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WWW.GOODRETURNS.CO.NZ | 9

FEATURES | GRTV

Advisers need to embrace technology to thrive Kernel founder Dean Anderson discusses the future of financial advice. He says it’s bright but advisers need to be more tech-savvy.

GRTV: YOU HAVE JUST DONE A SURVEY OF ADVISERS, LOOKING AT WHAT THEY'RE DOING, AND WHAT WOULD YOU SAY IS THE OVERALL STATE OF THE FINANCIAL ADVICE INDUSTRY? Anderson: We found was a really strong sense of optimism for the future of the sector and for their businesses. Many of them are looking to grow or hire new advisers, so I think tomorrow is looking really positive. GRTV: AMONGST THE THINGS YOU ASKED, ONE WAS HOW FULL ARE THEIR BOOKS. AND SO WHAT WERE THE NUMBERS THERE? Anderson: We found that there is a general sense of opportunity and problems that also need to be solved. Only 13% of respondents said that their book was 90% plus full. So there was a really large percentage of them who were only 50, 60, 70% full. So there is capacity out there. I think there is the ability to service more clients. There's two ways to look at that. Is that an issue, or is that actually the opportunity? And I think we see that in the response, that many of them are looking to try and grow and build their businesses still. GRTV: IT WAS INTERESTING TO SEE HOW MUCH, OR LITTLE, MONEY SOME CLIENTS HAD. Anderson: These are the subscale clients. We were trying to understand if advisers will take on clients either because they are trying to grow the business and they'll accept anybody, or from a friend or family. And actually what we found was a quarter of the respondents said that between 26 and 50% of their client base is subscale. And so, that's a large percent. What we found is that most of these advisers tend to have a large proportion of their business, of their client base, that is not efficient, 10 | ASSET SUMMER | 2023/24

that they're probably not making a return on when they really assess the amount of time and hours they spend looking after them. GRTV: SHOULD THOSE ADVISERS BE LOOKING AT CULLING THOSE SUBSCALE CLIENTS, OR WHAT SHOULD THEY DO WITH THEM? Anderson: I think what we have seen there is that when you look at the typical advice practice today, it hasn't really evolved over the past decade or so. So the options are either to cull those clients and be more serious and rigorous about who you're taking on and been very clear about why, or actually to look at the opportunity, which is, how do you leverage technology to actually make a better return and be able to service these clients and create longer term value? And there's a really interesting paper out of the US by Oliver Wyman looking at the future of wealth and advice, and they have basically flagged what we all can sort of see is that the real opportunity isn't scrambling to compete for the million and $5 million clients. The majority of revenue in the future is going to come from the mass affluence. These are the typical mum and dad investors, and that's going to come from two things as they're accumulating wealth, but they're also going to be the recipients of the massive intergenerational wealth transfer that's starting to occur and will accelerate over the next decade. But to actually service them, you need a hybrid-based model. You need to be really looking at the technology you use in your processes day to day, but also the way you interact and engage with your clients. The typical consumer today expects a really good technology-led experience, and that's the opportunity is to say, "Okay, how do we improve our business to not only make these subscale clients profitable, but actually further grow our business?"

GRTV: SO WHERE'S THIS TECHNOLOGY GOING TO COME FROM AND HOW ARE ADVISERS GOING TO ACCESS IT? Anderson: We've been working pretty hard on this ourselves. There's two pieces of the puzzle. One is leveraging different technologies to run your day-today processes internally. So what's your CRM? What's your mailing processes? What insights and data do you actually have on your customers? And then there's the actual interface from how do you onboard a client? What sort of platforms are you using for them? And so for us at Kernel, we've been working on, how do we support advisers with a Kernel platform-led solution that enables them to better deliver an outcome and create value for that mass affluent market? I think what people also need to understand is what is the value proposition for those clients. The mass affluent client out there, the ones that are receiving inheritance, the thing they really value is having a relationship with somebody that's helping them unpack those real emotional questions and give them comfort about what their future looks like. They really don't care about talking about different fund managers and different ratios of the portfolio. You really need to focus on the value, which is the planning elements, which is about giving them comfort about tomorrow. And so, you need to do that with a technology-based solution, though, to do that at scale and make it accessible. GRTV: ANOTHER THING WHICH WAS INTERESTING WAS THE AMOUNT OF TIME THEY SPENT ONBOARDING A CLIENT. I WAS STUNNED AT THOSE NUMBERS. Anderson: So the average was nine hours, but it went as high as 30. And so you can see there is a bit of a spectrum out there. There's a lot of people out there with 15, 20 hours to onboard and get a client delivering their first statement of advice. And so, again, that's where technology needs to be looked at. That is not a scalable business. If you're spending an entire day to onboard one clientGRTV:SO THERE NEEDS TO BE A BIG FOCUS ON TECHNOLOGY, AND THAT'S SOMETHING YOU GUYS ARE QUITE FOCUSED ON. AND TELL ME, ALSO, I THOUGHT MOST ADVISERS WOULD'VE GOT THEIR CLIENTS THROUGH REFERRALS, BUT YOUR RESEARCH WAS TELLING US OTHERWISE.

Anderson: About one third of advisers were properly really leveraging referrals, whereby that I mean over 75% of their clients were coming from referrals. Many are not actually properly leveraging their existing client base to grow their business. And so I think that's, again, an opportunity that really needs to be look at.

Now what we've got left is I think a more hungry, optimistic group of advisers who are looking to grow. I think it's going to be really interesting, though, about where those new advisers are going to come from because many were saying they wanted to hire, but we know they're not out there. So that's challenge.

GRTV: AND YOU ASKED ABOUT THEIR FUTURES AND WHERE THEY WANTED TO GO. AND AGAIN, THE RESULTS WERE INTERESTING, AND MOST OF THEM WANTED TO GROW.

GRTV: AND ALSO, AROUND USE OF PIE FUNDS?

Anderson: Yeah, I think overwhelmingly, the general comments were people were wanting to grow their business. A lot was saying they wanted to hire more advisers. I think that's a reflection of we've been through quite a fundamental regulatory change. Those that have decided that they are wanting to step away from that, they don't want to operate in the new environment, have kind of now passed out and sold.

Anderson: We asked a range of questions around portfolios, how advisers are implementing them. One of the overwhelming trends that we're seeing with 75% of advisers have said they plan to increase the use of unlisted PIEs for the new financial year. So I think there is a really strong understanding now of looking at the total cost of investments, tax leakage, the PIE benefits. And so with the trustee rate changes and RWT rate, top tax rate at 39% now, PIEs are becoming quite an attractive tool.

GRTV: I'M QUITE INTERESTED ABOUT THIS MASS AFFLUENT MARKET BECAUSE I GUESS IT'S A LOT OF THE PEOPLE IN THE KIWISAVER SCHEMES PROBABLY FIT INTO THAT CATEGORY, DON'T THEY? Anderson: Yeah. So there are a lot of mom and dad investors out there who have got several $100,000, who are now getting a reasonable sized KiwiSaver. But the critical number is that there's over a trillion dollars of wealth in New Zealand that is going to pass through an intergenerational wealth transfer in the next 15-odd years. So that's a trillion dollars of assets, where those people are going to want some form of guidance, and majority of that is sitting in property. A large portion is in property. So, there's going to be a full reshuffle about our asset makeup, and they're going to want to speak to somebody about the inheritance that they've just received and how they're going to manage it. A

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Wealth and health crises forges new purpose for retirement planner

Aussie financial adviser Nick Longo was in despair, struggling under the combined weight of the Covid lockdown, the Royal Commision on financial services, and a life threatening health scare when a miracle phone call changed everything. BY ANDREA MALCOLM

ongo is a partner with Relevant Financial, a retirement planning firm for private individuals with a fee for service model. He spoke at the recent Million Dollar Round Table roadshow about how three years ago he stood on the verge of losing everything due to a health and wealth crisis. What got him into MDRT is its values and whole person concept, he said. What got him to stay was the concept of the balcony person – a person who raises others to a higher standard. A balcony person can be someone you know personally or someone that inspires you. For Longo, it was Dr John Tickell - a health and wellbeing researcher, speaker and author. Being sent home to work when Covid broke out, was a shock to the system. In Australia, the Royal Commission also began its inquiry into the financial services industry. Ten page fact finds became 40 pagers, statements of advice went from 20 pages to 70, says Longo. There were no extended time frames. Life insurance business halved. “In the space of six months my business dropped by 60%.” The Royal Commission scrutiny was also retrospective but based on the new standards which meant Longo’s company had to pay money back. There was also a mandatory audit of everything from cybersecurity to protection of 12 | ASSET SUMMER | 2023/24

information to document management. Longo’s financial planning business was soon on the verge of collapse. “I thought things couldn't possibly get any worse. And then one night I put my hand on my throat and there was a nodule.” A scan revealed a three centimetre growth on Longo’s thyroid. He would need a biopsy and was told to prepare for ongoing treatment as it was possibly cancer. At this point Longo’s life fell to its lowest ebb. “For those of us who come from a broken home, who have lived with multiple families over the years and in multiple countries, stability is so important. And then one incredible time you meet somebody, you marry and are blessed with kids of your own. What broke me in the end, physically and mentally, was the possibility of not being there for my family.” He had the surgery and while waiting for the result, began suffering from anxiety and depression. “I thought there's no way out of this. What's going to happen? On Saturday night, I'm with my family watching a show. They’re sitting in front of me and I have tears in my eyes, wondering what’s going to happen and then my mobile phone goes. And this is one of those miracles in my life, one of those moments. I pick up the phone and say hello.”

Miracle call It was Dr John Tickell who had inspired Longo since his early twenties. In the past Longo had ordered Tickell’s books to give to clients and Tickell was using lockdown to go through the list and thank purchasers. “I’d never met the guy. One of the balcony people in my life, randomly out of nowhere, phones me at 8pm on a Saturday and asks that question. I said we’ve got a bit to talk about doc.” It turned out Tickell had faced his own health and wealth crisis, having been diagnosed with stage four brain cancer 15 years before and bankrupted twice. Tickell told Longo we can respond to stress negatively or positively. The positive stress response is to turn to your purpose in life. “He said to me, ‘That's what we need to set right now. What are you most concerned about?’ I said dying, who’s going to look after my kids? He said, ‘Don't worry about that. Statistically it's proven that a stepdad will do a far better job than you will ever do, so get that out of your head.’ And for the first time in about six months I actually laughed.” Longo talked about how he loves helping people transition and getting their retirement in place. “And that’s when we defined my purpose in life. My purpose in life is to redefine retirement in Australia.” The biopsy results came in and the

NICK LONGO

growth was benign but Longo’s thyroid still had to be removed and he had to start hormone replacement therapy. The following day he met Tickell at a Melbourne park for a coffee and they’ve been meeting ever since. Transforming the business Longo decided not to leave the industry but he knew he would have to transform the business. “The first thing I had to adopt was ‘the top five people philosophy’. The top five people you spend the most time with will determine if you fail or succeed.” These are the builders who are willing to work together and share, he says, as opposed to consumers, the ones who take but never give back. On sorting his top five people, he set up an “accountability call”. “I wanted people who understood what it was like to go through hardship, we had goals and we wanted to succeed. “We started with a system that every Sunday we would email each other with one thing we were going to do the following week. Then we began catching up on Thursdays for an hour on Zoom to talk about what we’ve done. That ranged from things like waking up at a certain hour to building a virtual experience for our clients. Learning how to use things such as Otter, Zoom, Loom. Power in one word The next step was learning to say no to things in his business that weren’t serving his purpose, including providing mortgage advice and the much harder choice to get

out of personal and business insurance. “However, I made it my goal to coach and mentor those who wanted to provide that service because it is a critical point with retirement planning that we have these measures in place. I’m proud to say that in three years I've coached four to my standard of providing personal insurance advice. So we've got that consistency. They charge $2,200 per person to deliver a comprehensive personal insurance plan and take their commissions of 60% up front and that is the maximum commission that we can accept in Australia. Being able to outsource that provided me with a great sense of security.” Projects with purpose Through coaching and mentoring Longo began thinking of planning and goals in terms of projects with timeframes, systems. “I did not months or years, I had weeks to turn this around. The approach is, if you have a project, you might have a list of 10, 20 or 30 items. But where the discipline comes in is that you must narrow that down to 10 or 12 in the first year. You do no more than three per month because you need to make things achievable.” Longo made his projects visual. As someone who enjoys and admires Disney content, he wanted to create a ‘Disney’ experience in his business. “I want to take the stress and anxiety away from retirement and make it fun and exciting. I want people to see the future in a positive way and change their emotions.

So we adopted the Disney philosophy of retirement planning. It's a very different approach.” When a project is visual the team gets on board, he says. You can set projects on anything - compliance, more revenue. For quality control, consistency and processes he looked to McDonald’s for inspiration, a place where he would go to think things through. “We adopted the McDonald’s way for everything we do to find efficiencies. If we got stuck we challenged and broke things down. Those 70 page statements of advice and 50 page back files are still there but we’re so much better at them now.” Sometimes a piece of paper and a pen is all you need, says Longo. “What is not going to work and what is going to work? You define it. But it has to be about what you’re passionate about, your unique ability and what is profitable for your business. “So, challenge the things you need to say no to, to help you reach your purpose in life. I'm sure there’s a lot there. I listed 20, it was pretty significant from administration compliance (what can we outsource to allow me to be the most targeted, the most effective and helping).” This included clientele, the upshot being Relevant Financial no longer does comprehensive advice to people with balances under $500,000. “That is now for people who have complexity and can afford the service – $500,000 in assets with the capacity to get to $1 million. He also looked to the MDRT ‘whole person’ concept to define his clients as people who share his values. “What was hard was what happens when somebody comes to $300,000 and also has the same value system again. It comes back to the at word - no. It's not a negative word. It's a positive word. This is a discipline to define your ideal clients.” People and centres of influence The McDonald’s think sessions turned out to be an opportunity of a different kind. As a regular customer he eventually got chatting to the manager and eventually took them on as a client and opened the door to other franchise owners wanting to do retirement planning. Another vertical market he has built, thanks to an introduction from one person, is teaching staff at high-cost private grammar schools. He calls these centres of influence, similar to people of influence. At an MDRT meeting in Adelaide, he heard of another adviser whose walking group turned out to be a centre of influence. “Are you able to articulate to centres of influence what you’re known for? Can you go from a 30 second presentation to a 30 minute presentation? I transition individuals and businesses into retirement. I want to be the number one person they think of when they sell their business or that inheritance comes through.” A WWW.GOODRETURNS.CO.NZ | 13

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KiwiSaver needs more than a review 14 | ASSET SUMMER | 2023/24

Reformation over review For Kernel managing director Dean Anderson, review is the wrong word indeed the wrong concept. “It implies short termism adjustment settings and we need a long term political plan of economic management and what role KiwiSaver will play because that’s the issue. It’s addressing the inequality gaps and infrastructure gaps and understanding what role savings play within the overall economy. “At the moment politicians give no consideration to this public capital. They just don’t understand the role or the potential. And to me, I think we have a risk that if you imply or push for a review, you’re going to have politically led short termism where they’ll change the settings rather than come up with a comprehensive plan to manage KiwiSaver equality and assets over the next 50 years.” Anderson says adjustment of settings and contribution rates are part of that but there needs to be consideration of the overall health of our capital market as a long term, multigenerational plan. Mint Asset Management head of sales and marketing David Boyle says there hasn’t been any real strategic future objective for KiwiSaver. He agrees with Stubbs that the inequality gap is growing and there is also a diversity risk around people not keeping up with contribution rates. “Also you’ve got nearly a third of members not contributing at all.” KiwiSaver needs to be taken off the political agenda, says Boyle. “I think as an industry, public/private and the regulator needs to get around the table to try to develop an approach that will help with all those elements. That way you’re going to mitigate some of the small, silly decisions or ideas that each government comes up with to tweak it.” Tweaking won’t address other underlying issues given KiwiSaver is not only a pension scheme but a source of capital, says Anderson. “In the last three years there has been 27% growth in international assets [in KiwiSaver] and just 5% growth in New Zealand assets. So increasing contributions is not going to do anything for New Zealand Inc. “There’s a bigger plan that needs to come through rather than a review because that’s not going to change their mindsets or understanding about the role of KiwiSaver and economic development.” Nor will adjusting contribution rates work for lower income workers, says Turnbull. With a new incoming government, what is the likelihood of action? KiwiSaver is not on National’s list of priorities for its first 100 days in power. But Boyle doesn’t think we should wait for the government to act. “I think as an industry, public and private, should come together and come up with a strategy that will help drive whatever government comes forward.”

LISA TURNBULL

t almost $100 billion, KiwiSaver is becoming a problem, say providers. Despite it being set up to help Kiwis cover the cost of their retirement, the settings make it not fit for purpose. Fisher Funds head of third party distribution Sharon Mackay says there are challenges ahead but no appetite for change among politicians. “That is a real challenge for Kiwis because ultimately when they come into retirement, they’re the ones that will likely have the realisation they haven’t saved enough in through KiwiSaver.” Simplicity founder and managing director Sam Stubbs says the country is facing some big risks. He says KiwiSaver founder Sir Michael Cullen told him shortly before he died that KiwiSaver has stalled. “And there’s little doubt that this was meant to be stage one which would take us in some form to compulsion and increased contributions.” He says KiwiSaver is now discriminating between those who save and those who don’t and that is exacerbating the wealth gap in New Zealand, so it is actually doing what it was not designed to do.” NZX Wealth Technologies CEO Lisa Turnbull says it’s time for KiwiSaver 2.0 but it has to be a holistic review looking at what will help people at lower and higher incomes. “Not piecemeal changes. There has been tweaking that hasn't helped.” The Labour government promised a comprehensive review that, apart from a reassessment of default providers in 2021, never materialised. National has suggested using KiwiSaver to fund student tenancy bonds and also enabling members to split their funds across providers something already provided by platforms such as Consilium KiwiWRAP and InvestNow. Harking back to the 2020 election, it said it would allow people who were jobless due to Covid, to use KiwiSaver to start up a small business. It seems that for politicians on both sides of the divide, KiwiSaver lacks allure, say providers. It’s not a hot button topic like potholes, petrol pumps or ram raids. KiwiSaver is the de facto retirement brand in New Zealand but it’s becoming a political plaything, says Stubbs. “So there are policies around the edges that feed the illusion everything’s going well and all you have to do is tweak it. “But we have a trainwreck arriving and the train we’re on is a narrow gauge slow speed train whereas the Aussies and every other OECD country are on wide gauge, high speed trains. We’re just getting further and further behind. We’ve created an illusion that we’re catching up - but absolutely not.”

Fisher’s Mackay says these issues have been discussed in the marketplace for years. What’s different is that the gravity of the conversation is now heavier. “To that point, I think that as an industry we need to have a bigger collective voice for Kiwis and we have to be prepared to stand behind that.”

Show and tell Stubbs says bipartisan agreement is a noble ambition that will never happen because KiwiSaver is not a priority for the old or new government. “They don’t care because there are no political consequences for ignoring it. It’s not part of the public debate so we are not going to force the politicians to get around the table.” But, he says, the industry can show positive outcomes from KIwiSaver funding when they happen. “So when this government and previous governments have a massive infrastructure deficit, you start having conversations around, ‘This is what we could do if …’ and ‘Some people are actually doing it … “Then you will start to appeal to the politicians that this is a vote winner because it will get roads built and stuff done. You have to appeal to this greed for positive public opinion.” What makes it a particularly hard sell is that for individual members, the rewards of KiwiSaver are in the future. “If you look at the political policies of this election, the greatest delayed gratification that was sold by any party was $5 for a prescription so you are never going to sell delayed gratification to the public or the politicians unless you show a fairly significant and immediate benefit on the other side,” says Stubbs. Mackay suggests a scenario analysis of what KiwiSaver assets would have been if contribution rates had continued increasing as intended when the scheme started in 2007. “So by now we’d be at [a minimum contribution rate] of 4% minimum employer and 4% employee without tax , in total

‘At the moment there is really no incentive to contribute to KiwiSaver beyond the 3% employer contribution and $520 the government gives you’ Sam Stubbs WWW.GOODRETURNS.CO.NZ | 15

FEATURES | KIWISAVER 8%,versus Australia’s 11%. That would have been pretty phenomenal. Right now the asset pool isn’t as large as it possibly needs to be.”

Boyle says one of the great things about KiwiSaver is the simplicity of having Inland Revenue as a central repository. He says he has an “idealistic” suggestion to use it to help New Zealanders build an emergency fund that wouldn't require them to go into toxic debt or chase third-tier finance, payday lenders. “It may not be a necessarily profitable element for providers, but it would be a good mechanism to start that savings and employer contribution and then when the pot is full, money would be going into KiwiSaver for the long term and it would mitigate the increased costs. “So it’s not part of KiwiSaver but it could be part of a mechanism of savings”, he says. In September this year $21.9 million was withdrawn from KiwiSaver due to financial hardship, up from $11.2 million in Sept 2022. Boyle says this will probably continue as the cost of living increases. InvestNow senior portfolio manager Jason Choy says overall we need to focus on net outcome and suggests a change to how KiwiSaver is taxed in line with other OECD countries. “At the moment there is really no incentive to contribute to KiwiSaver beyond the 3% employer contribution and $520 the government gives you. “If you’re a savvy investor you do the minimum KiwiSaver and then invest the exact same thing outside of it because then you get liquidity, you can retire and do whatever you want. So there needs to be some type of tax benefit incentive, either at entry or exit, to encourage people to squirrel money away.” “We can talk about [getting] contributions to go up but then tax is going up, inflation is going up and the outcome is that [even with larger contributions] Kiwis will still have the same purchasing power when they retire.” Mackay says simply dropping the PIE tax on KiwiSaver earnings would start to drive different outcomes, by recognising it as a long term savings vehicle and improving its favourability over other types of shorter term savings vehicles, but Boyle says that would be a big cost to the government and Turnbull agrees saying the difference in impact of tax at exit instead of tax at entry would be significant. Stubbs says you could possibly make it fiscally neutral by compulsion because that increases the revenue of the government. On other changes, Turnbull thinks there needs to be some thought on how to engage people. “That's where systems might come in and talk about open banking - how do you see a whole view of your wealth with different banks and different providers?” The best place for that is Sorted or the Retirement Commission says Boyle. “It’s trusted and well recognised and it should have some support from the government because they're an autonomous crown entity so they have got a little bit of flexibility around that.” Mackay would like to see changes around the annual reporting that providers give to the

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‘The banks have played a masterclass in obfuscation delay, which we think is costing us about $3 million a day in excess profits because they won't hand over open banking. The politicians still don't get it’ Dean Anderson

FMA. “It doesn’t have the level of detail or information that collectively we need to see. It comes back to understanding demographically where people are sitting, so average balances for people that have been in since 2007 and age profiling in a little bit more detail to help really understand where the problem is. We have the headline level that we think we have but we haven’t really broken it down to understand where the sections of problems are.” It would be good to be able to present that to the customer, says Anderson. “Here’s where you are compared to another 30 year old. Should I look at this more, should I contribute more, am I in the right fund?” Boyle says IRD is data rich but it’s about how you decipher. He suggests it should be released to coincide with the KiwiSaver financial year, June to June, instead of March. Mackay says another topic to be considered is the settings around decumulation and how to incentivise people to not take the $200,000 they’ve saved and go on the best holiday they’ve ever had. How do you start to create incentives around the duration and constraints? It’s nice to have figures in their statements but I’m not convinced people read it or understand it.” Anderson says KiwiSaver access should be decoupled from age of entitlement to

DEAN ANDERSON

Other changes

superannuation. “If they’re going to increase the age of super, KiwiSaver should remain at 65, politically, as a way to support different demographic profiles and social needs and create a buffer that will make [increasing the age of super access] more palatable.” Stubbs says the number one thing that will lead to better outcomes on decumulation is open banking. “The banks have played a masterclass in obfuscation delay, which we think is costing us about $3 million a day in excess profits because they won't hand over open banking. The politicians still don't get it. “We are legislatively where England was a decade ago. Every other developed country in the world has it now and that will open up not only decumulation tools because it will enable innovation. You cannot innovate properly without open banking and you have to have common standard, open access API's. It’s just got to be the law. Everything else is tinkering at the edges. We are not in the proper competitive environment.” A

‘...as an industry, public and private, should come together and come up with a strategy that will help drive whatever government comes forward.’ David Boyle

KiwiSaver: The FMA shouldn’t become an ASIC hen it comes to regulation and monitoring KiwiSaver, we’re on the cusp of too much, say KiwiSaver

DAVID BOYLE

providers. Fisher Funds’ head of third party distribution Sharon Mackay says New Zealand is in danger of regulating out innovation. “We’re creating an environment where you’ll get the same wherever you go.” Simplicity CEO Sam Stubbs says having worked in six jurisdictions, New Zealand is less regulated but also the most personable, approachable, adaptable and innovative.

He agrees with Mackay and thinks New Zealand risks stifling innovation. “Regulators have gone from regulating what was in effect a cottage industry to quite a ‘big’ industry and we risk treating New Zealand as a really big economy which it is not. “There’s a temptation for regulators, not just the FMA but all regulators, to think bigger is better and more is better and that form matters more than substance.” In New Zealand everyone gets a meeting with the regulators but the FMA is starting to feel like regulators overseas where they have the intention to be in touch but industry is increasingly talking to lawyers.

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“They're becoming distant now, which I think in part is inevitable as they get bigger. But you know, they can tweak this.” He says there’s an element of beefing up and professionalism that has to happen. “You shouldn’t be able to pick up the phone and just have a conversation with the boss but [the FMA] shouldn’t want to become an ASIC.” That would be a nightmare, says Mint Asset Management head of sales and marketing David Boyle. “If you think about the FMA and KiwiSaver they’ve done pretty much what they need to do. They’ve spent a lot of time and effort on value for money and they’re looking at it from an advice perspective as well but there will be many other things that will occupy them. Now it’s more about monitoring and keeping in touch. “I think KiwiSaver, fundamentally, is structured and protected from a consumer point of view better than ever so I don’t think they need to do any more.” OTT on liquidity Kernel managing director Dean Anderson says the liquidity requirements have a huge potential impact for New Zealand in terms of innovation, assets and the NZX itself. “We don't have big institutional or wholesale flows that risk creating runs. So it's over engineering for risk that isn’t there. “But if you look at the wholesale stuff, it doesn’t get captured and then there are property syndicates where people are being locked into property funds that cannot get their money out with no protections.” Stubbs says the focus should be on where people are exploited and it’s not KiwiSaver. On liquidity, Stubbs says, our regulators want to emulate the likes of ISOCO (International Organization of Securities Commissions). “The big boys do it and we want to do it as well but they operate in very different, much deeper, more liquid capital markets that can afford that type of thing. Here, you bring those things in here and you stifle what is really a small market, it’s just not nearly as workable.” Anderson says there’s a big picture consequence of driving money overseas as well. “So there's two and a half million dollars traded on the NZX today. If you take a serious lens on liquidity, how can you even justify investing in the New Zealand market if you’re going to satisfy your stress testing.” A

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KiwiSaver: Filling the gap on advice Advisers are hugely important to the success of KiwiSaver, says NZX Wealth Technologies Lisa Turnbull, but with contribution levels low and balances small (an average $30,000) there is little incentive for them to engage. “KiwiSaver is our main source of savings in New Zealand and we need help in building that savings psyche and keeping ourselves honest. I know if I had someone tapping me on the shoulder to say, ‘you need to be contributing this much’, I’d be better off. I think it’s important but at the moment, there’s no room for it. It’s more meaningful somewhere like Australia where you have the space for advice.“ Here’s where we could do with a regulatory regime that supports providers to be able to appropriately nudge people to check their settings, says Kernel managing director Dean Anderson. “How do you help get a collectively better outcome for New Zealanders and ensure they're in the right fund? You're not going to be able to do that through financial advisers at scale. “If [a provider] sees a young person that's already bought a house sitting in conservative fund we cannot tell them to maybe look at something else. So a challenge is having a collective ability to be able to help steer the ship, because not everybody's gonna get access to advice.” He says whether KiwiSaver advice is done digitally or through some other mechanism, it needs regulatory support. It’s not so much about advice on KiwiSaver, it’s about independent advice generally and KiwiSaver as an asset is part of the planning. “In the next 15 or 20 years, there's a trillion dollars worth of generational wealth that's going to be transferred through. There's a huge

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cohort of people that need somebody to guide them with creating an overall plan for all their assets, how to set up a retirement, what to do with the kids? So that independent planning element is a key gap that we need to solve for.” He says increasingly advisers who historically have not touched KiwiSaver are starting to look at it within the context of the overall advice they're providing for clients. Fisher Funds head of third party distribution Sharon Mackay says providers need to

‘This industry has hundreds of millions of dollars of profits floating around that can easily be redirected into education and advice’ Sam Stubbs challenge themselves. “I get that the regulatory regime has changed but in the old days we used to do text and email, really simple stuff. ‘Do you know you’re in a conservative fund and you’re giving away $100,000?’ Quite clear, quite direct. “We were taking a risk because we were globally putting something out saying we think you’ve got it wrong and we think you should be here.” So does she think this would work in the current regime? “I think if we were confident on where the regulator’s current appetite was.” Mint Asset Management head of sales and marketing David Boyle says whether it’s KiwiSaver or overall financial planning, there are not enough advisers. “In the past they haven’t done it because

it wasn’t worth the time and effort. The new regulatory regime doesn’t allow ‘light’ advice and then it comes down to service as well because once people get into the right fund not much is going to happen unless circumstances change.” He agrees with Anderson that providers should be allowed, without being deemed to be providing a recommendation, to give members information and insights about their KiwiSaver. If KiwiSaver were compulsory and people had to do it, the industry would get smart, says Simplicity CEO Sam Stubbs. “This industry has hundreds of millions of dollars of profits floating around that can easily be redirected into education and advice but you have to have demand for it and there is only demand,” he says. He thinks AI will impact the finance industry more than any other sector, and it will happen fast. Anderson thinks maybe in 20 or 30 years but in the interim, its effect will be more felt in the operational processing rather than any real disruption in delivering the end product. “AI has been involved in financial services for decades although people have just started talking about it in the last six months. But it is something everybody needs to be conscious of, and how they're leveraging it because it's those that aren't will be left behind.” Mackay says it comes back to nudging people into action. “That's where it becomes really useful at the front end and you're starting to see some of that but it’s not fully evolved. If you look at the system today, you've got fundamentally different requirements for engagement of default members than for everyone else. So it's a big program of activity around old members - educate me, give me advice, show me that you've done it this way’ so why would you not extend that across the market.” A

KiwiSaver: If I could change one thing right now Providers were asked what is the one thing they would bring in right away to improve KiwiSaver.

Kernel’s Dean Anderson "For the government to sit down and actually listen, to come and have a proper discussion aimed at forming a long term plan about our overall management of KiwiSaver, the financial industry and capital markets as a whole."

Mint Asset Management’s David Boyle "Bring in soft compulsion over time to full compulsion to mitigate having the Reserve Bank use the cash rate as a blunt tool for stopping or creating spending and incorporating small regular contributions from employers and employee salaries as increases go up. That would help, in particular, those who are financially in a position where they can't just increase it to 5%."

InvestNow’s Jason Choy "Likewise with the government to sit down with the relevant players and listen. “There's just no one actually championing this and I don't think it's going to come from the beehive unfortunately. There’s no-one like Michael Cullen sitting there at the moment."

Fisher Funds’ Sharon Mackay "Politicians on either side of the political divide need to agree that KiwiSaver is fundamentally important to the health and success of New Zealand. “If we can’t get past that first measure, we can’t get it past them that KiwiSaver can become the most useful tool in terms of infrastructure projects in New Zealand."

NZX Wealth Technologies’ Lisa Turnbull "It's about going back to those fundamentals – what are we trying to achieve and what has actually happened. Then don't change one or two things but work out what's the right thing and then look at change."

Simplicity’s Sam Stubbs “We have just seen in the election, the politics of people fighting for 20,000 or 30,000 voters, that under MMP define the next government. And in fighting for those people it was all about what am I going to give you rather than what are we going to do as a nation to make everyone better off. Everyone else was forgotten because they were all assumed to be something. “So I would like the politicians to have a serious conversation, which basically says, we're in a funk, we have problems, we have capital market issues and this involves sacrifices but here is the game. And if you want to get New Zealand on the right track, to coin the government’s phrase, that track involves laying track and stoking the boiler and all those sorts of things.” He says KiwiSaver is a critical part of that conversation because it is the only savings pool we have outside term deposits and houses in New Zealand that is meaningful and growing and will continue to grow. And it could be, as it has been in Australia, the great mitigator to economic volatility. Australia hasn't had a recession for 26 years, because of super and we could be in that situation.” A

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KiwiSaver: the question of compulsion Now in its 16th year, KiwiSaver’s total assets as a percentage of GDP is 37.3%, way behind Denmark at 233%, Iceland at 218%, the Netherlands at 213% and the United States with 174%. Australia’s pension assets make up 147% of GDP. “We’re definitely behind the eight ball in terms of having contributions that will make a meaningful difference in our retirement,” says InvestNow senior portfolio manager Jason Choy. According to the OECD 2022 Pensions Outlook which came out in March, the top ten for percentage of GDP are all mandatory or quasi/mandatory plans. New Zealand operates auto-enrolment with non-compulsory contribution along with Lithuania, Estonia, Turkey, Poland and the United Kingdom. Australia is one of the countries with mandatory contributions. When its superannuation guarantee was the same age as KiwiSaver is now, the contribution rate was 9.5% with total assets under management sitting at about 80% of GDP. In 2021 the contribution rate rose to 10% and was scheduled to rise progressively by 0.5% annually until July 2025 when it will reach 12%. While minimum KiwiSaver contributions were lifted from 2% to 3% of gross salary for employees and employers in 2013, they haven't shifted since. Mint Asset Management’s sales and marketing head David Boyle is not a fan of

compulsion but thinks it is probably necessary with provisos. “If we want equality and to ensure everyone will be lifted along the way, it's got to be transitioned and planned into future income growth to make it easy to dovetail into. “At one period Australia had all its blue moons aligned where government, employers and employees were able to negotiate and accommodate aligning pay rises to increasing contributions. “It's also a way to bring those that are on lower incomes back into fold.” NZX Wealth Technologies CEO Lisa Turnbull says compulsion could be another driver for sending skilled workers overseas to countries where base salaries are higher; nurses to Australia for example. Simplicity CEO Sam Stubbs says the industry would have to sell the upside of compulsion to get the public and hence the politicians interested. “We have to show how good this industry could be for New Zealand. If we had compulsion we could afford to pay nurses more, if we had higher rates we could build roads. The industry has to speak very clearly about this.” From a social impact point perspective, being in a financially better position and not having to draw so much on government pension and services also adds value, says Boyle. The SME effect The problem with compulsion, says Kernel managing director Dean Anderson, is that New

Zealand is full of SMEs. That means a lot of sole practitioners, contractors and self-employed people who aren’t contributing. “If you look at the contribution rates by age, we’re nearly 100% within the core demographic of the 30s and 40s. So a lot of people are actively contributing and engaged and curious at one end of the spectrum. “But how do you get kids involved earlier? How do you get the settings right that get people started in KiwiSaver early and also ensure that it also works for the SME market? I don't think compulsion itself is the silver bullet.” Stubbs is absolutely for compulsion and believes it is the silver bullet. “I don’t believe in new ideas. Compulsion has worked everywhere else in the world, just do it slowly, half a percent every year. If the government started it now, it would be done by the next election.” He says the point about sole practitioners is valid but it means they’re paying less to their KiwiSaver and putting more into their business which is still creating wealth. “The whole idea here is to get people richer.” Turnbull is a qualified yes if it is tailored. “I'm coming back to that lower income earner who doesn’t have the disposable income for the future. Maybe it's a compulsion on the employer of only 1.5%.” Sharon Mackay, head of distribution at Fisher Funds says New Zealand already has a high coverage rate. Where compulsion would make sense is with employer settings. A

National’s election promises With National now in power, what do providers think of the idea put forward by the party’s commerce and consumer affairs spokesperson Andrew Bayly to enable KiwiSaver members to split their accounts across providers. In principle InvestNow is a big fan of diversification amongst managers given that is what InvestNow provides, says InvestNow portfolio manager Jason Choy. “But we're not such big fans of the multiprovider rule. There’s almost a separate issue here because multiple providers essentially means you don't have a one source solution for where your money is. Who do you go to for customer service, who do you deal with when you want to withdraw money for a house? “Equally, the fund manager won't be incentivised to give proper service because the amount they're receiving gets smaller and smaller but they would still have the same operational overheads. “Australia has basically done this ahead of us and now they’re trying to go backwards and consolidate again, because operationally it just makes things a lot easier.” Fisher Funds’ head of third party distribution Sharon Mackay thinks the legislative framework doesn’t support multiple options on 20 | ASSET SUMMER | 2023/24

the platform. “If you think about how in ten years' time when fund managers and members have continued to grow, then multiple providers is a good thing but the execution is incredibly difficult because of the framework today.” NZX CEO Lisa Turnbull says she doesn’t know what problem would be solved. “Every provider will give you different funds and let you split across them. “I think there's a lot of work to do in terms of support from structural regulators to enable what it could look like in the future. Do products have to be unitised? Can you go to a platform with multiple different products rather than wrapping up from one provider. Obviously, there still has to be control, regulation, transparency, value for money, all that stuff, but it doesn't have to look like what it looks like now. I think there's a lot of cost in the way that we wrap funds at the moment.” If you look at Australia, you’ll find that when people have different separate accounts, they have worse returns, says Kernel managing director Dean Anderson. “They forget about a piece, they don't ensure it's up to date, it’s not the best setting for them. “Most of the studies of self-managed supers, where people are actively fiddling around and

playing with things, have found they actually have worse returns than those that simply have a well structured, centrally managed solution.” KiwiSaver is a truck and trailer, says Mint Asset Management’s sales and marketing head David Boyle. “Do you want another trailer? It’s tough enough to get people to read their KiwiSaver statements now.” All agreed that it is aimed at high net worth individuals, a fraction of the market, and isn’t a burning platform. Simplicity CEO Sam Stubbs says the industry has to be very careful because the [incoming] government has identified it as an issue. “It creates the illusion of doing well because there would be more choice. The political risk for the industry is that’s the reform. ‘We gave them more choice in KiwiSaver so let’s move on and talk about something else. It would be a waste of a review.” Mackay says some smaller players will think it’s good for them. National’s campaign promise to allow students to use their KiwiSaver to pay tenancy bonds was smartly and unanimously dismissed as a bad idea and an example of unhelpful tweaking by Simplicity, Kernel, Mint, NZX Wealth, InvestNow and Fisher Funds. A

KiwiSaver: building a habit from childhood on In the last ten years the number of people under 18 contributing to KiwiSaver has decreased by 37%. Numbers peaked in 2015 and fell steadily after the National government repealed the $1000 ‘kick-start’ programme which aimed to encourage parents to enrol their children. InvestNow portfolio manager Jason Choy says getting children involved from birth is key to its success. “We really need something to incentivise parents to start them early again. If they get a KiwiSaver, they get ID numbers, and they get a little bit of money snowballing for 20 years.” Simplicity CEO Sam Stubbs would get rid of the member’s tax credit, which he calls middleclass welfare, and redistribute the $900 million it currently costs to all under-18 year olds, putting $700-$800 a year into each child’s account from birth. “Let’s be honest about people's motivations. If you're taking something away [the member’s tax credit] you've got to give them something in return. With this they’d be giving something to your kid and every kid in New Zealand. The language of incentives here, in the short term, means it could possibly be a way of making compulsory participation and contribution acceptable.” Such a move would also be fiscally neutral and every child would have around $25,000 by the time they are 18 or 19. “Every child would get an IRD number and a bank account which is critical. If you talk about poverty in New Zealand, it's people who can't get IRD numbers, can't get bank accounts; they're just not just visible in the system. This would put every kid into the financial system straight away. They would have some wealth and with that comes choice and dignity.”

It would also help solve the issue of KiwiSaver participation and engagement requiring Kiwis to accept delayed gratification, says Choy. And it might help with financial literacy, says Lisa Turnbull, CEO of NZX Wealth Technologies. “KiwiSaver would be a brilliant live real time engagement in financial capability; a live learning experience, " says Mint Asset Management sales and marketing director David Boyle. “Back in our day when we had school savings and put in 20 cents a week, we got into the habit and built knowledge. Not that schools should be burdened totally with financial capability but it’s a wonderful live learning experience that you can play around with and understand because it’s yours.”

Kernel managing director Dean Anderson says during the New South Wales state election in March, the unsuccessful Liberals party promised something similar. It proposed that every newborn and child 10 and under would get an individual NSW future fund account with an initial contribution from the government of $400. Then for every $1000 contribution by a parent, the state government would match it. It wasn’t enough to move voters and Labour won the election. It’s interesting politically, says Anderson, because National is not typically a young vote winner. “Rolling this out now might be a way to swing the narrative for them. So the political motivation would be where actually going to turn the dial in terms of public perception.” A

SCORECARD OUT OF 10:

How is KiwiSaver doing? David Boyle

Lisa Turnbull

6.5

Sharon Mackay

Jason Choy

6.5

Sam Stubbs

Dean Anderson

WWW.GOODRETURNS.CO.NZ | 21

REGULARS CONTENT | OPINION SPONSORED

METRICS MANAGING PARTNER ANDREW LOCKHART

Opportunity to invest in private credit ASSET catches up with Metrics founder and managing partner Andrew Lockhart to find out how private debt works - and why advisers should consider adding it to portfolios.

Andrew: We started the first fund in June 2013. Today, we have about 15 different funds, with more than A$13 billion, and offices in Brisbane, Sydney, Melbourne and Auckland. Our focus is primarily on lending in Australia and New Zealand. Most of the companies we lend to don't have an external credit rating and they're not usually large enough to access capital directly through the corporate bond market; they're heavily reliant on banks for funding. 22 | ASSET SUMMER | 2023/24

But the banks have been subjected to increasing regulatory pressure. They’re looking to lend more on home loans, and they can't get the returns to work from lending to large companies and projects in the same way they did prior to the GFC (Global Financial Crisis). That means companies are looking for alternative funding sources. Investors can now gain direct exposure to lending to those companies by investing in a private credit fund, rather than just putting the money on deposit and letting the banks lend.

We've created funds which span the entire risk spectrum: from very high investment-grade borrowers all the way through to sub-investment-grade borrowers. We've been able to segment our funds to give investors exposure to the kind of risk profile they want. The market is not homogenous, and one company's financing terms, conditions and pricing might be quite different to the risk profile of another company. Some companies want mezzanine debt and some investors are happy to

take that risk for a higher return. Other investors want lower risk and a lower return. The investment product for New Zealand is diversified across more than 300 individual direct loans to companies - and the cost is very low as well. ASSET: And how big is the addressable market? Andrew: It's in excess of $1.1 trillion in Australia and New Zealand. We decided to come to New Zealand in January 2020, at a time when banks were required to have additional capital, which means higher interest rates for borrowers. We formed the view that the Australian banks would be unlikely to want to invest further capital into their New Zealand subsidiaries - and that meant demand for non-bank credit from New Zealand companies would increase. We are originating direct-lending opportunities with a number of New Zealand-based companies. We started with three people who came from ASB Bank to start originating loans directly to New Zealand companies. Then we introduced the New Zealand PIE in about March 2021, and we've increased the team to five. The PIE has the same exposure to the Metrics Master Income Trust (MXT) as the ASX-listed fund and is designed for investors in New Zealand that would otherwise maybe buy MXT on the ASX (Australian Securities Exchange). It's an unlisted version of MXT. ASSET: As an investment opportunity, how does this private credit market sit with a traditional bond fund? Andrew: At one end of the spectrum, you can invest in private credit as an alternative to traditional, fixed-income assets like bonds. It is the defensive part of the portfolio. At the other end of the risk spectrum, where you're doing mezzanine or higheryielding, higher-risk transactions, we would say it's a replacement for an equity allocation. Equity can be significantly volatile and it wears the first risk of loss. The mezzanine debt is lower risk than outright equity ownership, but the returns generated through private debt can replace the income you would otherwise receive from dividends.

We've created funds that are both an equity-market replacement in a client portfolio and a replacement for traditional, defensive assets. ASSET: The way the banks have been behaving has created more of an opportunity for you here, hasn't it? Andrew: Yes, it has. During the pandemic, governments and reserve banks created a lot of liquidity to support companies and consumers. The Australian term funding facility (TFF) provided the banks with cheap financing from the Reserve Bank to lend to companies. In June 2021, the TFF was terminated, and the banks have until June of 2024 to repay about A$185 billion. Now, central banks are looking to reduce inflation pressures, so you've got rising interest rates and a withdrawal of liquidity as the banks repay the TFF. When liquidity tightens, terms, conditions and pricing become more favorable to a lender than to a borrower. It's a very attractive time for people to invest in private credit. In a recession, shareholders will wear the risk of a deterioration in a company’s performance, potentially reducing their dividend income. But that company has a contracted obligation to pay you the appropriate interest and fees. Otherwise, you've got the right to enforce your security. As interest rates rise, investors in our funds are seeing that immediately flowing through in the form of higher returns. About 97% of our loans are secured. It's only loans to large, publicly-listed, investment-grade corporates that are unsecured. ASSET: What are the default rates like? Andrew: For banks, they peaked at 0.67% net write-offs and are now down to about seven basis points. Over the 10-year period that we've operated, we’ve demonstrated consistent-performance, month-inmonth-out, positive income distributions to investors for no loss. Our losses have been zero, and we’ve outperformed the loss experience of the banks. ASSET: What are the big issues that you and your team are debating at the moment?

Andrew: In all investment markets at the moment, people are nervous; they’re uncertain about the economic outlook. It’s important to demonstrate the differentiation between private market debt and private market equity compared to more traditional asset classes. The Future Fund in Australia recently asked whether the model of a 60/40 allocation to equities and bonds is broken. Personally, I don't think it was ever a very sensible model. If you look at long-term returns generated from different pension funds, often you’d have been better off just being a lender in the private market. Look at our historical returns and the stability that we've generated. They're pretty attractive compared to other asset classes. ESG (environmental, social & governance) risk management is obviously important for us. We have great levels of data and information to assess ESG risks across our clients. We were a signatory to the recent stewardship announcement in NZ. Looking at ways we can structure our funds to deliver good ESG outcomes is top of mind for us at the moment. People have worried for a long time about liquidity in private markets. We’ve found as our funds have become larger, they naturally become more liquid because they’re open-ended with the natural churn of repayment across our portfolio. We have about an A$8.5 billion exposure to commercial property. That portfolio turns over almost on an annual basis. In excess of A$1 billion every 90 days is replacing loans that are maturing or being repaid with lending to new companies. ASSET: Do you know how many KiwiSaver funds are invested with Metrics? Andrew: Currently? One. Booster ASSET: I know you've done some capital raising. What's happening there? Andrew: We're always raising capital. We've been one of the strongest fundsmanagement groups in raising capital in the last 12 months. We see a lot of interest from insurance clients, pension funds, universities, charities, high-net-worth individuals. We've also seen significant interest from retail clients. A WWW.GOODRETURNS.CO.NZ | 23

PROFILES

Three young 'uns become advisers

Fidelity Life has seen graduates from its financial adviser training programme enter the industry. Jenni McManus speaks with three of them.

BY JENNI MCMANUS

i delity’s Career Connect programme aims to kick start the

careers of the next generation of financial advisers. Not just that it also aims to support a more accessible, diverse and sustainable advice industry. Scholarships, worth up to $5,000 each, are awarded to outstanding applicants from groups typically under-represented within the financial services sector including Maori, Pasifika and women. Fidelity Life chief sales and service officer Bronwyn Kirwan says she was encouraged by the first scholarship recipients’ diverse

backgrounds, spanning different regions, cultures, lifestyles, and professions. “The interest we’ve had in the first Career connect intake has been amazing. We received almost 30 submissions for the scholarships alone and were highly impressed by the calibre of applicants. She says the judging panel focused on candidates’ ability to display the soft skills needed to be a great financial adviser. These include great communication skills, strong interpersonal and relationship building skills, interest in the sector and how they hoped to serve their communities once becoming a qualified financial adviser.

Covid switcharoo

or trainee insurance adviser Stephanie Wilson, the decision to switch careers was made during the long, dark days of Auckland’s Covid lockdowns in 2020 and 2021. With time on her hands to reflect on where her life was (or wasn’t) heading, Wilson says she realised neither she nor her friends had a firm grip on their finances, and few clues about how to plan for the future. At the time, Wilson was working in government funding and grants but she had also done a stint in emergency management and disaster planning at Auckland Council. So she well understood the precarious position people could find themselves in if they had little, or no, insurance cover. “I spent a lot of time learning,” she says. “I really wanted to work in financial services because I think there's a lot of opportunity to help people understand their finances, look at long-term planning, what the benefits of insurance are. A friend sent me the link to the [Fidelity Career Connect] course and I thought it was a great opportunity because you get the qualification, but you also get industry skills. So, that was my motivation to get into it.” Wilson signed up for the part-time course at the beginning of this year and walked into a job – as client services manager at Johny Winstone’s Insurance Market Collective – when she graduated in July. The plan is that by

24 | ASSET SUMMER | 2023/24

early next year, Wilson will be a fully-fledged insurance adviser. “I wanted to start in a supporting role just to get a handle on working in insurance because I'm from out of the industry, so I've never worked in this space before,” she says. “So I'm currently doing that role as well as progressing into an adviser role. I’m working on getting my registration and on getting set up with all the different insurers and doing the product accreditation. It’s pretty busy but I'm enjoying the balance.” At 30, Wilson was one of the younger members on the course. Ages for the first intake ranged from 30 to about 55 and 50% of the participants were women. According to Fidelity’s Solutions Manager Sarahmay Butterfield, more than 110 people, representing 16 different cultures, applied for the two intakes this year but only 15 were accepted for each course. The course itself comprises a weekly Zoom session and several bolt-on modules covering topics such as lead generation, codes of conduct, engaging with clients and personal branding. Participants are also expected to achieve the New Zealand Certificate in Financial Services Level 5 (life and health insurance). Wilson says she particularly liked the structure of the course. “It was a supportive, group-learning environment. I found it gave me a really solid understanding of the legislative context, the regulation that is the

foundational knowledge you need to have to work in this industry. But I also really loved that there were the industry skills as well. And also that there was a focus on having good customer conversations. “As someone who's got a background in customerfacing roles, I thought that was really important because you're talking about quite unpleasant topics sometimes, like getting people to think about what would happen if their partner were to pass away. So I really thought that aspect of it was really valuable.” “I thought the course was a great opportunity. It helped make it less intimidating to join a new industry. A

Hooked on being an adviser

amie Ward was studying international relations and politics at Victoria University when he received an offer he couldn’t refuse: his older brother Connor, a director and mortgage broker at Financing Futures in Nelson, called to tell him there was a great opening available in the business if he wanted to change direction. A link to one of Fidelity Life’s Career Connect introductory sessions was soon on its way and, better still, not only was Ward’s application accepted but he also managed to snag one of Fidelity’s six scholarships, giving him $400 a month for the duration of the sixmonth part-time course. While he plans to finish his degree at some point, Ward, aged 22, says for now he’s hooked on the idea of being a financial adviser, specialising in life cover. “I hadn’t thought much about life insurance, but the introductory session was really good, and I thought ‘wow, this really aligns with my values, and I can see how I can help people through this career path’.” Concerned about the need for more diversity in the industry, Fidelity set up the Career Connect program at the end of last year. For a fee of $2000, successful applicants are supported through the NZ Certificate in Financial Services Level 5 and are offered a series of modules that teach practical skills, such as how to generate business and dealing with clients. With diversity in mind, Fidelity’s scholarships target Maori and Pasifika applicants, young people (under 25) and those in rural areas. Few applicants make the cut. Of the 110+ people who applied this year, only 15 were accepted in each of the two intakes. Asked to explain how his values align with Career Connect, Ward describes himself as a “purpose-driven” person. “I want to be able to help people and actually make a difference. Empathy is a big one, so being able to understand people and help them on a personal level is very important. “What I really liked about [the course] was that there were a lot of people from different backgrounds and it was a very diverse group. So, hearing other people's stories and having that support in a group setting was really good, especially going into a new industry that I knew nothing about.” Ward has now graduated and has his feet under the desk at Financing Futures in Nelson. Traditionally, the company – an offshoot of founder Tony Hall’s businesses in Queensland and South Australia – dealt mainly in personal

lending and mortgages. The plan now, with Ward on board, is to build up the areas of life and health cover. “I'll eventually become an advisor when the business thinks it's a good time to do it,” Ward says “I’m still getting that in-person experience because I think at the moment I'm lacking the confidence when it comes to doing interviews and meeting with people. I'll be a trainee advisor until I'm ready to be let loose. So, I do a lot of the servicing and a lot of administrative roles at the moment. But mainly it's just learning what it means to be an adviser, how to be a good adviser.” Fidelity’s course was “really great”, Ward says, particularly the way it was structured around giving students the formal, theoretical training they needed to pass NZCFS Level 5 while, at the same time, they were working in the industry, sitting in on client interviews and generally seeing how everything connects. Particularly useful was the soft-skill training

on how to recognise and deal with different personality types. “I'm a very analytical person, which means I like to know all the different details. And some of our clients are like that as well, but some are more dominant. They want to get straight to the point, they want to get their insurance in place. And then you've got the kind of more bubbly personalities who like talking about things that are going on and how things relate to their situation and their values.” One thing Ward has noticed already is what he calls New Zealanders’ “relaxed” attitude to insurance. “I think a lot of people don't understand insurance and a lot of people don't really see the value in it.” When people are struggling financially, life insurance is often the first thing that’s cut. “Part of our job is to take them through that and show them options that can make their cover a bit cheaper. It’s important that they keep that protection because if something bad happens, they’re going to be struggling a lot more financially. So, I think it’s really important to recognise that life insurance is one of those things that you don't want to be cutting down on. You don't need to, either. There is some options there to make it cheaper.” On the qualities that make a good adviser, Ward says understanding clients’ values in order to make long-lasting connections is key. “It's not just a transaction. They’re your clients, they're your friends and you're there for them.” A

WWW.GOODRETURNS.CO.NZ | 25

PROFILES

Becoming hands on

acinta Seed, aged 25, was already working in financial services – as an administrative assistant at Insurance Design on Auckland’s North Shore – before beginning the Fidelity Career Connect course in July. After leaving school she’d studied physiotherapy for nearly three years but says it “wasn’t quite right”. So when she saw an Insurance Design job ad on Seek, she decided it would be a good stepping stone to her ultimate goal: becoming a financial adviser. “I thought it was a good start, where I could begin with no knowledge of the finance industry and I could grow and expand my knowledge and be able to work my way up into an adviser role,” she says. Her boss and mentor, Anthony Gobbie, thought she’d make a good adviser and suggested she apply for the Fidelity course but initially Seed was hesitant. “I didn't want to do it [earlier] because I was still quite young. So I've waited and then this opportunity came up and I now want to upskill my knowledge and be able to progress into a higher role.” Seed’s current role involves booking in client appointments, compiling alterations for clients such as cancellations and amendments, and assisting the brokers. “And I've moved into a more senior admin role, where I'm working under two brokers as support staff but doing more of the underwriting and client report writing for the brokers and gaining more skill in the role.”

26 | ASSET SUMMER | 2023/24

Once her course ends in December, Seed will become an adviser with Insurance Design. She will also be moving with her partner to Queenstown where she will, among other things, help to develop the firm’s South Island client base. Seed says she particularly liked the way the course was set up: the group Zoom class every week, the independent study (about seven hours a week) and the focus on the soft skills needed to succeed in the financial services sector. She says relating to clients of all ages and being able to communicate with them, not matter where they are from, is important to her. Sarah-may Butterfield, Fidelity’s Solutions Manager, says Career Connect gives would-be advisers a structured entrée to the industry. “There’s never been a really clear career pathway into financial advice, particularly for advisers who want to work in the health and disability space.” The other problem facing the sector at the beginning of last year was an expected exodus of older and experienced advisers who were reluctant to get involved with the new licensing regime. While the numbers quitting the industry weren’t as great as predicted, Fidelity was keen to see new blood coming on board in the form of younger advisers and those from diverse backgrounds. And so Career Connect was born. Butterfield says Fidelity thought hard about what would be most valuable to the industry

and the community. “We were thinking about not only helping to create the next generation of financial advisers [but we’d also] be able to reach more people and help them to understand the importance of insurance as part of their financial planning. And a lot of adviser businesses are small and were actually finding that attracting and recruiting people was a really big issue and it's actually not easy to do. We also wanted to ensure we created greater diversity within the financial services industry so there would always be financial advisers who look like our diverse communities, particularly those who are impacted by underinsurance, and there would be people who understood their culture and understood how insurance works within the way that they saw their communities.” Butterfield herself was once an adviser and “fell” into the job in much the same way as her peers – knowing someone already working in the sector. “Career Connect really helps to create a clear career pathway for people to come into the industry but with small businesses it's that additional support and that mentoring of people when you do get them that is also quite difficult. So, Career Connect is not only helping people to get their qualification, but we're wrapping around a whole lot of support modules to help new advisers to the industry to learn soft skills that they need to be a successful advisers.” A

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OPINION

Are life advisers meeting advice compliance obligations?

Steve Wright asks if advisers and FAPs are doing enough to meet new regulatory standards. In this article he explores risks advisers may not be aware of.

dentifying areas for improvement in advice is good for business. Our aim should be to create highly skilled advisers, grow revenue, reduce advice risk and to make the FAP more resilient against criticism and complaint. Are advisers and by extension, their FAPs, doing enough to ensure the advice they give meets the required standards? If not, they may be leaving themselves exposed in various ways. For life insurance advisers there are multiple advice compliance risks that need managing and minimising by advisers and FAPs. I’m not talking about process and procedure compliance, which by now most advisers should have sorted. Compliance in process and procedure is no guarantee of suitable advice and my fear is that many advisers are so ‘compliance fatigued’ that they are not recognising the need for work on their knowledge and ‘advice compliance’ and therefore not recognising their ‘advice risk’. Advice risk comes in many forms and I think separating them out is useful.

Advice risk Advice risk is the risk of giving less than acceptable advice, something which remains pretty much untested under the current laws and Code as far as I know. Advice on life and health insurance is complex and requires knowledge and 28 | ASSET SUMMER | 2023/24

understanding of a great many things, including a great many products and options and how and when to use them. Knowledge risk (or knowledge gap) - is information and knowledge the adviser does not have, or does not have in enough detail, possibly resulting in both unacceptable or unsuitable advice and an inability to properly ensure clients understand the advice. Aside from product knowledge gaps, areas where knowledge gaps might typically manifest in poor advice, include: • Poor appreciation of risk and risk financial quantification, in particular the effects of compounding and inflation. • Poor understanding of different premiums structures and how they work. • Poor understanding of policy ownership and corresponding consequences. • Lack of understanding of product tax implications (no one expects advisers to give tax advice, but basic understanding of possible tax implications can be necessary client understanding and making suitable recommendations). A big risk with knowledge gaps is that they are often not understood or recognised at all. This means there’s a risk no action will be taken to eliminate them, a problem compounded by the Dunning Kruger Effect, which shows that the people most in need of more knowledge are the least likely to recognise that need.

Advisers have an obligation to identify knowledge gaps (and do something about them - Code Standard 9), but this is impossible if you ‘don’t know what you don’t know’. Product risk - is the risk of making recommendations based on poor understanding of products, how they work, when and what they will pay, and when to use a particular product or provider’s product. Poor product knowledge may lead to recommendations that are unsuitable or obviously less than optimum for the client, and, unexpected and disappointing outcomes at claim time. A good example of the dangers of this can be found in income protection policies. The difference in claim benefits payable across seemingly similar products can be massive, hundreds of thousands of dollars, perhaps even seven figures, depending on the claim circumstances. Knowing the various products available and how to calculate likely benefits paid in numerous claim scenarios, is essential for understanding different products and what advantages or disadvantages, they might have. Evidence risk - is the risk of not properly documenting the risk advice and recommendations regarding, for example: the need identified and quantified; product and options; premium structures; ownership and structure of the

‘Poor product knowledge may lead to recommendations that are unsuitable or obviously less than optimum for the client, and, unexpected and disappointing outcomes at claim time'.

policy, and the justification for all of this. Evidence that the recommendations, advice and accompanying rationale, has been properly explained (and understood and accepted by the client) will be invaluable for both the client and the adviser. Statements of advice (SOA) and scope of service/terms of engagement agreements, are arguably the most critical documents for recording the scope of advice to be given and the eventual advice and recommendations made. Get these documents right and they will be evidence of a job well done and of information given which allows clients to make informed decisions and understand the advice. Get these documents wrong and they may prove more valuable for the client making a complaint than the adviser. I think a SOA should be clear, easy to understand and sufficiently detailed that a stranger could pick it up years later and understand exactly what was needed, what was recommended and why. In particular: • SOAs that differ in significant ways from the Scope of Service (SOS) or seem inconsistent with the fact find/ client needs analysis, must include the reasons for that inconsistency. • Product and option recommendations should be clearly explained including the justification for the recommendation based on the client’s circumstances and need as evidenced by the client fact find/

needs analysis. Recommendations regarding policy structure, policy ownership, premium structure, for example, should be explained and justified. I don’t believe a SOA is a sales tool, it is much more important than that. Yes, the SOA should encourage the client to accept the recommendation (or a variation of it) and take action, but, it should also include sufficient information to evidence good, clear, understandable, advice given and not leave important questions unanswered. •

Advice timing risk – when should advisers be giving their clients advice? Is advice something that happens only initially and then at review time? Are advisers obligated to be ready to give their clients advice at any time and be proactive about it too if necessary? I suspect advisers, in certain circumstances, would be expected to recognise events that might impact their clients and be proactive about contacting them and advising them before the next review (by which time it might be too late).

Knowledge costs less than ignorance. FAPs might question why they should spend money on advice training and identifying advice risk: I think the answer is simple – turning your advisers into highly

skilled professionals will grow revenue and reduce complaints. I say this because better knowledge, competence, skill, and excellence in advice, creates: • Engaged, confident, skilled advisers, who are equipped to give great advice. • Confident advisers giving great advice will create confident clients (‘close more prospects’), resulting in more revenue. • Well advised clients are more likely to trust and respect their adviser, improving persistency and again improving revenue. • Better advice will reduce unwelcome and unexpected client outcomes and thereby reduce complaints and the time they take to resolve, again improving revenue. Reducing and managing advice risk is arguably necessary for the protection of the company and as such part of any company director’s duty to act in the best interests of the company. By now process and procedure compliance should be sorted. Now is the time to work on our knowledge and excellence in advice. A Steve Wright –has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

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REGULARS | INVESTMENT COMMENTARY

Are we getting better at KiwiSaver?

A year on from his previous assessment, David van Schaardenburg grades KiwiSaver on its performance over the past twelve months. Have investment returns gone up or down? Are contributions increasing? And are members making better decisions?

weet sixteen KiwiSaver now is. A year ago, I looked at the substantial progress, at least in terms of size, that KiwiSaver had developed between the ages of 10 and 15: 120% larger in funds under management over that five-year period. The 2022 KiwiSaver annual report did note some concerning statistics: • Fees were up 99% over the same period, meaning KiwiSaver clients were getting minimal benefit from economies of scale; • 1.2 million KiwiSaver accounts, or 38.8%, were not receiving any member contributions. And at the time of writing late in 2022, fund returns across the six largest KiwiSaver provider balanced funds averaged -9.3% returns pre-tax, post fees. At that point, the KiwiSaver industry was showing a major FAIL grade on its investment capabilities. While we know KiwiSaver is relatively new, and modest in size compared to the superannuation industry across the Tasman, each year we should expect enhancements in value for money and in the quality of the collective KiwiSaver industry. And given the not inconsiderable effort being made to provide investment education, usually at no cost, we should also anticipate incremental improvements in the quality of decisions made by KiwiSaver members.

Report card for 2023 So how has the KiwiSaver industryand its members - made positive 30 | ASSET SUMMER | 2023/24

progress in the last year? Investment performances have improved. The average balanced KiwiSaver fund from the top six providers had +5.4% returns post-fees but pre-tax in the 12 months to 30 November 2023. While this shows a degree of recovery in returns from 2022, contributions to KiwiSaver in the year to March 2023 reflected a lower level of confidence for members. Overall these declined by 6.7% from the year prior. From a value-for-money perspective, overall KiwiSaver fees were down 8% - even though year-end assets under

‘Contributions to KiwiSaver in the year to March 2023 reflected a lower level of confidence for members’ management were up 4.3%. Splitting between active and default scheme costs, default members paid on average 43bps, which was down round 27% on the previous financial period: a great reduction but there’s probably some more to go. The average cost for active members funds under management (97% of KiwiSaver funds under management

or FUM) was also materially lower at 73bps, down 15%, though still 70% above the average default FUM bps cost. An FMA comment attributed much of this decline to reductions in performance fees from two of the larger providers. So the trend of lower fees in active scheme management may turn out to be a one-year phenomena on the back of weak scheme returns. Not so great.

Are members any smarter? One year on, are KiwiSaver members acting smarter? On the contributions front, I would expect overall KiwiSaver contributions to grow at a long-term, annual, average rate of inflation plus 2%, based on a logic that average incomes grow around the longterm nominal GDP growth rate. While we know that economic growth was pretty subdued over the last year, the last 12 months’ decline in overall contributions undershot my long-term contribution growth target by a massive 13-14%. Delving a little deeper, standard employee contributions did grow slightly above my assumed long-term growth rate at 9.2%. The reduction in overall contributions was driven by a massive decline in the voluntary components of KiwiSaver contributions: lump sum and above-the-standard-deduction-rate contributions. How much of lump-sum contributions is driven by the end-of-contributionyear ‘catch up’ campaigns by KiwiSaver providers is not contained in the annual report.

However, I can imagine in June 2022, with financial markets having a very negative time, the everyday KiwiSaver member probably wasn’t lining up to give their provider the extras to attain the full Government subsidy. Overall, voluntary KiwiSaver savings declined by significant 61% between the two financial periods. Does this reflect a sharp drop in KiwiSaver member confidence in the scheme as a long-term savings vehicle? Did the ‘cost of living crisis’ reduce voluntary savings? A one-year drop in voluntary contributions doesn’t signify a long-term trend, so it will be interesting to see, with KiwiSaver returns now moving back into a ‘normal’ range, if there is a decent pickup in voluntary contributions over the subsequent year.

selection a few years back - possibly driven by provider marketing or a belief one can get yesterday’s returns. We’re also seeing a trend for default scheme membership to continue to decline – and, in active schemes, there’s a net trend for members to move from conservative to balanced and balanced to growth. Given that growth funds are the logical investment strategy for 95% plus of KiwiSaver members, these are positive signs of the increasing quality of decisions made by KiwiSaver members. How much is driven by members engaging with financial advisers is not measured in this report, but would be a useful industry statistic for the FMA to gauge.

Fewer members jumping ship

With a Government of a different hue now in place, it is time for a structural review of KiwiSaver to occur, with further thought and research put in to considering whether the present KiwiSaver design is optimal. Top of my list for review are: • Increasing base-level employer and employee contribution rates • Strategies to kick off contributions by the 1.1m non-contributing members • Membership compulsion for all New Zealanders over a certain age (say 21) • Option to have a multi-manager approach to KiwiSaver portfolio management

Some positive progress is being made on a reduction in the preparedness of KiwiSaver members to jump from one KiwiSaver scheme to another. Given the fact most of the larger providers have very similar asset allocations and consequently longerterm returns, the benefit of switching between KiwiSaver providers is dubious. So it’s good to see that switching between schemes declined by 19% between 2022 and 2023. That said, at one in nine members doing so in a one-year period, this switch rate still seems extraordinarily high. Maybe that reflects poor scheme

Time for a review

‘A gradual phase of higher contribution rates, as has been successful in Australia, is a must’ Current contribution rates will, for many, not provide the financial nest egg and retirement lifestyle to which they aspire. A gradual phase of higher contribution rates, as has been successful in Australia, is a must. Non-contributing members will face a retirement lifestyle that’s even less attractive. Maybe more incentives are needed to reduce this large minority. Persuasion of the benefits is a good start, but some need to be forced over the line. Compulsion would further grow the savings pool in New Zealand. Finally, while there is the appearance of lots of investment choice in KiwiSaver, if most of the main providers have substantially very similar asset allocations in each risk profile then your KiwiSaver choices are akin to varying shades of the same colour paint. And maybe lack of excellence. Multi-manager options for KiwiSaver members would better drive excellence in investment management and improved investment outcomes for KiwiSaver members. A David van Schaardenburg is independent of any KiwiSaver/fund provider and is CEO of the Ignite adviser network, which has over 10,000 investing clients.

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REGULARS | OPINION

Is any recommendation to replace insurance ‘safe’?

Russell Hutchinson argues the case for and against replacement business and comes up with a verdict. BY RUSSELL HUTCHINSON

everal advisers I know will not even consider any form of replacement business advice – irrespective of what their client

wants. That’s a controversial view, and it hasn’t been examined much. Here I present the argument for and against the idea that there is no safe replacement business.

The prosecution case People who say that there can’t be any safe replacement cases have some strong arguments, in summary here are three: Underwriting risk: Regarding health and wellbeing, most people have something wrong with them, and over time, more goes wrong. The risks associated with disclosure and underwriting increase as clients age. Their memory is poorer, and they suffer competing incentives: maybe they ask for a little too much to save some premium, for the process to go quicker, to not talk about topics they’re embarrassed about. In essence, some say the client can be

32 | ASSET SUMMER | 2023/24

assumed to be an unreliable partner in the underwriting process at the best of times, for most replacement business, especially when the client is aged over 50. Low benefit gain: There are two main kinds of replacement, one for price, and one for benefits. In the first kind, the price gain is usually small. The broader the range of coverage, the smaller the gain. Sure, there are edge cases, but in general, it isn’t much, and even if there is a small saving to be made this year, who knows that next year’s pricing position will be like compared to another insurer. With benefit driven changes, there are also usually small differences, or if it was, say, an old bancassurance product, the difference may be large, but the sum insured is usually small. So, hang on to the old bancassurance product and wrap around some additional cover. If it’s an adviser insurer the benefit gains tend to be small, and the existing insurer may catch up and pass back benefits next year anyway. Cover restructures can be done effectively with the current insurer:

advocates of ‘keep in place’ say that nearly all the gains from restructuring cover are from the current insurer, with much lower risk. The solution to getting paid is to charge a fee, and maybe gain something from adding new cover types. Advice risk: Irrespective of any benefit to the client, there’s too much advice liability risk to make it worth doing, and since an adviser can always decline to offer advice in any situation – you aren’t compelled by law to give advice in all cases – you can safely decline to offer advice on replacement, or even retention, and narrow the scope of your advice to the recommended package and leave the client un-advised for the rest. These are arguments I’ve heard, not necessarily my arguments, and I hope that I have adequately represented them without leaving too many holes. Apologies to the advisers who may recognise their position above and feel that more could be said in its favour.

Arguing the defence There are those that argue that safe

replacement cases do exist. Broadly, their arguments are as follows: Underwriting risks are manageable: Essentially replacement business underwriting for a 55-year-old is no less risky than new business underwriting, the financial advice code states, “Treating clients fairly does not mean that clients are not responsible for their own decisions or that they are not exposed to risk.” Benefit gains can be large: Some older products, and even some current direct products are so limited that very large gains in coverage can be achieved. Underwriting risk, too, is reduced if the claims threshold, say, for cancer, is substantially lower in the new product. These changes can have a large impact on clients. Some non-underwritten products have low claims success rates, limited benefits, and high premiums. Big gains are available. Even with fully underwritten products, some clients are in existing business pools in which premiums are higher than better-featured on-sale products.

Needs change: Say personal financial situation means a client has a low need for cover, but has a high need for business insurance – shouldn’t the adviser recommend the best product to suit the changed needs and advise the client to gain the benefit of reduced personal costs? Dozens more situations could be discussed, each where a possible solution could be found with the current insurer, but where the ideal solution may be with a new insurer. Client preference counts: Some clients want a change. You may have good reasons to try and talk them out of it, but if an insurer has failed a client badly in a service perspective, some clients can be as direct as “move me”. Duty to advise: If a client has existing cover, which the adviser would not recommend, some advisers feel that they have a duty to advise. This is possibly the most nuanced argument: they may seek to balance advice risks with a careful examination of the risks and issues of a possible replacement. They may advise either for or against it – and bear the risks of either kind of advice, but they will give

advice, as to decline would be worse.

The Verdict I do not consider the matter settled. I have seen advisers that, in my opinion, are too quick to recommend replacement, and others that should help their clients more in this respect. I feel that no blanket rule can be made. It would be a shame if replacement advice were deemed so risky that it could never be offered – not because I am in favour of widespread replacement, but I wonder, where would it all end? Would the market lurch towards lots of no-advice engagements? Most clients need advice, and this seems to me to be another good advertisement for the need for wellinformed personalised advice. I would not be surprised to find that different advisers will apply different criteria, and often the deciding factor will be in the client’s situation. A Russell Hutchinson is director of Chatswood Consulting and Quality Product Research, which operates Quotemonster.

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TOP 15 TOP 5 NEWS 01

The axe falls at Kiwi Wealth As expected most Kiwi Wealth executives lose their jobs after Fisher Funds takeover.

Auckland FAP has its licence cancelled The Financial Markets Authority (FMA) has cancelled the financial advice provider (FAP) licence of Foundation Advice Limited.

ANZ Investments links up with Mercer; CIO leaving ANZ links up with Mercer and Blackrock to grow its business and announces its chief investment officer is leaving

New and cheaper PI insurance hits the market A new entrant has joined the crowded professional indemnity (PI) insurance market for mortgage and financial advisers.

Why we need more female advisers To work in insurance requires a sharp suit and a mathematical mind? Wrong.

TOP 5 INSURANCE 01

Southern Cross drops $60k benefit by stealth: agents Insurance advisers are discovering that Southern Cross quietly dropped a $60,000 a year benefit for non-surgical hospitalisation without telling either advisers or Southern Cross policyholders. Partners names new CEO to replace Naomi Ballantyne Partners has chosen to make an external appointment to fill the chief executive role being vacated by founder and managing director Naomi Ballantyne.

Keep up with the news at

GOODRETURNS.CO.NZ

34 | ASSET SPRING | 2023

For something special here is the most read News, Insurance and KiwiSaver stories over 2023

Fidelity Life CEO departs Fidelity Life chief executive Melissa Cantell has resigned and will finish up later this year.

Ballantyne announces her future plans Following the sale of Partners Life to Dai-ichi, founder and managing director Naomi Ballantyne outlines her future plans.

FMA aware of but won't comment on Southern Cross benefit removal The Financial Markets Authority is aware of the Southern Cross situation in which those in the industry have been surprised to learn it withdrew a $60,000 a year benefit in late 2020.

TOP 5 KIWISAVER 01

Another leading KiwiSaver provider calls for changes Calls for changes to KiwiSaver are growing louder.

KiwiWrap KiwiSaver has highest average balance With an average balance of more than $120,000, KiwiWrap is way ahead of other KiwiSaver providers, although it has under 300 members.

National floats allowing KiwiSaver splitting ANZ links up with Mercer and Blackrock to grow its business and announces its chief investment officer is leaving

[The Wrap] FMA bares its teeth This week we got a much better look at the "new FMA" and it's quite different to the old one.

Budget boost addresses gender imbalance on KiwiSaver Under the heading ‘backing parents of young children’ the government has taken aim at the on-average lower KiwiSaver balances of women compared to men.

STEVE C AIN Portfolio Manager JA NUS HENDERSON

JUSTIN TYLER Portfolio Manager DA INTREE A SSET MANAGEMENT

MATT REYNOLDS Investment Director C A PITAL GROUP

A BBEY C OOK Portfolio Manager FA IRLIGHT A SSET MANAGEMENT

KATIE STAFFORD Head of Sustainability SC HRODERS

TUESDAY 20th FEB 24 THE WELLINGTON CLUB LEVEL 4 88 THE TERRACE WELLINGTON C HRIS HESTELOW Investment Specialist A llan G r a y

WEDNESDAY 21st FEB 24 RYDGES HOTEL 30 LATIMER SQUARE CHRISTCHURCH

Looking Forward: Where to Invest in 2024

STEPHEN BENNIE Portfolio Manager C A STLE POINT

THURSDAY 22nd FEB 24 MARITIME MUSEUM LEVEL 1 CNR QUAY & HOBSON STREETS AUCKLAND FRIDAY 23rd FEB 24* TRINITY WHARF 51 DIVE CRESCENT TAURANGA

JUSTIN LA NNEN Portfolio Manager MA PLE-BROWN A BBOTT

JONATHAN WU Executive Director PREMIUM A SIA

N O AH SC HILTKNECHT Principle MAKAO

C HRIS DOUGLAS Principle MYFIDUCIARY

WWW.GOODRETURNS.CO.NZ | 35

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Award voted by Reader’s Digest readers in a survey conducted by Catalyst Consultancy & Research. Fisher Funds Management Limited is the issuer of the Fisher Funds KiwiSaver Scheme. Past performance is not a reliable indicator of future performance. Returns can be positive or negative. A Product Disclosure Statement for the scheme can be found at fisherfunds.co.nz