Cautious investors wanting to reduce impact of failures should consider the spread of their investments.
I have a KiwiSaver account, and am very happy with the gradual accumulation of savings.
I think it was a great initiative for New Zealand.
However, the collapse of New Zealand finance companies during the Global Financial Crisis has made me nervous about the fact that my KiwiSaver account sits entirely with one provider.
Can I open and maintain multiple KiwiSaver accounts, with different providers, to enable me to reduce my risk of the provider going under?
My nightmare scenario is spending a lifetime contributing to KiwiSaver, only for my provider to 'go under' just before I am entitled to access my savings.
I know the provision of KiwiSaver accounts is regulated, however, regulation cannot provide a guarantee.
The first KiwiSaver accounts were opened in 2007, just before the economic meltdown that was the global financial crisis.
Research firm Morningstar has calculated between the end of June 2008 and March this year that KiwiSaver funds have grown from $954 million to nearly $19 billion.
As your funds in KiwiSaver grow it's right to question what provisions have been put in place to ensure it doesn't all go down the gurgler if your provider hits a tough patch.
I asked Stephen Jonas, head of client services at Craigs Investment Partners, about your concerns.
"Due to the nature of KiwiSaver individuals can only maintain their KiwiSaver account with one provider.
"This means that investors are unable to reduce their provider risk by operating accounts with different providers.
"However, 'provider risk', in a KiwiSaver context, is quite different to the investment risk arising from market failures to which the writer refers.
"Addressing the provider risk: KiwiSaver providers are supervised by independent trustees along with the Financial Markets Authority (FMA).
"Every provider is a member of a disputes resolution service, required to report to members and to the FMA every year," Jonas says.
The Financial Markets Authority is a fairly new arrival on the scene, with its creation in 2011 in the wake of the global financial crisis and finance company collapses.
Its job is to regulate conduct across New Zealand's financial markets and enforce the new Financial Markets Conduct Act, which replaces more than 20 separate pieces of legislation.
FMA spokesman Andrew Park says before the introduction of the new conduct act licensed trustees have become the front line supervisors and oversee the activities of the managers of KiwiSaver schemes.
The FMA in turn actively monitors the trustees' performance of their oversight of KiwiSaver providers, Park says.
"Your reader is correct that regulators do not provide a guarantee in terms of the returns and performance of investments.
"The FMA's role is to ensure participants involved in KiwiSaver management, distribution and oversight meet the regulatory standards and act with their customers' interests first."
Craigs Investment Partners' Jonas says the key protection for members is all investments in a KiwiSaver scheme are held by an independent custodian, in the name of the scheme trustee and are not available to creditors of the manager should the manager become insolvent.
"KiwiSaver managers are also required to identify and quantify any related party activities," says Jonas.
The related party activities Jonas refers to are behind some of the problems with the finance companies.
In some cases they were taking money from investors and using it to fund their own projects or activities they had a vested interest in without being terribly clear that that was what they were doing.
"Looking at the investment risks: market failures, like the collapse of finance companies, the 'tech wreck' of the early 2000s or the demise of collateral debt arrangements (ie the global financial collapse), are always a huge risk for investors," says Jonas.
"Usually these failures come as a surprise to most investors, particularly retail investors, and they can have a significant impact on investment outcomes.
"Unfortunately investors cannot fully insulate themselves from market failures.
"They can, through diversification, reduce the potential impact of any failures, but they cannot eliminate them completely.
"Even holding physical assets does not fully protect an investor - prices for gold and silver fluctuate over time, property values move in line with markets and economies, etc.
"To minimise the impact of a particular failure an individual should consider the "spread" of their investments:
• Do they hold an appropriate balance of income and growth assets?
• Do they hold multiple asset classes (for example, fixed interest, equities, cash, etc)?
• Do they hold assets in different industries, countries and currencies?
• If investing in pooled funds, do they hold funds managed by different fund managers?
• Do they hold assets from different companies?
• Do they consider what the impact would be on their investment strategy if one or more of these were to fall in value.
"It is important that investors have the opportunity to spread their investments.
"Schemes with limited options [of funds and fund managers] may be exposing their members to greater investment risk,' says Jonas.
Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.
• To have your KiwiSaver questions answered by the Herald's panel of industry players, email Helen Twose, firstname.lastname@example.org.