Diana Clement: Save more, but watch for the naughty bits

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We need to save more - as individuals and as a nation. The trouble is that the savings industry is riddled with nasty little rorts that part saver from money.

The small consumer doesn't have much in his or her arsenal to protect against the collective might of the lawyers and marketing people behind the financial products.

Just look at any investment statement.

In theory, these statements are supposed to give the pertinent details of an investment.

Instead, says financial mentor and author Anton Nadilo, they're a sales and marketing tool, and hide some of the important details.

I recently read OnePath's KiwiSaver investment statement which is no better or worse than most.

I was interested in the "What are the charges?" section, which didn't tell me how much I would pay.

There was a management fee and a trustee fee, which were spelled out, then nebulous "expenses" such as audit, registry, postage fees and so on were mentioned.

The statement refers to these expenses as "deductions", which the manager and trustee "may recover". That means in plain English that these expenses are taken out of the fund as a whole, but aren't shown on your statement.

Even less clear was that further fees and expenses were charged by funds that OnePath invested in and that these were also deducted from the saver's money in the background and slowed the growth.

As Nadilo points out, there are more controls over KiwiSaver than the managed funds and related areas such as superannuation. Yet it's still nigh impossible to know what you're being charged.

Apologists for the industry say these fees don't matter, it's the fund manager's investment prowess that is important.

Yet research by Consumer magazine, which is a little dated now, discovered that one-third of the returns earned by the manager disappear in fees and charges.

Commenting on this at the time, Gareth Morgan said 70 per cent of the endemic underperformance of managed funds came from the level of fees (declared and undeclared).

Fees are just one rip-off. Savers have little chance against the might of the industry, says Morgan. Managers "systematically usurp the savings of the investing public".

He would like to see fund managers have a fiduciary duty of care to clients. If they breached that duty, and it was proven in court, the managers should be sent to prison.

Morgan has published a series of articles on his website about what he calls "The Naughty Behaviour" of the funds management and life insurance industry. The articles are at http://gmi.co.nz/pages/kiwiSaver/57/The-Naughty-Behaviour.aspx

Another issue Morgan was hot under the collar about when I called him this week was the performance figures for funds with illiquid assets. For example, a fund may revalue buildings it owns only annually, so the prices don't really reflect values of the underlying assets. That will affect investors who are slow off the mark selling in a downturn.

Those who get out early get more than their investment is worth and the slower sellers pay the price.

Banks have their own naughty behaviour. A simple ruse is to offer tasty interest rates on new accounts to attract customers, and quietly drop the rates once the customers have been snared. Many customers are also on now-defunct accounts that are kept open, but paid no interest or next to no interest.

Some of the interest tricks can be even more subtle than that. A 5 per cent interest rate from two banks might not give the same compounded return at the end of the investment.

One bank might, for example, calculate interest and credit it to the account daily. The other might calculate the interest daily, but credit it to the account once a month or year, so the compounding power of that money is lost until it is credited.

In some cases, interest might be calculated monthly or even annually and only credited then, which is even worse. The more money you have in your account, the more it matters.

One con that people often fall for when getting a mortgage is signing extensive guarantees - in the fine print. Such guarantees are often unnecessary and a broker might whittle them down. If the lenders can get away with it, they will.

An example of this is outlined by the Banking Ombudsman's case where Mr and Mrs C extended their mortgage to provide the $50,000 deposit for their daughter's first apartment.

When the parents separated and sold their home, instead of each partner getting their share of the surplus, the bank applied the surplus to the daughter's loan.

Another rort in the wider savings industry is quoting potential compounding gains without taking tax into account. It makes the returns sound far better than they are.

For example, if you put $10,000 a year away over 25 years at a 6 per cent return on average, your financial services provider will show you a graph showing your money rising to $581,564 over 25 years.

If the provider had been honest and included tax in the calculation - say at 30 per cent - the ultimate amount would be $445,828.

That's $135,000 less than you'd been led to believe. The difference isn't due to the vagaries of markets. It is because the savings institution did not include tax in its calculations.

Financial service providers can, and often do, change the terms and conditions of investments. Those changes or the new terms and conditions land in our mail boxes, but few of us ever read the changes.

The regulators have come in for a lot of criticism in recent years for letting financial service providers - including finance companies - get away with all sorts of appalling behaviour such as these examples.

Moves by the regulators, such as the Securities Commission's freezing of assets belonging to Hanover finance company director Mark Hotchin might signal a stronger approach to upholding the laws and protecting investors.

Likewise, the new super regulator might stop certain industry practices from falling between the cracks.

Even so, the group EUFA (Exposing Unacceptable Financial Advice) isn't optimistic. Gray Eatwell, who runs EUFA, believes the problem is enforcement and he doubts that the Financial Markets Authority is going to be any less toothless as its predecessors.

But investors can fight back:

* Start by complaining to the provider if you believe you've been treated unfairly or the provider has breached terms and conditions.

* Complain to the Banking Ombudsman or the Insurance and Savings Ombudsman, who can hear your case independently. If it's a "systemic issue" you may find the entire industry changing its ways as a result. In one case in the Banking Ombudsman's annual report, a customer complained that although he'd paid $7000 of his $8400 outstanding credit card bill on time he was charged interest on the paid and unpaid sums. The bank's fine print allowed this, but after pressure from the ombudsman, this no longer happens at that bank.

* Read, read, read and understand. If you can't understand the terms and conditions of what you're signing, see someone independent who can.

* Complain to the relevant regulator - which from April 1 will be the Financial Markets Authority. Regulators don't take cases for individuals, but they do take test cases which can result in improvements for all customers.

* Make submissions to Parliament on proposed law changes. For example, the Ministry of Economic Development has a discussion document open - Periodic Disclosure for KiwiSaver Schemes - which is looking for ways to ensure managers give uniform information about fees and charges.

* You can also highlight cons through the media and other channels. Naming and shaming does work.