New Zealanders are being shortchanged in their retirement savings because offering advice on KiwiSaver doesn't pay.
Nigel Tate, president of the Institute of Financial Advisers and a practising adviser, said unless advisers were dealing with KiwiSaver on a very large scale, it was not profitable. On average, they received a trail commission of 25 basis points - a quarter of a per cent of the balance and usually less than $20 a year - and an introduction fee of about $25.
With an average balance of about $6000 - based on 1.9 million KiwiSavers with a total amount of $11.26 billion - that means advisers are earning an average of $15 a year from each KiwiSaver they advise.
But Tate said the lower commission was not matched by a smaller workload. Because KiwiSaver was classified as a category one product, advisers had to go through the full Financial Markets Authority-dictated process when offering advice. "You have to go the whole nine yards."
He said KiwiSaver should be the cornerstone of New Zealanders' investment plans and most advisers would offer advice if required - but would try to do it in conjunction with something else. "Either you do it as an add-on or people specialise in KiwiSaver and go for large corporates and do it more efficiently."
Some were offering advice online.
Commerce Minister Craig Foss said trail commissions were a commercial decision for financial providers - who administered the KiwiSaver funds - to make and should be market-driven.
But Tate said the public was "absolutely" missing out. Too many people were defaulting into funds without advice. "If you have six new
employees, they'll all default into different schemes on a rotational basis and end up in different conservative funds. If they are 55 and above that might be okay but if they aren't, it's highly likely they should be taking more risk."
New Zealanders were loathe to pay for financial advice, he said. He suggested that instead of a $1000 kickstart in each KiwiSaver account, the Government should offer $500 of that to get good financial advice.
"That will end up with more in growth assets, greater financial literacy because people will understand why they are in KiwiSaver and what they are trying to achieve."
But Foss ruled that out. "I would certainly encourage investors to seek advice before making decisions on their funds but I have no intention to require new KiwiSaver investors to use the $1000 kickstart from the taxpayer, to get that advice."
He said measures were already in place to help New Zealanders get adequate advice. "We want to arm investors with as much information as possible, Foss said. "The Government has developed disclosure and reporting requirements for KiwiSaver providers. The new rules will require all KiwiSaver fund managers to report their performance and returns, fees and costs, and other key information in a form that makes it easier to compare funds."
He said that would allow investors to compare fund performance.
Tate said he was aware that Britain and Australia were moving towards a ban on commissions for financial advisers. He said until New Zealanders thought of advisers' fees in the same way they did lawyers' or accountants', commission was the only way advisers would be able to be paid.