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More government involvement in financial advice?

The President of the Institute of Financial Advisers, Nigel Tate, is calling for a portion of KiwiSaver cash to be set aside to fund financial advice.

Is this a bad idea? From a purely functional perspective we can see the advantage of helping more KiwiSavers in default funds move into asset classes which have a better match with the long term nature of their savings goal, and may deliver better returns. You might lose a $500 contribution to the fund at the outset, but gain 2% in real terms with 50% of savers switching into equity funds. That would make a massive difference to outcomes. Of course, you could do it very effectively without providing any advice by creating a lifecycle approach to the fund allocations.

But let's suppose we are in favour of this use of KiwiSaver funds. There appear to be two ironies.

This is the no-advice product that is so friendly and simple that you can be defaulted into it (through your employer) which now needs urgently the full personalised advice services only an AFA can deliver. It could have been sold that way - but government designed it to have low fees and an enrolment mechanism almost designed to avoid the involvement of financial advisers.

Mr Tate's recommendation would at least help reduce that conflict. But perhaps at the cost of creating another:

KiwiSaver has attracted so many savers, but please bear in mind that they are mainly people who are in work, and are therefore the main body of individual taxpayers. There is a wasteful circularity about taking their taxes off them to pay for financial advice which they could have paid for direct from the product or their own pockets.

Finally, a caution: be careful what you wish for. The lesson from the UK's Money Advice Service is that when you call upon government to direct some funding towards the provision of financial advice, they may agree heartily, and set up a new bureaucracy to do so - reducing the market for members of the IFA, not increasing it.

 

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