Advisers Quick Guide: AMP's KiwiSaver Essentials

AMP's KiwiSaver Essentials was a smart way to offer a basic bundle of insurance to KiwiSaver members. Without requiring a lot of health evidence or burdening the client with a pre-existing conditions exclusion an offer was able to be made. How? Because of three factors that combine to reduce selection risk: an in-work test, low fixed benefit amounts, and a limited enrollment period. 

For advisers coming across the KiwiSaver Essentials product the key points you should probably retain are: Yes, pre-existing conditions are covered. The main difference between Essentials and Lifetrack is the IP benefit which is limited to full-time workers (30+ hours per week) and 13 week wait with a 2-year benefit period, and covers sickness only.

Last Days of the AFAs

David Chaplin has this report detailing the changes in AFA numbers and alignment over the last five years. Called 'last days...' because of the recommendation to end the AFA designation under the FAA review proposals, the report remains a good way to think about investment advice distribution in the medium-term - even after the changes that will end the designation. Link

Put this way - those worried about the future of provision of retirement advice by an already-low number of AFAs should applaud the admittance of RFAs into the ante-room to the provision of such advice. By erasing the categorical difference between being an adviser in, say, home loans or insurance, only one obstacle will remain to prevent hundreds if not thousands of new advisers advising on, say, KiwiSaver. Of course, the remaining obstacle is quite large, it is competence. But some advisers were keen to advise on KiwiSaver and will eagerly take to the required study. This could be good. 

Brexit and the Risk to Your KiwiSaver

Although I rarely link to or comment on investment matters as a former resident of the UK an article on Brexit caught my eye. David Isaacs examines the chances of Brexit and possible impact on KiwiSaver caught my eye. I think he sums it up just right. Do read it.

As an aside, this is exactly the kind of communication I would expect from a good investment adviser. I wish more people got something similar from their risk advisers too. 

KiwiSaver: How Sick Do You Have to Be?

KiwiSaver can be dipped into if you are suffering from serious illness or financial hardship, but just how hard is it to qualify for either of these? This article in NZ Herald discusses just how hard it is to judge whether or not your circumstances will allow you to withdraw funds from KiwiSaver. 

"About a year ago I did some serious investigation into joining KiwiSaver, but decided against it because I could not get a definite answer to my questions. I have multiple sclerosis, which at some point may prevent me from working. If it does I want to be able to withdraw my KiwiSaver. I thought KiwiSaver would have a list of illnesses that qualify, as with life insurance early payouts, but it would appear that is not the case. The conclusion I came to was it would depend on the committee and the day."

Fund managers should make these provisions more explicit and they have no excuse not to do so. It is not good enough to have a committee make the choice - inequity is bound to creep in as some will be granted and some will not and the criteria will vary. Insurers have successfully defined thresh-holds for payouts for decades. Rather than having a list of diseases that qualify, there should be a definition of disablement that qualifies. That should be backed up by a terminal illness type of qualification.

I think the logic works like this, if you are effectively being pushed into early retirement by disability, then you should be able to access your retirement funds. Or put another way, caution is well and good, but the money should be there to spend while you still live. 


The Advice Gap

The gentle decline in AFA numbers (see this story) now down to 1,842, after a net loss of 31 advisers may not sound like much. But this must be set against the growth of the financial services industry. To take two indicators: in September KiwiSaver funds were just nudging $30 billion up from around $26 billion last year. Insurance regularly ticks up 4% to 5% annual premium growth. Financial services growth is big, really big, and yet the number of advisers is static at best or falling slightly.

So what takes up the slack? No-advice sales. 

The growth of no-advice sales accounts for most of the growth in the market over the last ten years, and to judge by these numbers, it will continue to grow. That is contrary to the stated aims of organisations like Sorted and the FMA it seems that for more and more New Zealanders their financial choices will be made without advice. I am worried about that. I certainly do not want to ban or restrict no-advice sales - they are an important part of the market - but I am worried about the effect that no advice sales can have on New Zealanders.

I am also worried about the idea of a 'no-advice' sale for a switch from one KiwiSaver scheme to another. See this story. Unlike many products where multiple purchases can be made (I can have several insurance policies, credit cards, or savings accounts) you are meant to only have one KiwiSaver scheme. In order for a sale to be made to someone who already has one a switch must be made. It is surely hard to claim that disposal of the original contract is not part of the conversation. Are consumers being warned, as per the FMA's replacement guidelines, that no review of the current scheme is being made and they may lose benefits that the salesperson is unaware of. 

Speaking with a friend this morning he pointed out that given most KiwiSaver members are saving for a goal that is decades away a much higher proportion of their funds should be in growth assets. The problem is that such asset allocation usually requires advice to establish risk tolerance - or an unusually brave and self-motivated client.

I could illustrate a similar point using 'any occupation' definitions common in income protection products sold with no advice.

I could highlight the issue of no advice around break fees and guarantees in the home loan market. 

Advice is a crucial part of the mix in a future where more New Zealanders take better financial choices for the benefit of their families and society as a whole. 



How Much KiwiSaver You Need to be Comfortable?

The only problem with this otherwise interesting article in The Herald is the title "How Much KiwiSaver You Need to be Comfortable" You need money, it doesn't have to be in KiwiSaver. In fact, as most financial advisers will tell you, above a certain level, the savings you need should not go into KiwiSaver. Contribute enough to obtain the advantages, and the rest should be in a fund which is not locked-in. Life has many surprises - retirement is the prize for avoiding or managing them. 

The best, and central point, is that the amount of money required isn't that big. It is big if you are 55 and haven't got a cent saved, but for most people 45 and under the changes to lifestyle necessary to accumulate a sum of about $500,000 aren't terrifying. A plan can usually be made that includes savings, downsizing the home, and part-time work for a period in retirement that will make it all possible. 

The other fascinating thing revealed is that it is actually slightly cheaper to retire in the main centres than in regional or rural centres. I presume this is because if you own your own home the single biggest extra expense of the big city is dealt with.