NZ Herald 15 October 2022

ALaddering term deposits works well even in volatile markets — perhaps particularly so.

What we’re talking about is dividing up your money into, say, four lots. You invest a quarter in a one-year term deposit, another quarter in a two-year deposit, a third quarter in a three-year deposit, and the last in a four-year deposit.

Then, as each deposit matures, you reinvest it for four years — while withdrawing some for spending if you want to. The advantages are:

• You have money maturing every year, to spend as needed.
• After the first few years, you keep receiving the higher interest rates that usually apply for longer terms.

Occasionally — when experts expect interest rates to fall considerably — longer-term rates are lower than short-term rates for a while. But you’re investing for years, so ignore hiccoughs like that. Most of the time you will be better off in longer-term deposits.

You’re wondering, though, whether you should wait for higher interest rates before setting up laddering.

I wouldn’t. Even if interest rates keep rising for a while, in the meantime your money is sitting in a savings account. Interest.co.nz tells us that almost all savings accounts pay less then 3 per cent — many much less. Meanwhile, all one-year or longer term deposits pay more than 4 per cent. Waiting is expensive.

In any case, you will be setting up the deposits so one matures in 2023, one in 2024, one in 2025 and so on. By spreading out your reinvestment dates, you’re spreading your risk. Sometimes you’ll reinvest at a higher rate, and sometimes it will be lower. Obviously it would be better to always get high interest. But nobody can do that. And laddering beats investing the lot at what turns out to be a low rate.

Laddering means you can stop worrying about trying to time interest rates, and get on with important issues like where your next holiday will be.

P.S. It would be good if you were brave enough to invest some longer-term money in, say, a higher-risk KiwiSaver fund, which will almost certainly give you higher average returns than term deposits in the long term. But if you can’t cope with volatility — and if you have enough to retire comfortably anyway — it’s fair enough to stick with term deposits.

AGreat to hear from a happy investor amidst the flood of panicky letters.

I can’t work out your return — to compare it with property — without knowing how much you invested when, and how much you’re received in dividends. But clearly good old “buying and holding” has served you well. And I applaud your wide diversification.

ATime to challenge your broker — and then drop him.

Firstly, it seems he didn’t give you a good reason for switching providers — a reason that benefits you, not him.

Secondly, you would indeed pay his advice fee for moving you to Milford, and also the ongoing fees he would receive.

“People can invest in Milford’s KiwiSaver Plan in two ways: directly, or through a licensed — and Milford approved — independent financial adviser,” says Murray Harris of Milford.

An adviser “may choose to charge for that initial advice, (up to a maximum of $150). The investor must authorise Milford to deduct this fee from their KiwiSaver account and pay it to the adviser, so it is a fee for advice provided, paid by the investor to the adviser, and not a commission paid by Milford.

“Advisers can also charge an annual advice and administration fee of between 0.2 percent and 0.5 percent of their clients’ account balance, which is paid monthly. Again, the investor must authorise Milford to deduct this fee from their KiwiSaver account and pay it to their adviser.

“The Adviser must work with their clients at least once a year to review their circumstances and the advice, and an investor can instruct Milford to stop paying this fee at any time if they are no longer receiving the advice service.”

Harris adds, “All of this information is disclosed in the Milford KiwiSaver Plan Product Disclosure Statement provided to every investor,” and in a linked document.

It remains to be seen whether you would receive that ongoing advice — which you would be paying for. But given the broker’s performance so far, I wouldn’t wait around to see. If you have moved provider by now, I suggest you ask Milford to stop the arrangement.

There are two ways that financial advisers work with some KiwiSaver providers:

• The individual investor pays their adviser — as you would be doing — through withdrawals from the investor’s account.

  “There are several other KiwiSaver providers who also offer this type of transparent fee-for-service model,” says Harris. “It gives investors access to qualified, independent financial advice throughout their KiwiSaver journey, helping them work out their risk profile, choosing the right fund, the right contribution rate and providing guidance through market ups and downs. This should ultimately benefit the investor in achieving their KiwiSaver goal.”

• The provider pays financial advisers to work with their members. That money comes from fee revenue paid by all investors.

  Generate operates that way. “Adviser commissions (both upfront and ongoing) are common across the industry because advisers need to be paid for the service they provide, and access to financial advice is important for educating and empowering the public to make informed decisions about their KiwiSaver investment,” says Henry Tongue of Generate.

  Advisers “do a great job for our members,” he says. “Generate has 84 per cent of members’ funds in our growth funds versus the KiwiSaver average of 40 per cent. Given the long-term nature of KiwiSaver, those members will be materially better off.”

That’s a fair point — as long as all members are aware that their fees include adviser commissions. Generate says it outlines the process in its Product Disclosure Statement and Financial Advice Provider Statement given during advice meetings.

But do all members of KiwiSaver schemes that operate this way understand how the system works? And do they all receive much useful advice?

The Financial Markets Authority acknowledges that financial advice is helpful for KiwiSaver members, but it has concerns.

In a May press release about a pilot study of 14 KiwiSaver and non-KiwiSaver funds the FMA said, “Fund managers commonly pay substantial commission to third parties (including financial advisers and banks without KiwiSaver schemes) for introducing new members to their funds — only some of which are financial advisers helping investors make good investment decisions.

“This has a significant, ongoing impact on fund costs, the fees paid by investors and, ultimately, on fund performance.”

Paul Gregory of the FMA says of the pilot study, “We saw very few instances where the third party continued to provide advice or of members being made aware the fees they pay are inflated by the cost of commission.”

In a Value for Money Industry Report, the FMA says it would prefer fees for advice to be charged separately to the member receiving the advice. In any case, it says:

• “Advice should be received, not just offered;
• “Advice should be ongoing — at least annual — not just at on-boarding;
• “The fee for advice should be reasonable;
• “The fee for advice — the sum, and who receives it — should be disclosed to and discussed with members.”

How can KiwiSaver members easily learn what happens in their scheme?

“It is not easy for investors to find out currently” says an FMA spokesperson. “We are continuing to work with providers to ensure that advice is available to investors and that it is clearly disclosed and accounted for.

“Investors need to ask questions at the point of sale, or when a recommendation is made, and when advice is provided. And this information should be readily and easily available to them.”

You are a good example of an investor asking questions. I hope more people will do that. This is about your money.

AWell done in the 2020 downturn — staying in the growth fund despite the drop, but learning from it and reducing your risk later, after the markets had recovered.

The adviser is correct. If you move money from one fund to another at the same risk level, that’s fine regardless of what the markets are doing. It’s bad only if you reduce risk during a downturn, making paper losses real.

However, I strongly suggest you ask the adviser why the move will be good for you. If the new provider charges lower fees, that will probably work well. But if the fees are the same or higher, what is the justification for the move? Could it be the adviser receives commission, while you gain nothing?

Another thing: It’s not wise to have your travel and car money in a growth fund. If you expect to spend that money within ten years, I would put it in a balanced or bond fund. And if it’s within about three years, use a low-risk cash fund. Otherwise, you might find you have considerably less than you thought at spending time.

Meanwhile, if you’re more than ten years away from turning 65, perhaps make your KiwiSaver a growth investment.