KiwiSaver’s Achilles heel

It was with great interest that I read the Australian Financial Review August 30th headline “IOOF to buy NAB’s MLC Wealth”.

Many moons ago when I started my career in financial services the three largest providers were AMP, National Mutual and MLC in that order. Sometime in the 90’s the big four Australian banks decided they needed a greater slice of their customers wallet and all went on buying sprees for wealth management firms. The CBA bought Colonial, Westpac bought BT, ANZ bought into ING and the NAB bought MLC.

AMP also jumped on the mergers and acquisitions train and purchased AXA who had previously purchased National Mutual.

Once all the buying and selling settled down, bank management set about trying recoup their capital spend and turned these new assets into wealth management sales factories. They integrated their own financial products into the advice given by their in-house advisers and traded on the reputational safety of the banks size. Unfortunately, clients paid a high price for this cookie cutter approach, which the Hayne Royal Commission in 2019 described as a ‘vertically integrated model’.

The Hayne Royal Commission held a magnifying glass to the conflict of interest inherent in a vertically integrated model and, when finally exposed to the sunlight, these obvious imperfections were laid bare. In the ensuing backlash, the big four Australian banks took the only realistic option and moved swiftly to cut wealth management and financial planning from their core business. A cynic might say the directors were worried about losing their Porsche’s. Regardless, NAB’s recent sale of MLC completed the mass exodus.

As for AMP, it has been imploding in recent years, destroying shareholder value with scandal after scandal and is now also up for sale. I could never have guessed all those years ago that the brands AMP, National Mutual and MLC would all soon disappear and be consigned to history.

Buying MLC probably makes sense for a company like IOOF who aspires to be a large institution. Their challenge of course is overcoming the perceived conflicts. I do not believe anyone can square that circle and be both product manufacturer and advice provider without being conflicted.

In New Zealand, we have the interesting situation where many of the same Australian companies still maintain a vertically integrated sales system via KiwiSaver.

Not long ago my son, who has an orange coloured KiwiSaver scheme, went into a big blue bank to open an account. He had recently started work. The bank staff member asked him the usual list of generic questions including “Do you have a KiwiSaver?” The fact that he couldn’t remember the name of his current scheme provider was all the evidence needed for the bank staff member to insist he change KiwiSaver funds to the big blue bank. He was harangued on the matter for a considerable time. I recounted this story at the office and two staff told of their similar experiences over the prior 12 months.

Make no mistake, this is a vertically integrated system hiding in plain sight.

Disappointingly, this has gone on for years. Switching KiwiSaver schemes is easy and open to abuse with pushy sales tactics. Some schemes boast of high returns, others low fees, and yet others size and safety. Unfortunately, few seem concerned about what is in the best interests of the investor member. They are selling a product, not financial advice. Most schemes lack any transparency around advice and service.

The flaws in the current model were starkly highlighted during the recent COVID-19 mayhem when large numbers of mostly non advised KiwiSaver members switched from growth to conservative funds at the worst possible time and missed the market rebound. This had the effect of wiping out years of positive returns and destroying wealth. Very few people, including myself, are objective about their own money and need advice to increase the probability of making successful decisions.

Sadly, this is KiwiSaver’s Achilles heel. 

The Hayne Royal Commission highlighted that product manufacturers are inherently compromised when it comes to the provision of advice. And yet, KiwiSaver was primarily designed as a product for institutional distribution, not as a vehicle for the delivery of independent investment advice. 

In surveying the wreckage following the Hayne Royal Commission, surely decision-makers on this side of the Tasman were taking notes. Getting the KiwiSaver scheme up and running in 2007 was an important first step towards assisting generations of New Zealanders towards a better retirement. But, a more critical second step is to now change the rules of engagement within the scheme to promote and encourage independent advisers to the table. 

Until that happens, investor needs will continue to take second fiddle to those of the incumbent product manufacturers and distributors. It would be a great shame if it required a Royal Commission of our own in a few years to finally rectify that.