The value of advice - an external perspective

26 November 2019

A common piece of feedback we receive at kōura is why do I need advice and what is the value of advice.

 

Our immediate answer to this question is, "advice is essential - having the right KiwiSaver fund can make you hundreds of thousands of dollars richer". Our second answer is "if you don't care about advice, then hopefully you care about our amazing funds which have best in class sustainability metrics, we charge fees half the average growth fund fee, and we work with some of the largest and most established players in the industry to deliver great results for our customers. 

But advice is at the core of our kōura, so we were delighted to see an independent report released yesterday quantifying the value of advice and providing external validation of our business model. 

The report produced by Russell Investments (a large global asset manager with over $300 billion of assets under management) this week that suggests that in 2019, the value of securing financial advice is 5% or more in returns per annum.  We offer every kiwi access to high-quality advice to make sure that they can have the best possible retirement. 

People believe that KiwiSaver is simple and therefore, different from other investments. Still, we need to realise that being in the wrong KiwiSaver fund will cost us hundreds of thousands of dollars by the time they retire.  And research shows that less than half of people are getting it right as less than 20% of people seek proper advice.   Securing quality KiwiSaver advice could, therefore, be the difference between an okay retirement and a great one. 

kōura, of course, is a digital adviser and not quite the formal in-person adviser that the Russell Investments paper refers to. Admittedly we are a little biased, but we firmly believe our digital adviser will be able to compete with the best of the best in-person advisers. To prove our point, we have compared the “benefits of advice” discussed in the research paper and assessed how we provide those same benefits to a kōura KiwiSaver member.

Annual Rebalancing - adds 0.4% per annum

KiwiSaver is a set and forgets for most KiwiSaver members. The portfolio of funds selected at sign up is more than likely the same portfolio that a customer still has today. There is no recognition that the portfolio needs to change and be reviewed on an ongoing basis to match your objectives.

You may have chosen a growth fund when you were 22 and in your first job but how often have you looked at that since then. What happens if you were looking to buy a home at 30 and suddenly found your deposit for your first home had dramatically reduced due to a market downturn?

At kōura, we check in with you annually, just like a financial adviser does to make sure that your portfolio still matches your objectives and risk tolerance. If market movements push your funds to a different allocation from what we recommend, we rebalance the funds back to their recommended application every 6 months. Ongoing communication also reminds our members to adjust their objectives as they change, which further increases the probability of good investment outcomes.

 

Behavioural Mistakes - adds 1.9% per annum.

Behavioural mistakes refer to people “chasing the markets”, this means investors will change their portfolio based on the news in the market or basic analysis. This chasing generally costs many investors. We have spoken to so many KiwiSaver users who have made the mistake of changing their fund allocation following a short term market movement that we even wrote a post about it. 

The key issue in the 12 years since KiwiSaver has been operating is that the focus has been on encouraging customers to sign up to KiwiSaver, rather than focusing on ensuring the right outcomes for customers. There is a huge lack of awareness on how much is needed in retirement and whether what we are contributing right now and the way we are identifying our 'risk appetites' will get us there. Most of us have never taken even basic classes to learn about money management, let alone understanding the complexities of goal-based advice and multi-asset investing.

At kōura not only do we assess your risk tolerance (rather than asking you to choose) but we also have an education program to help you understand the impact of your decisions and to help you stop making the behavioural mistakes that will cost you a great retirement.

 

Cost of getting it wrong - adds 2.9% per annum.

Research by kōura has shown that 53% of Kiwis are sitting in the wrong type of KiwiSaver fund for their objectives and profile. This is supported by research from Deloitte that studied the habits of Australian investors and found that younger investors were, surprisingly, more risk-averse than their older counterparts. Some 81% of investors under 35 said they were seeking guaranteed or stable returns, compared to 41% of those aged over 55.

Investing without professional advice can be viewed as an effective way to lower the costs of investing. When you invest your KiwiSaver money using a quick retirement calculator, you do save on an adviser’s fee, but this can be a short-sighted decision. Currently, there are 1.8m people under the age of 45 in KiwiSaver with $38 billion invested. Our analysis shows this segment of the population have missed out on over $2.5 billion in returns over the past 2 years simply because they have been unable to identify their correct risk appetite.

Whether your KiwiSaver goal is to achieve long-term growth or preserve capital, developing an appropriate investment strategy based on individual risk tolerance, time horizon, and investment goals are all important. Trying to do this without advice is tedious, and most of us are short on time and don't know how to even go about finding a trusted adviser. Recent kōura research shows that only 41% of Kiwis would even be open to talking to a financial adviser! It’s no wonder then that 700,000+ Kiwis continue to stay in default funds rather than finding better alternatives for their retirement investments. 

 

Digital advice is the answer.

The key to a great retirement is planning for it and asking for help.  But who do we go and ask for help? KiwiBank research has found that given less than 20% of New Zealanders have a financial adviser, digital advice could act as a great alternative.

Digital advice combines the best bits of a financial adviser and Aunty Google. You get great advice from the comfort of your couch, making it convenient and easily accessible. At the same time, the use of algorithms allows investment recommendations to be based on financial techniques that are free from the behavioural bias of an advisor, resulting in objective best-in-class recommendations for you.

The best bit? kōura's advice is totally free. Additionally, we have some of the lowest and most transparent fees in the market of just 0.63% of funds under management per annum plus a $30 yearly administration fee. We don't believe in charging you more because you chose a growth-oriented portfolio and neither do we charge any performance fees.

So we'll ask you again, who are you going to for advice on your KiwiSaver investment? Come, ask kōura

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Personal Digital Advisor

To design your advice, we need to know a few of your details.
My name is .
I am years old.
My KiwiSaver balance is approximately .
I regularly contribute to my KiwiSaver.
I contribute of my income,
and my pre tax income is
My pre tax income is
I intend to use it to purchase my first home.
I expect to purchase my home in less than years.
I make an annual voluntary contribution. of .

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