Money Moves: Understanding KiwiSaver with Amanda Morrall of Simplicity
Welcome to Money Moves by The Twenties Club.
The topic of personal finance is, well, personal. Despite the intrinsic role money plays in our lives, we’ve never been very good at talking about it. Personal finance starts to take shape in our twenties; we’re earning a proper salary for the first time and the excitement that it brings, but we’re also navigating the realities of student debt and investment, saving for a first home and – yes, really – thinking about retirement.
In this series we will work together, with the help of some incredible minds from the finance sector, to de-stigmatise these concepts and find a little financial freedom in the process.
Amanda Morrall is the Head of Communications and Education at Simplicity. The New Zealand company is a KiwiSaver provider known for its low fees and strong ethics (they don’t invest their clients money in companies who profit from fossil fuels, pornography, alcohol, weapons or gambling). Just last year, they caught my eye when the company donated $72,000 to Lifeline after learning how cash-strapped the suicide-prevention platform was. Amanda is also the author of Money Matters: Get Your Life and $$$ Sorted, which seeks to empower people to live the life they want while still getting ahead financially.
Here’s my chat with Amanda on four key concerns put forward by readers on the topic of KiwiSaver.
Two things caught my eye about the business model of Simplicity. The first is your ethics as a business – you have made the decision not to invest your clients money in industries like fossil fuel, tobacco or weapons, plus you also donate a significant proportion of your fees to charity. Secondly, Simplicity Funds has a much more modest fee structure than most banks. Could you explain to readers how your fee structure rewards clients so significantly over time?
For many investors, fees will consume 20% of their retirement nest egg. That’s a lot of money. As the lowest fee KiwiSaver provider on the market, (we only charge $30 a year plus 0.31% as an investment fee) we’re effectively leaving more in New Zealander’s accounts which compounds and grows. Together, we’re saving our members more than $7 million per annum in fees. That’s because we only charge what we need to, not what we want to, like the banks who profit from peoples’ ignorance. So far this year, KiwiSaver providers have been charged more than $100 million in fees. Last year, it was more than $500 million.
There’s a lot of fat in the industry which is why we decided from day one to cost into our model a charitable give back; 15% of our investment fee goes into the Simplicity Charitable Trust which has so far given away upwards of $360k. As we grow, our ability to help charities will too. Members love that.
On the ethical issue you raise, yes we decided to divest away from ‘sin stocks’ like tobacco, alcohol, gambling and landmines, because not only was it unpopular with our members but they were no longer profitable to hold in our portfolios.
Fee structure aside – is it smarter to keep our KiwiSaver funds within the banks we are a member of, or should all of us consider a KiwiSaver specialist outside of the bank? Is this a risky move?
KiwiSaver is one of the most heavily regulated investments in the country. There may be a public perception that banks are ‘safer’ or it’s ‘easier’ but that assumption is wrong. Banks are making massive profits from KiwiSaver and since our “big four” are owned by Australian parents, those profits are being shipped offshore. Investors don’t know what they don’t know and they don’t switch because they think it’s all too hard. In reality, it couldn’t be easier to switch providers. Technology has made that possible. It takes two minutes to switch online to Simplicity. Comparing different providers (fees, performance and services) is also incredibly easy now. Sorted.org.nz and now SmartInvestor are great resources for those wanting to learn more. There’s no excuse these days not to get more engaged.
Generally speaking, is there a type of KiwiSaver fund that best suits a twenty-something? And if he/she isn’t happy with their current type of fund and how it is performing, can they switch?
KiwiSaver is not a one-size fits all product. Choose a fund based on your risk tolerance, your time frame for investing and your purpose. For example, if you’re planning to use your funds to buy a first-home, and it’s sooner rather than later, a lower risk fund might be appropriate. That’s because in a high-risk fund, you’re more vulnerable to market shocks and that could have an impact on your deposit, if the recovery is a long one. Many twenty-something KiwiSavers will opt for growth or aggressive funds because they’re gunning for the highest returns and believe they can ride out the volatility. That may be the case but the danger of chasing high returns is that this year’s best performer is seldom next year’s best performer. You want a provider with a reliable track record who is delivering consistent returns.
Also, investors would do well to remember that while they can’t control stock market performance, they can control what they pay in fees for their investment and their contribution rates. These two things have a major impact over time.
If you’re unhappy with your current fund, most providers will allow you to switch easily and some even allow for split funds where you can be invested in multiple funds. Because all our funds at Simplicity have more than 3,000 investments spread across 23 countries, you’re getting a fair bit of diversification already.
What is the biggest mistake you see young people making when it comes to KiwiSaver?
The biggest mistake young people tend to make is not caring enough about KiwiSaver. Properly managed, KiwiSaver will make the difference between an okay retirement (materially) and a very comfortable one. It’s such a shame because the earlier you start investing and the more you invest, the more you’ll likely have in your account for that first home too. Schools haven’t done a great job at educating young people about the power of compound interest and how KiwiSaver works, so it remains poorly understood. On the bright side, books like The Barefoot Investor and Tony Robbin’s Unshakeable are getting more people excited and interested. So we are starting to see a shift, but it’s slow. The pay-off for those who do switch-on to finance early can be huge. Again, apathy and ignorance are the enemies in personal finance and KiwiSaver.