The funds are invested conservatively meaning the money is mainly in cash or bond investments which are lower risk and have lower returns.
The default funds were meant to act as a parking space for people's money to go to while they made a decision but instead members have remained there.
John Cliffe, an Auckland-based financial adviser who is the spokesman for the advisers, said a conservative strategy was incompatible with the overall purpose of KiwiSaver and effectively penalised long-term investors.
He said the decision to keep the decisions to keep the default funds conservative rather than balanced had resulted in members missing out on approximately $830 million over the six years ended 31 March 2018 - roughly $2.7m every week.
Cliffe said members were also staying in the default funds for too long.
"Default funds were designed as a 'temporary holding place' for new KiwiSavers from which they could be switched to a more appropriate fund.
"Yet for many default fund members, the switch has never taken place. Default fund managers have performed poorly in this regard."
As of March 31, 2012 there were 447,274 members in default funds - by March 31, 2017 it was 446,534.
"In those five years despite lower volumes of enrolments in default schemes the total number of members declined by only 740, while the value of funds increased by $2.9b to $4.6b in default funds, compounding the regulators conservative default fund selection error."
An individual earning $40,000 a year could be potentially be $6000 worse off while someone on $60,000 a year could potentially be $8100 worse off.
Since 2014, when the government reviewed the default providers, there has been an obligation on them to provide financial literacy with the aim of getting people to move out of a default fund into a more appropriate fund.
But annual reports by the Financial Markets Authority show the numbers moving to another fund have been low.
The advisers claim bank default providers face a serious conflict of interest when it comes to getting people to switch because $1.5b money in the default funds is invested in their own bank products.
In 2018 the five bank default KiwiSaver providers on average had 34 per cent of their own default funds invested in bank products.
That compares to 11.7 per cent of balanced funds invested in the bank's own products.
The advisers also believe the Inland Revenue Department should give KiwiSaver providers a member's tax rate so individuals are taxed at the right amount.
At the moment it is up to members to ensure they are on the right prescribed investor rate and if they do nothing providers automatically charge the highest rate of 28 per cent and there is no way of clawing money back if people have overpaid the tax.
The advisers estimated default members have overpaid tax by $100m.
Cliffe said it was speaking out for default members despite them not being clients of the advisers.
"...this is a serious financial issue that has not and is not, being resolved," the advisers wrote in a letter addressed to the FMA, Reserve Bank, finance minister Grant Robertson and commerce minister Kris Faafoi.
"There are clear conflicts of interest with some default KiwiSaver providers. Some of the default providers have acted in their own interests, not in their default client's interests. ...it has cost some of the most vulnerable New Zealander's significant sums.
"It is both an inexcusable and continuing problem. The ethical standard of our industry has not been met by some of its most important institutions and government bodies."
Cliffe said he and the other advisers had been prompted to speak out by the Australian Royal Commission into misconduct in the financial services industry and over concerns that the regulators were not doing enough.
"The FMA, government ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education of default investors is required along with better fund manager performance in switching out default members to solve the problem.
"After a decade of failure with this approach it is time to take action."
What the financial advisers want changed about KiwiSaver
• Change all the default fund options to balanced, not conservative fund types.
• Ensure IRD provides default fund managers correct member tax rates for all default members.
• Progressively remove all members still in a default fund after 12 months by switching them out.
• Establish a white-labelled Government balanced fund into which all longer-term default members are switched.
• Stop new default member flows to any default fund provider who does not adequately meet specified engagement and switch out rates for default members.
• Instruct the white-labelled Government balanced fund to minimise investments in Australian-owned bank securities.
• Require default fund providers to keep default KiwiSaver funds separate from other funds, to not use the word "default" in the name of any other fund they operate and to switch "active choice" members out of their default fund.
• Investigate KiwiSaver fund managers that have significant conflicts of interest in security selection or in the way they determine what fund types to recommend to members.
• Require default fund managers to refund management fees charged in relation to placing and keeping investments in their own issued securities.
• Require explicit identification and ongoing disclosure of such conflicts to fund members.
