Simple strategy for your term deposits works even in times of market turmoil. Photo / 123RF
OPINION:
Q: My husband and I retire soon and currently have our savings in an online savings account. We had intended to set up a series of laddered term deposits as you have recommended in the past, but wonder if this is sensible in a rising interest rate environment?
A: Laddering 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 than 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.
Q: Having read recent letters about the sharemarket declines, I thought I might share my experience.
In the 15 years leading up to my retirement, I bought shares and bonds. They cost $210,613, and the portfolio comprises shares and ETFs (exchange traded funds) listed in NZ, Australia, UK and US.
The current value is $458,000, after a recent decline of 8per cent — still a rise of 117 per cent. In addition, I have received dividends over the years currently running at about 7.6 per cent a year.
I have not indulged in trading, adopting a buy and hold policy. A few have lagged but some have done especially well, the best up from $6000 to $38,000.
Some may say, "But your house will have risen by more over that time". But it hasn't provided the interest or the income. So hang in there in the tough times!
A: Great 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've received in dividends. But clearly good old "buying and holding" has served you well. And I applaud your wide diversification.
Q: My broker recently recommended that I switch my KiwiSaver provider but stay in the same fund category. I would move from Generate to Milford's aggressive fund.
I was surprised as he recommended Generate to me two years ago. I asked for a full disclosure and was surprised to read in the small print that the broker will receive an "introduction fee" from the new provider, but also ongoing fees for the life of the savings. So in effect, because of my investment he gets a free meal without doing any work or taking any risks.
When challenged I learnt that this is paid by the provider and not by me. In spite of that, I feel this is not fair. I don't mind a one-off commission but ongoing commission ... I have also sent emails to various providers and learnt that the fund providers at their discretion will pay the broker both an introduction fee and an ongoing fee when their funds are recommended.
My broker was blunt and said, "It does not affect you and does not come out of your pocket, so why bother?" It's an agreement with him and the fund manager, who pays him the "commission".
A: Time 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 per cent and 0.5 per cent 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."
• 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.
Q: I have $185,000 in a fund tied to a previous employer's super fund. I left it alone in growth for about three years. I can access it when I choose.
It took a significant dip with the 2020 March Covid hit so I left it to recover in growth, then split it up to reflect my risk tolerance levels revealed by that big drop.
Currently, those funds are divided into 40 per cent stable; 30 per cent balanced; 30 per cent growth. An adviser suggested I move it all to another recommended provider, saying it won't make much difference to change in this current dip because I am not buying new units.
Now contributions from my new employment go into KiwiSaver (balanced) with other savings going into another growth fund for travel, and car replacement.
Is selling and buying in the same market like real estate? Is there a loss from changing in this market, or am I selling low and buying low?
A: Well 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 10 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 10 years away from turning 65, perhaps make your KiwiSaver a growth investment.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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