KiwiSaver Panic Switching Can Be Stopped

A just released study from the Financial Markets Authority (FMA) that analysed how KiwiSaver members responded to COVID-19 shows high rates of fund switching during lockdown among young people, leading to potential losses.

A lack of access to financial advice and knowledge about individual investment strategies has led to fund switching decisions that are often detrimental to the long-term interest of many young KiwiSaver members. The FMA uses Anna as an example, who saw her KiwiSaver fall by thousands of dollars.

“I got scared because I didn’t understand how KiwiSaver really works, so I thought I had lost a whole bunch of money and I would never get it back so then I switched immediately to conservative to keep the money that I had and hopefully not lose any more.”

This story is one shared by many young Kiwis who switched to more conservative funds after seeing their KiwiSaver balances drop. The study shows that members of KiwiSaver aged between 26-35 switched funds five times more than they did the previous year.

Fund switching results in losses among members with a longer investment horizon staying in conservative funds and missing out on the market rebound. Only a little over 9% of those who switched from a higher risk fund to a lower risk fund have switched back. Therefore around 90% of fund switchers effectively locked in their losses because they didn’t fully realise the consequences of switching.

The FMA study mentions that advised clients were less likely to switch their KiwiSaver funds during volatile times thanks to better education of how the funds work. This is true according to National Capital’s own internal data.

Only a small percentage of National Capital clients reached out to them during COVID-19, since they had already been educated and forewarned. One client switched to a more conservative fund, but upon follow up by National Capital, switched right back to his Growth fund, saving them about $8,000. The link between financial advice and making more informed decisions around finances should not be underestimated.

The issue however remains that Financial Advisers have a strong preference for working with people earning more than 100k a year or who have a large nest egg. Providing financial advice to younger people is more often than not unprofitable for the majority of financial advice firms. Unfortunately, this creates a barrier for young people and many other investors who arguably have the most to gain from good financial advice.

National Capital founder, Clive Fernandes believes technology is the answer to the problem. Clive says, “Through the use of AI and technology, we can provide advice to everyday Kiwis who typically don’t have access to it. While this is not a market that is appealing to a lot of financial advice firms, we can actually provide this advice profitably because of the efficiency gained by our use of technology.”

If young people had better access to financial education, then the above fund switching statistics and subsequent losses could be significantly lower.

National Capital believes accessible technology is the answer to encourage more young people to seek out financial information and help them understand the best way to use KiwiSaver. With personalised advice, young people can make rational decisions rather than acting on emotion, like panic, or taking advice from others in completely different situations.

For anyone who has switched funds over the past year and would like to know more about their KiwiSaver options and which is best for them then National Capital’s free range of resources and KiwiSaver HealthCheck service will be of help.

For more information or to complete the ‘KiwiSaver HealthCheck’, visit NationalCapital.co.nz

About National Capital

National Capital is a financial advisory firm based in Auckland, New Zealand that provides personalised investment advice to its clients. Our mission is to help one million Kiwis become financially secure using technology and the principles of pūataata (transparency), tikanga (ethics) and taurikura (prosperity).

www.nationalcapital.co.nz

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