Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 23 January 2010
Q&As: Should couple repay mortgage with redundancy money, or invest it in KiwiSaver or elsewhere?
Big KiwiSaver provider should know better about first-year tax credits
More information available about investment advisers - and are hourly or percentage fees better?
Less room for trouble if people make their own investments after seeking adviser's recommendations
Question: I have the following dilemma, which might be shared by other readers.
We are a couple in our mid-30s with young children. My partner is self-employed, with a fluctuating modest income. I have had a regular income, but am about to be made redundant.
We have a mortgage of about $350,000 on a house valued at $670,000, and no other significant assets.
My redundancy package will cover our expenses for several months and require me to resign from the company's superannuation scheme. Should I pay the $80,000 returned superannuation off our mortgage, reinvest it in a new superannuation scheme, contribute to my KiwiSaver account or something else entirely?
Answer: My vote is for paying off the mortgage. In most situations - and especially if you have young children and your partner's income is not steady - this is a smart move, as it increases your security.
Repaying a mortgage is also your best bet financially. Your wealth - sometimes called your net worth - is measured by your assets minus your debts. So reducing debt increases your wealth in the same way as adding to your assets would.
More specifically, paying back a mortgage with, say, an interest rate of 6 per cent boosts your wealth as much as an investment with a return of 6 per cent, after fees and taxes.
A return at that level is, of course, quite possible in a super scheme or other investment. But you probably won't get it without going into riskier assets such as shares and property, whereas repaying your mortgage is risk-free.
There's another advantage, too. You don't have to agonise about which investment to make.
One other point: If you were to put the money into your KiwiSaver account - and this might also apply to a super scheme - generally you wouldn't have access to the money until you reach retirement age. While some people welcome that, because otherwise they would spend the money, most prefer accessibility.
Who knows whether you or your partner might want to start a business, take some time off work to study or be with the children, or support other family members? If you repay the mortgage you should be able to borrow back that money any time you need it.
Despite all I've said, it might be wise to hold some of the $80,000 in a bank account until you get a new job - just in case it takes longer than a few months.
Question: I noted your comment in a recent article regarding the KiwiSaver tax credit. You said it would be less then $1043 in the first year, and it would be proportionate to the number of months of membership in the KiwiSaver year, which runs from July 1 to June 30.
I am about to join KiwiSaver - retired, 61 years old. I discussed this point with my selected provider - a large bank and default provider I understand - and was given a different answer, after the agent talked to a more senior adviser.
The interpretation seemed to be that if you had the amount of $1043 in your account as at 30 June, regardless of when it was paid in, you would get the maximum tax credit.
It will of course affect the amount of contributions I make for the next six months. I would not make the full $1043 if this would not give me the maximum tax credit.
I do not understand why I should not get the full credit if the contributions reach the full amount for the year, but expect you have an explanation from the IRD.
I would appreciate your comments on why the credit is only allowed on the proportionate basis. If you have some form of ruling this would be helpful, and would also help correct what appears to be a misunderstanding by a major financial institution, who may be giving out incorrect advice.
Answer: Would the government's website, www.kiwisaver.govt.nz, do as a source? It says, "If you join KiwiSaver part-way through a membership year (1 July to 30 June), you'll receive a member tax credit for the portion of the year that you've been a member."
Frankly, I'm appalled that any provider - especially a default provider with many thousands of members - should be giving out the wrong information on a basic point about KiwiSaver, which affects each new member. Any readers who work for providers might want to cut out this Q&A and pin it up on a work bulletin board or give it to their bosses - in the hope the misinformation stops.
In every other year after your first year in the scheme, it's correct to say that, "if you had the amount of $1043 in your account as at 30 June, regardless of when it was paid in, you would get the maximum tax credit". But in the first year, that is not the case. For more detail on this, see "tax credit timing" under Incentives on the KiwiSaver Basics page on www.maryholm.com.
As for why the rule is this way, you would have to ask the KiwiSaver designers, not Inland Revenue, which simply enforces the rules.
I'm afraid I'm not going to ask the designers on your behalf, because I think the rule is perfectly reasonable. The government is handing out heaps of money to new KiwiSaver members. Everyone gets the $1000 kick-start three months after they sign up. Don't you think it's just a wee bit greedy to expect a further $1043 for being a member for less than a year?
Remember, it's taxpayers who are paying all this.
Question: Thank you for listing fee-only advisers in your last column last year. This has been most helpful in distinguishing between commission-based advisers and fee-based advisers.
One thing I have found though is that fee-based advisers are generally remunerated by charging their clients a percentage of funds under management.
Is this not also an issue, in that there is a perception that advisers are "motivated" by the size of available assets to invest? Or when they do the asset allocation process they may be investing a higher allocation to riskier assets (where the possibility of faster growth exists and hence greater funds under management), so the adviser is arguably lining their own pocket?
This may sound cynical, but are there advisers in this list that charge for their time like accountants and lawyers?
Is there really any difference when an adviser works on a $500,000 or a $1 million client with the same allocation, unless the client requires greater attention with respect to meetings or communications?
Finally would your table benefit from showing how fees are charged?
Answer: It probably would - if only there were room. I asked advisers about their fee structures, but many of them were quite complex. And summarising complex information can be more misleading than helpful. In the end, I decided readers could check for that info on the advisers' websites, or phone or email and ask them.
I did, however, gather some other information from the advisers, which I've included in a fuller version of the table on a new page on www.maryholm.com, called Info on Advisers.
That table includes the location of each firm's head office and areas they regularly visit. It also states the minimum initial investment amount clients must have - which is zero for quite a few firms.
It's important to realise that being in the table doesn't necessarily mean an adviser is good. I'm not in a position to check that, and would appreciate readers' feedback if they are unhappy with any advisers on the list. However, being in the table does mean the adviser's investment recommendations aren't affected by the size of commissions they receive from different providers - which is a good start.
Two new firms will also be included in the table. They are:
• DecisionMakers, www.decisionmakers.co.nz, which has seven advisers.
• Quartz Wealth Management Ltd, www.quartzwealth.co.nz. The adviser is Glenn Read.
But I've got sidetracked from your issue - about charging fees by the hour versus as a percentage of the client's total investments.
With the latter, the fee for a client with $1 million typically won't be anywhere near twice the fee for a client with $500,000. Fee percentages always seem to reduce as the money increases. They will, though, always be somewhat higher - which may be justifiable because we would expect more diversification in the bigger portfolio, so it would take more time to manage.
Still, generally I agree that charging by the hour is better. As you say, an adviser charging a percentage fee might indeed be tempted to suggest riskier investments in the hope the money - and therefore the fee - will grow faster.
Some clients might welcome this alignment of their own and their adviser's interests. But if a client worries about risk, they might prefer to find an adviser who charges by the hour. They do exist - and I would suggest they highlight this strong point in their literature and on the home pages of their websites.
Question: With response to your articles late last year about independent financial advice and fees versus commissions, I would offer the following comments.
I'm an accountant/economist, an expat kiwi resident in Australia for 20 years. I was a consultant to a mid-size "independent" financial planner/adviser for 15 years, which gave me a thorough understanding of the inner workings of the industry.
If an investor seeks investment advice from an independent adviser and implements that advice themselves, independently of the planner, then commissions and kick-backs do not, and cannot arise.
Commissions and kickbacks will only arise when an investor employs the adviser to "manage" the investments and implement the advice.
Your article implies, and relates to the second option, while the simple solution is for investors to do their own investing.
The issues you discuss are the same problems here in Australia. Solutions will only arise when investors are provided with a full accounting of "total fees" extracted from their investments as they travel down the fee-clipping highway.
Answer: You're quite right, that we'd get around a lot of the problems if people made their own investments. Trouble is, many don't know how to go about it. Then again, I guess they could ask their adviser for information on that, too - and pay by the hour for that information.
I would certainly like to see people taking more of a role in their investing. That way they would take more interest and learn more - as well as avoiding commission problems.
* Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.