Risk in ‘water-cooler’ advice
Savers are relying on friends and neighbours to make crucial Kiwisaver fund choices, a report has revealed.
Chats over the garden fence or at the water cooler with colleagues appear to be more influential than professional advice, says research from Annie Zhang.
The former Massey University, PhD student delved into data from over 600,000 Westpac and ANZ KiwiSaver accounts to glean insights into how savers behaved.
And she found many were taking their lead from key influencers in their homes, workplaces and communities.
Zhang crunched the information in relation to KiwiSavers’ addresses, and also looked at their work locations.
‘‘We found that almost twothirds of people hold the exact same investment fund – and therefore identical asset allocation – as the people they live with in the same household,’’ she said.
Zhang discovered the level of risk people were prepared to take on was also influenced by others.
In addition, divorce was a big driver, with couples who split less willing to take on investment risk.
But, Zhang said: ‘‘There is a growing body of literature on the possibility that neighbours and co-workers play a role in investment choices, particularly with respect to stock market participation.’’
She said the findings may uncover the ‘‘the ultimate peer effect’’ where one household member is making the decisions for all the other household members.
But Zhang could not see the relationship between those in each house. Some households could be composed of flatmates.
Yet the household peer effect was particularly strong on younger KiwiSavers.
While 68 per cent of younger Kiwisavers hold the same funds as other household members, 34 per cent hold the same funds as their co-workers.
The likelihood of switching funds also increases when those around you are switching theirs.
Switching between funds is still relatively uncommon. During the period of her study Zhang found the chances of a KiwiSaver making a switch was about 1 per cent.
But that figure rose to 10 per cent if a household member switched fund.
Older KiwiSavers, women, and richer KiwiSavers were more likely to have sought advice.
‘‘I find that people who receive financial advice differ significantly in their asset allocation holdings compared to people who do not receive advice,’’ Zhang said.
She found those who had had advice held 11 per cent of their KiwiSaver holdings in cash, compared to 16 per cent for those who had had no advice. SHOULD YOU LISTEN TO WATER-COOLER ADVICE?
Binu Paul from SavvyKiwi, a subscription KiwiSaver advice service, says taking KiwiSaver decisions based on water-cooler talk is risky.
But with low financial literacy levels, it is not surprising people take investment leads from more knowledgeable friends, he says.
‘‘There are probably two risks of the water cooler conversation. The first is that the person providing the information would be speaking completely out of their own context,’’ said Paul.
‘‘The second is you would be more likely to switch funds more often than you should.’’
Paul says listening to others and acting on their advice, means taking on personal bias, and someone else’s appetite for risk.
Paul added that many people shunned professional advice because of the cost or ignorance of where to find it.
He said: ‘‘The growth in KiwiSaver is really exponential for everybody. Returns compound over time, so anybody who thinks the early years are not that important lacks the awareness of how money grows on money.’’