Impact From Simplicity

In a world of exponential innovation, disruptive technologies and giddy cryptocurrency speculation a discussion about another KiwiSaver fund might seem a little vanilla. But after a few minutes with Simplicity founder, Sam Stubbs even the most finically unfocused would be hard pressed not to find excitement in compounded interest from saved fees, the growth of a domestic capital base and passive funds that have governance level influence over the companies that they invest in.

In a little over a year of being live Simplicity’s non-profit low fee model has attracted over 10,000 New Zealanders and over $300 Million into the fund while not only saving Kiwis a fortune in fees but also changing the way that many of us think about money. Simplicity has also created the foundation for changes in regulation that encourage more transparency in the industry and an environment of lower fees. Stubbs and his team of largely volunteers might have earnt themselves a break but one gets the sense that this is only the beginning.

Since launching you have grown exponentially. You’ve changed the industry and you’ve changed the way a lot of people think about money. What was the seed for this?

Simplicity started with my midlife crisis. I had been an investment banker and a fund manager for almost 30 years. I had a very lucky career and wonderful opportunities, but I got to the point where I was looking in the mirror in the morning, and I was saying: “Look, I’m making some people – including myself – a little money here. But I’m from Sunnyvale…I’m from West Auckland and I’m not looking after my farm out here. This is not doing good.

So when the last business I ran – which was Tower Investments – got sold, I decided to work in charity. It was ‘give back’ time. I was mainly fundraising. Just little bits of money and trying to get it from all various places. But I had the genesis of this idea. I sat around with a group of people in a pub and we said: “Look, blank sheet of paper, how would you actually make the biggest difference to New Zealand? How do we make the biggest difference?”

The answer was obvious. We know that this is a massive pool of money; it’s NZD$42 billion now. It’s going to be $200 billion in the not too distant future. We know the margins are massive. We know that we can run a much lower cost business. And while we were in there, we threw in, “Why don’t we just give 15 percent of our management fee to charity? Build it in as a cost item.” Which is kind of weird for a non–profit, to still be giving 15 percent to charity. But we thought: “Why not?” Because as this thing grows, not only do you make Kiwis more money, you make charities more money.

At the time, we couldn’t do that. Because the law wouldn’t allow you to have an online business. There weren’t the technology platforms. It was tough. We spent three years doing three big things. The first was getting the law changed to allow an online business to exist. Secondly was getting the technology platforms in place. And the third thing was getting all the relationships in place, to allow the suppliers to provide us with services and so on.

We’ve taken the Vanguard business model and bought it into New Zealand. They are also doing our asset management for us offshore. They have just hit six trillion dollars. They are literally 40 times our GDP. And they’ve been a non-profit for 40 years.
They’re just amazing. So we said, “Let’s do that in New Zealand.” Generally, the fees in KiwiSaver are very high. It’s real David and Goliath stuff too because 85 percent of KiwiSaver money – in fact more like 90 percent now – is controlled by six major players. And the big banks, and the big insurance companies.

So why do you think you can succeed against that?

Well, it’s actually very easy. It’s because what we’re doing is the truth. We’re telling people the truth about what it costs to manage their money.

In financial products, most providers say really nice things, and they say they’re looking after you and caring for you. But fundamentally, they don’t want you to know too much. That’s why you see so many billboards with cheesy messages and not facts and figures. Because if you knew stuff, you’d ask questions. And those questions are difficult questions… “Why are you charging me this much? Why am I paying for this? Why is it taking so long?”

We just thought: if we go in and tell the truth and do an honest business, people will gravitate towards it. It seems to be working.

What does the structure of your business look like?

We have a really unusual business structure for a financial company in New Zealand, but not unusual in an overseas context. We have six employees. Sometimes we risk them all in one lift at a time. But we also have 45 volunteers. PR people, employees from Google, senior Facebook consultants, lawyers and accountants – a whole bunch of people. And they will get excited, they will get involved for one of several reasons. They like the high-tech side of things. They like the concept of a New Zealand owned financial institution. They like the charity thing big time – that’s a big motivator. And then the other motivator, I think is that they can see the scalability of what we can do, and so they want to get involved. The pitch is that one or two or three percent of your time will make this difference to New Zealand. And the numbers are enormous.

We actually do work for the government. We gave them our numbers and asked, “How much richer will your average community be? And they said, $65,000 – based on an average New Zealander paying the minimum KiwiSaver contribution. Saving $36,000 to $37,000 in fees compounds up to $65,000. Well, think about that, right? Where I come from, Sunnyvale – 65 grand is food on the table and a warm house. It’s a load of money. In Australia, that number’s $250,000 now between the lowest cost provider and average cost provider. It’s enormous. In Australia, their industry will charge 23 billion dollars in superannuation fees this year. Think about what that means in terms of making a difference. Here, if we had 100,000 members (less than four percent of the market) 100,000 times $65,000 is six and a half billion dollars that would’ve otherwise gone to Australia and stayed in Australia. 10 percent is $11 billion. And if we manage to get the rest of the industry to drop their fees by 25 percent, we can put a multiplier of two or three times. It ends up being a GDP shifter over time. These numbers sound crazy–high but this is exactly what Vanguard has done in the United States. It’s exactly what’s happened in the United Kingdom and in Japan, and we’re just bringing it to New Zealand.

What have you had to overcome to get this started in terms of regulation and technology?

The business model we wanted required a regulation clarification. An official note that comes out of the regulator saying that you can actually sign up online. So that was the issue beforehand. And most financial institutions love that you’ve got to go into a branch or sign a piece of paper. We said, “Listen, this is crazy. We should be able to do this online.” So we had to get that done in the first instance.

The second one was a technology platform. In the past, we would’ve had to have maintained our own database of clients, our own back–office infrastructure. Cost was more than half a million dollars a year to do that minimum as the starting point. Now you can use Amazon Web Services for $1,200 a month. That’s our entire back office infrastructure outsourced. So those sort of things have changed over the last few years as well.

In terms of the law change side of things, were the bigger players lobbying against you?

I don’t know whether they were lobbying against it. I certainly know, had they been asked they wouldn’t have wanted it. But you had to make a case for why this was going to be safe for New Zealanders, and good for New Zealanders. And we also had to explain, “If you do this, our business will launch. And if you don’t, our business won’t”. The regulators come down to their own conclusions. They take time, they carefully consider these things, as they should. Our observation of the regulations in New Zealand, is they’re very positive, very proactive. We’ve actually worked through another one which is about member fee disclosure. The average fee that KiwiSaver funds charge (just north of 1.2 percent) doesn’t sound very much, right? Sounds quite low. Well, think about it this way. Imagine if you had a house worth a million dollars, and your rates bill was 1.2 percent. That means your rates would be $12,000 every year. There would be rioting in the streets, right? Think about it this way… the average KiwiSaver fund will earn about five percent over the lifetime of the member. If the fees are one percent, that means 20 percent of everything you make is a fee. Well, it’s not a fee – it’s a tax. It’s huge. Instead of saying “We’re charging you one percent”, you could actually say “We’re going to take 20 percent of everything you make over the lifetime of your KiwiSaver account.” People would think twice about that. We said, “Look, this is just wrong, because fees aren’t being disclosed in dollars and cents.” Your rates bill charges a percentage of the value of your house, but they put it in dollars and cents. Your phone bill – dollars and cents, your power bill – dollars and cents. KiwiSaver bills? What they say is, “$30 administration charge, plus a percentage of your fund balance.” So you might have thought the administration fee was just $30 when the actual fee could be hundreds or thousands.

We went back to the government and said, “People just should just know in dollars and cents what they’re paying.”

How would you describe your philosophy?

One philosophy is that money is really simple. It’s not hard. I think a lot of people want you to think it’s difficult and so it’s better to give it to somebody to look after. It’s not. Money’s really simple. The second one is – people are smart. We give people information. It’s honestly delivered in a language they can understand. They’ll get it, and they’ll act on it. Most people make great decisions in their lives most of the time. If we’re honest about the advice we give, and treat people like the sensible, intelligent, good decision makers they are – we’ll win. And people will make their own way. We won’t be right for everybody, not by a long stretch.

Do you find with your current clients that seeing the growth and seeing how things work in terms of their own KiwiSaver that it makes them think about their financial situation in a wider context?

We’ve got a few financial bloggers out there that are really keen and advocating for us. Because they’re really excited about money. And there are people sharing it on Reddit. Huge forums with people talking about money. Seeking, and questioning the things that the banks have told them. This thing provides so much transparency. So if your corporate strategy relies on unintentional obfuscation, which I think is the case with a lot of financial institutions (we’ve all got friends in the banks, right? They’ve got wonderful people working in them. But it’s the business model that is often horrible – just make more money, squeeze the lemon even harder) the truth is not your friend. I know I keep on talking about Vanguard, but these guys are just a phenomenon, right? Last quarter in the United States they had 80 percent market share. The only business in the United States that has more market share in any sector, was Google. And it’s all word of mouth. Why? Because when people get it, they get it. People make smart decisions about buying food and buying cars and where to go out all the time, they’re just going to make a smarter decision about financial services.

While you follow the Vanguard model of passive investing and invest an index do you not feel like you could also have more positive influence by being able to target investments?

Even though we will invest in an index of 50 companies on the New Zealand Stock Exchange and make no distinctions we’re actually an activist shareholder now as well in terms of influence. Recently we wrote to all of the companies with shareholders in New Zealand, and we said, “We want full diversity in your governance and management within five years.” And this is what’s happening with Vanguard and Blackrock internationally. They’re saying, “Look because Vanguard owns seven percent of every listed company in the United States we should have a view.” Also, from our point of view we’re invested in these companies for 40 or 50 years (the lifetime of the average KiwiSaver’s account is 45 years) so if we’re going to have an investment in these companies for that long we want them to really thrive. We’re not interested in what dividend you pay this quarter (that’s the short term stuff) but we are very interested in the long term stuff. We’re very focused on the 40 year thing. That’s where diversity makes perfect economic sense. It’s the smartest economics. As Warren Buffett said, “If you’re not a feminist in business, you need your head read.” If your business at management and governance level taps the biggest possible pool of talent you’re not prejudicing your future by unintentionally excluding groups of people who could bring great talent into your business. That takes years to achieve. That’s all about hiring policies, parental leave policies, flexible work practices and so on. We’re saying, “Look, come in with a plan in 6 months’ time, and execute it over five years. But it’ll take you five years to do that properly.” And we know that they can do it. Because in the public service, 45 percent of senior management government positions are held by women. In corporate New Zealand, 12 percent. We just have to want to do it. So as a shareholder, we’re saying, “We expect this of you as a shareholder, and we’re going to be a growing shareholder over time. It will be good for your long-term future, but it’ll take you time.”

What has the feedback been like?

No one’s going to be publicly negative about diversity in New Zealand. So it’s the silent ones you’ve got to pay attention to. The other thing is that this is not about opinions. It’s about facts. It’s data driven analysis. Which is why we got AUT involved to do some statistical analysis, rather than just saying, “Oh we think you’ve done a good thing.”

Any other areas that you want to hold these companies to account for?

I think ultimately there’s going to be some campaigns around things like in the payout ratios. There’s some companies in New Zealand who pay out more money in dividends than they make in profit every year. It’s dumb. I think every now and again, there’s going to be some executive compensation issues. It’s not necessarily about the amount that people are paid, but about the incentives – short versus long term incentives. It should be about long-term incentive structures. Very long-term incentive structures. So that you’re encouraged to stay around a long time, produce long term results and create a proper funnel of talent coming through to replace you. This is how the Scandinavians and the Germans and the Japanese and the Swiss think about how they do business. The American model is generally very short term focused and that can get some spectacular results. But in terms of long term return of wealth – that’s a much, much more divided camp.

What do you consider long term?

Twenty years–plus, that’s long term. We’re about to enter a very interesting period in New Zealand’s history. In the past, New Zealand has always borrowed a lot of money from overseas. The domestic pools of savings weren’t huge, so we were highly dependent on overseas opinions of us. However, over the next 15 years, 160 billion dollars will be invested in KiwiSaver, and another 50 billion in non–KiwiSaver products as people sell their homes and diversify investments. Just call it 200 billion dollars. 100 billion dollars of that will stay in New Zealand, because it’s typically about a 50/50 split. $100 billion is 60 percent of GDP. It is two thirds of the value of the stock market at the moment. It’s like a rising tide of money is going to stay in New Zealand. That means businesses in New Zealand will have access to capital like they’ve never had before. Domestic capital. People like us who want to invest in New Zealand businesses. This is the biggest opportunity for growth that New Zealand has ever seen. Because one of the big limits on growth has been access to money to fund it. What are the messages we’re giving companies? Invest in long term capital–hungry projects that generate really long term returns. So the message we’re giving companies is: trust yourselves, believe in your long term growth story. The KiwiSaver money will help New Zealanders buy back New Zealand. That’s what’s going to happen. New Zealanders are going to buy back New Zealand over the next 15 years. And we have never seen it before. Not in the last hundred years have we had an institutionalised domestic pool of savings funding New Zealand businesses. It’s really exciting. It’s not a tidal wave of money, which is what happens with overseas markets. And once that tidal wave crashes, it recedes and New Zealand is left vulnerable. We’ve seen it with the Japanese money, we’ve seen it with American money, we’ve seen it with UK’s [pound] over the last 60 or 70 years. It’s happening now with Chinese money. The difference now is that it’s New Zealand money. It’s a very different environment and much safer. It’s like borrowing from a family member. It’s much more reliable and it will fund growth. I think the next generation is going to be an extremely cool time to be in New Zealand. And I think a whole lot of things will happen, that haven’t happened here before. Because there’s going to be a lot of money around.

Do you have faith that our companies will rise to that investment?

In financial markets, supply begets demand. It’s amazing what turns up when there’s money available for investment. And if there’s money there, it will happen. Even New Zealand’s a growth economy too. We are very rich in natural resources and increasingly connected with the world. Think about the internet. The internet shrinks the world, which means the countries that are farthest away benefit the most. In fact – arguably – (I’ve heard someone make this case, and I agree with it) the country in the world that has most benefited from the internet has not been the United States, it’s been New Zealand. It’s empowered us. Look at all the businesses here that would never have existed without the internet, Xero, Weta Workshop and so on. New Zealand’s incredibly positioned. Remember we’re also one of the least corrupt countries in the world and a very stable, robust democracy. We’re a safe place to put money. I think we’re about to become a higher growth economy. Because – well one is immigration, but the other one is the availability of capital funding, right? I think, there’s never been a better time to live in New Zealand than right now. You think about these big companies that need investment. That’s where the jobs come from. And it doesn’t have to be building roads or bridges, it might be large scale tech. Hundreds and hundreds of developers. They need capital as well, right? Large scale capital and long term. Just because it’s high tech doesn’t mean it’s short term or light on the capital.

Does a part of you now not resent not making money out of this?

I love not making money out of it. Look, I’m very lucky that I’m financially comfortable. I’m not massively rich, but I have a warm bed and a full belly and people who love me and people to love. My life is abundance. But ultimately, I decided that more money was not going to be the key to happiness, and it isn’t. And I’ve had personal experience of that. You just buy bigger toys, and they give you less satisfaction – in fact, they end up owning you. The toys get to be so big that you’re working for them.

This business has been funded by myself. It’s got a zero-interest loan and I’m not paying myself anything. I’m one of the volunteers. If you talk to the other volunteers, they’re all getting an awful lot of satisfaction out of thinking that they’re doing good. The feeling is beyond money. Everyone gives in their own way. It’s no different than coaching a small rugby team or looking after someone. Everyone gives in their own way and there’s a huge volunteer movement in New Zealand. Kiwis are just naturally getting people. This is just our way of doing it.