Money is one of those topics that affects us all, yet many Kiwis still feel stuck when it comes to saving. With banks offering notoriously low rates, billions of dollars in potential interest are slipping through the cracks every year. We talk to David McLeish, founder of Wedge, about why he launched New Zealand’s first savings fund, how it aims to give you a fairer deal, and what he wishes every Kiwi understood about money.
What motivated you to launch Wedge, and how did your background lead you here?
For as long as I can remember, I’ve had this hang up about fairness. Admittedly, this hasn’t always been to my benefit. But the motivation to do something meaningful to level the playing field for people and to use my investment experience to help them get ahead financially has been with me for a long time.
As for my background, I’ve worked in financial markets for coming up three decades now. And most recently, before launching Wedge, I was fortunate to have to established and led the cash and fixed income investment business at Fisher Funds for 13 years. So, in that context, it’s pretty straightforward what brought me to launch Wedge. From my vantage point, it’s crystal clear how banks in New Zealand make so much profit above what’s reasonable. And after several years of working on a solution to wrestle back those billions of dollars a year we’re missing out on as a nation, I landed on the concept of the Savings Fund.
For someone unfamiliar with finance or managed funds, how would you explain what Wedge does?
Wedge is a New Zealand owned and operated licensed fund manager, who is backing Kiwis with a fairer, faster way to grow their savings. To do this, we’re using our knowledge of and access to wholesale money markets to deliver people a simple, advertised savings rate that we’re confident will be consistently much higher than the one people can get at the bank.
To try to make it accessible to as many New Zealanders as possible, we’ve wrapped this up in a hopefully easy to use mobile app which lets savers access their money on demand. The goal really simple: bring the best of a bank savings account and a managed fund together, so that savers don’t have to put up with low-interest bank accounts ever again.
Wedge is described as NZ’s first savings fund. How is that different from a standard bank savings account?
Yes, that’s right. The Savings Fund is a managed fund, but made for savers. We think a big reason why there’s so much money sitting in low-interest bank accounts in New Zealand is because the alternatives haven’t quite delivered what most savers are after. You see, managed cash funds have historically been the primary alternative, but they charge fixed and often high fees while at the same time not giving savers enough certainty or transparency about the return they are likely to get.
Which gets me to the short answer, there is purposefully very little difference between the Wedge Savings Fund and a standard bank savings account. Fundamentally there are a few differences though. The primary one being:
When you save through a bank, you’re legally lending your money to the bank. They then take your deposit, put it on their balance sheet, and use it to fund lending and other activities. But with a Savings Fund, every dollar you invest remains in the fund and you own units in (or a share of) all the assets of that fund. This is all entirely separate from the manager’s own finances. Otherwise, both are on-call, offer an advertised rate of interest, and don’t charge a management fee. Both are also considered very low risk with New Zealand’s largest banks holding a AA- credit rating, while the weighted average credit rating of the Wedge Savings Funds assets are one notch higher at AA.
Many people don’t know the difference between saving and investing. How do you think Wedge bridges that gap?
You touch on a really important point here. Because there does seem to be a dangerous blurring of the line going on where some investment products are being marketed for saving purposes. Saving is about setting money aside for short- and medium-term goals and emergencies, while investing is about putting money into assets that will hopefully grow faster over the long-term, but with more ups and downs along the way.
Which is why, when we designed the Savings Fund we consciously removed many of the standard features of a cash fund – because they didn’t fit with what savers were telling us they wanted. One of those features is the fee structure. You don’t often get charged a fee from your bank for saving, however management fees are commonplace with standard investment products, like cash funds. So, to ensure savers knew the rate they were getting, we designed the Savings Funds fee to be taken after the saver gets paid their return first and in full each month, rather than the saver only getting what’s left over like with a cash fund.
By flipping the cash fund model around like this, Wedge only wins once our members have won.
A lot of people feel nervous about moving their money away from the bank, because it feels ‘safe’. How does Wedge manage those risks and reassure people their money is secure?
The sad truth is that banks have long shaped the narrative of what ‘safe’ means in our country. The reason this is so sad is because banks are not the only safe way to save. And it’s because of this misconception that New Zealanders are losing out on billions of dollars in missed interest every year, by keeping their money in low-interest bank accounts.
In terms of security, Wedge has multiple layers of protection built into its structure. Firstly, your money is always segregated, which means it’s never mixed with Wedge money. Instead, it goes directly into the Wedge Savings Fund, which is a separate legal entity, and is held in trust by an independent custodian, on your behalf. Secondly, the assets held in the Savings Fund are limited to cash held at registered banks, or bonds issued by very high quality entities. And thirdly, the day-to-day operations of Wedge are supervised by the New Zealand Guardian Trust Company. They are a licensed supervisor who has the power to remove Wedge as the manager of the fund if we breach our duties. Essentially, they are there to protect investors’ interests above all else.
Liquidity is important, what should savers know about accessing their money from Wedge, and how quickly that happens?
Your money is on-call when it’s in the Wedge Savings Fund. What this means is, if you submit a withdrawal request in-app before 3.30pm on any business day, your money should be back in your bank account by that same time the next business day. We don’t charge fees or penalise people for accessing their own money. And we don’t impose special conditions on people before they get to earn the best interest rate Wedge has to offer. We know transparency and accessibility is really important to our savers, so we’ve tried really hard to make the Wedge Savings Fund simple.
What practical steps do you recommend for someone who wants to start saving, but only has a small amount each week?
First. Start. The hardest thing is often getting started. One common excuse we hear to not start is the person believes they don’t have enough money saved to start properly saving. And although that might be true with some investment managers, we’ve got a $0 minimum balance to remove this excuse.
Second. Break it down. Big financial goals can be really daunting. Mentally break them down into smaller, achievable milestones. And make sure you celebrate your successes along the way.
Third. Automate. This is probably the most powerful savings tool you have. Set up an automatic transfer into your savings on pay day. Soon you won’t even recognise the money leaving your transaction account.
What’s the biggest misconception you see among New Zealanders about their savings or getting ahead financially?
As I mentioned earlier, one of the biggest misconceptions I see is people believing that keeping money in the bank is the only “safe” option. Yes, the money feels safe sitting in a bank account, but once you adjust for inflation, fees and tax your money is always going backwards. Surely you can’t call your money constantly losing its purchasing power a “safe” option.
A close second for me is thinking investing is only for those willing to accept big risks. The reality is long-term goals like financial freedom should be matched with long-term investments. Just make sure, you keep a long-term perspective – especially when financial markets get shaky – because that’s often the worst time to make impulsive changes.
You set a mission to ‘save Kiwis $1 billion each year’, how are you measuring progress toward that goal?
By our estimates, banks in New Zealand are currently keeping about $3 billion in profit every year, that they should have paid to Kiwis in interest. This makes them among the most profitable banks in the world. Savings New Zealanders all that would be insane, but we thought a billion dollars was a big enough BHAG for now.
As far a tracking our progress goes, we take a pretty straightforward approach – using the monthly data the Reserve Bank publishes about the average interest rate paid on various types of bank accounts – we then calculate how much more interest our members are earning by having their money in the Wedge Savings Fund.
We’re only three months since launch, so there’s a very long way to go. But we’re delighted to say we’re currently delivering our current member base roughly $375,000 additional interest a year.
Looking back at your early days in finance, what advice would you give your younger self about money and investing?
How long do you have? Because there is so much I’d want to share with my younger, often naïve and ill-informed, self. But if I had to choose two that might also be helpful to your readers, they’d be:
First, I wish I’d learned earlier that being right is a necessary but not sufficient condition to win in the world of investing. Regardless of if you’re just having a dabble at stock-picking on Sharesies or if you’re looking to make a living out of investing – to be successful you must not just get things right but you must also be different. Why? Because regardless of if you’re right, if your view is the same as most people’s, the market has likely already priced it in, and you are unlikely to be rewarded.
Second, don’t fall for the myth of certainty – investing is about probabilities, not predictions. Even the greatest investors, who have made billions investing, don’t it get it right much more than 50% of the time. How they make there money is by ensuring the probabilities and the associated payouts are almost always on their side. Which actually goes back to my first point – investing is hard, really hard. Don’t fool yourself into thinking anything less.
Read more about Wedge online.