James made the comment in response to the Green Party’s plan to introduce a “public option” KiwiSaver default fund, managed by the NZ Super Fund, which the Greens claim could reduce KiwiSaver fees by up to 40%.
“While the idea of the Super Fund being the only default provider is inherently sensible the current political and public obsession with Kiwisaver fees is a red herring,” James said.
“KiwiSaver investment management fees are low by any standards. Total costs just appear high at present because member balances are still relatively small and the administrative costs are too high. Both of those factors will normalise over time.”
Instead, the greatest cost to KiwiSaver investors will come “in the form of their own behaviours.”
He referred to an international study by financial services market research firm Dalbar that found investor returns “lagged market averages” by as much as 5% per year.
Over the twenty-year period studied, equity investors earned 3.83% and asset allocation fund investors earned 2.56% compared to the S&P 500 return of 9.14%.
For the same period, fixed income investors earned 1.01% compared to the Barclays Aggregate Bond Index return of 6.89%.
“The 2011 study also found that the average equity investor has increased retention rates from 3.22
years in 2009 to 3.27 years in 2010. However, this still falls far short of the optimum needed to take
advantage of market performance,” the report said.
“The psychological factors that batter away at average investor returns remain dominant and the “code” to crack these behaviours remains elusive.”
James said of the survey’s findings: “That is a cost many times greater than the fee issue currently being debated.”
Niko Kloeten can be contacted at niko@goodreturns.co.nz
On 9 November 2011 at 8:43 am brent sheather said:
forget fees...yeah right
On 9 November 2011 at 8:58 am Fred said:
The man is absolutely correct.
The NZ Super Fund currently has no need for, or costs of, managing a registry with KiwiSaver's many small balances and numerous regular and very small contributions. Those would be new costs.
KiwiSaver is of course much higher taxed that Australian, USA or British equivalents.
On 9 November 2011 at 11:08 am Richard James said:
Just to clarify, it was not I that said "forget fees". That was the editor's phrase.
On 9 November 2011 at 12:53 pm Greg said:
So what sort of template provides the most desirable outcome overall then? Perhaps the solution is just one NZSF style scheme where everyone has their own individual account but it is locked in to age 65. It doesn't guarantee the best performance but it takes out of the equation the biggest risk highlighted by Richard James. Thoughts?
On 9 November 2011 at 1:30 pm Frank said:
“KiwiSaver investment management fees are low by any standards. Total costs just appear high at present because member balances are still relatively small and the administrative costs are too high. Both of those factors will normalise over time.”
Huh? I thought the math was simple - if the Net of Tax RETURN in a given year is, say, 5% and the management fee is 1%, then the cost is 20% of the return. How does this change as the fund size grows? 1% remains 1%, and as a %age of the total net return in any given year, the simple division calculation doesn't change either...does it?
On 9 November 2011 at 2:38 pm Forthright said:
My KiwiSaver providers annual report told me their fees were made up of admin fees 27%, Management fees 58%, Trustee fees 1%, Other 14% forming the total of 100% of fees & expenses. The total fees equalled 6.6% of the net investment income. The 14% of the other expenses is the unknown veriable.
On 9 November 2011 at 5:28 pm Mac said:
Forthright, the 14% "other" costs were probably marketing costs e.g. annual reports.
On 10 November 2011 at 9:28 am Mike said:
As individual balances grow (and total fund sizes at the same time) a number of costs incurred by Fund Managers should decrease as a percentage of the fund size. The admin fees, which are normally a set amount, should also decrease as a percentage of the individual balance.
What I would expect to see is a drop in the fees charged by the fund managers over time as higher balances mean that a smaller percentage fee would recover the same costs. KS shouldn't be a license to print money for the Fund Managers to reap super profits - that is what their other fund are for if they can convince people to invest - but conversely they shouldn't be required to run KS at a loss.
On 10 November 2011 at 10:17 am Kimble said:
"How does this change as the fund size grows?"
Umm, because there is a non-zero flat fee on top. And while peoples balances are low, this fee looks large. But when balances grow, the fee gets smaller and smaller.
There are fixed costs to providing investment management services. This means that even % based fees will need to be relatively high to cover them. As balances grow, the % fee can get smaller without and still cover the fixed costs.
On 14 November 2011 at 10:22 pm Matt Y said:
Last time I checked preparing an Annual Report was required by statute. Not a 'marketing cost'.
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You first though?