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FMA warns against KiwiSaver fee double-dipping

KiwiSaver investors shouldn’t be charged two lots of fees on the same return, the Financial Markets Authority says.

Friday, November 18th 2011, 7:02AM

by Niko Kloeten

The FMA has released a new draft guidance note on KiwiSaver performance fees, which it polices to make sure the fees charged are "not unreasonable."

Recently the regulator has received an "increasing number of enquiries regarding the reasonableness of performance-based fees."

It said performance fees need to be assessed on a case-by-case basis, and in its assessment the FMA will be guided by the principle that "it is reasonable to offer fair reward for the application of investment manager skill.

However, "Investors should not pay twice for the same return," the FMA said in the note.

"Therefore the relativity between any on-going fixed fee in relation to the ‘standard' or base investment asset mix and the performance fee must take account of effective allowance already in that base fee for an element of active management (the Beta portion).

"It is our expectation that the higher the fixed fee the lower the expected level of performance fee."

Another principle guiding the FMA is that "performance fees should adequately reflect the risks taken by both the investment manager and the investor."

Performance fee structures should share the downside of performance between manager and investor as well as the upside, and should be based on an appropriate extended time frame, the FMA said.

"They should avoid situations where large fees are paid for a single year immediately preceding or following periods of low returns."

Fees also shouldn't have the potential to encourage inappropriate or undue risk taking by the manager.

The FMA will look at how the performance fee arrangement (including any fixed fee elements) "compares for reasonableness against alternative equivalent fund structures with only fixed flat fees."

The FMA invites submissions on the document during the consultation period, which lasts until Friday December 2.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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