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Fee debate welcomed

The Commission for Financial Capability has welcomed fresh debate on the touchy subject of KiwiSaver fees after a new report suggested there was an "unhealthy focus" on fees - rather than the overall outcome delivered by various schemes.

Monday, December 5th 2016, 6:00AM 6 Comments

by Owen Poland

Adam Gee

The Australian-based SuperRatings research house says that substantial improvements have been made over the past year in terms of member engagement and servicing, but chief executive Adam Gee says that "the race to the bottom on fees remains particularly concerning."

Using it's unique 'value for money' assessment, SuperRatings has analysed over twenty-five KiwiSaver schemes in the five years to March 2016 and found that there is often an inverse relationship between fees and investment outcomes achieved by members. In short, those funds with the lowest fees will often provide lower investment returns than their higher fee counterparts.

“All participants within the KiwiSaver market, including regulators, providers and advisers should ensure that the key measure of the industry’s success should be the net after fee and tax outcome, rather than a race to the bottom on fees, which will benefit very few over the longer-term” says Gee.

As GM Investor Education at the Commission for Financial Capability, David Boyle welcomes the fees debate at a time when KiwiSaver balances are growing and members are looking for greater transparency about their real costs - and whether they are getting value for money.

Like SuperRatings, Boyle says the most important thing is the return after fees and if people make investment decisions based solely on fees "that would not be a good outcome."

While one recent KiwiSaver entrant has adopted a low fees model, Boyle disputes whether there is any race to the bottom, "because that would mean that everyone would be chasing it, and that's not the case."

Indeed, he says that New Zealanders have a wide range of choice in terms of management style and fees and the industry focus should be on how to improve financial outcomes for KiwiSaver members. "It could mean higher returns but lower fees somewhere down the line as balances grow and as KiwiSaver funds grow."

The Fisher Funds Two KiwiSaver Scheme was among seven top-rated 'Platinum' schemes in the SuperRatings survey and managing director Carmel Fisher says that extrapolating the lost returns from low fee schemes over longer periods of time could mean the difference between an okay retirement and an absolutely wonderful one.

"In some products and services, cheaper is definitely better. But, for the important things in life, I'm prepared to pay more in order to get the best on offer" Fisher says. "I'm thinking my retirement lifestyle fits in that category."

Scheme Fees deducted Fees deducted RANK Investment returns Investment returns RANK Net after fee and tax outcome Net after fee and tax RANK
Schemes with lowest fees            
Scheme A $1,239 1 $14,031 14 $12,792 11
Scheme B $1,523 2 $12.556 16 $11,033 15
Scheme C $1,718 3 $17,236 6 $15,518 3
Schemes with the highest after fee and tax returns            
Scheme A $3,570 15 $24,365 1 $20,794 1
Scheme B $2,955 10 $18,545 2 $15,560 2
Scheme C $1,718 3 $17,236 6 $15,518 3


Tags: Commission for Financial Capability KiwiSaver

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Comments from our readers

On 5 December 2016 at 10:29 am R1 said:
Let's be clear that SuperRatings is a wholly owned subsidiary of Lonsec Fiscal which has as its business: "Lonsec Fiscal’s businesses provide a full range of specialised services for financial advisers, fund managers, and the broader investment community." More details at:

Not surprisingly when you look at the way they rate schemes 22.5% of the score is based on "Investment, including methodology, performance, risk profiles and process" (whatever that means in terms of developing as core for total return), 22.5% on "fees & charges, including cost, structure & transparency across various account balance & employer sizes" (whatever that means in terms of deriving a score for total, look through fees) and the rest on other stuff. Consequently if they do the other stuff very well then returns and fees play a small part in achieving a high rating. More details at:

Clearly this whole approach is favourable for the industry (and Lonsec’s key client base) even when investors' primary objective is to typically to maximise their standard of living in retirement (i.e. maximise their return).

It is pretty annoying when our regular fund manager contributions to the NZ newspapers quote this source of 'research' as being "independent" and saying that the higher the fees you pay the better the return you can expect for your retirement based on only 5 years of data.

This sort of behaviour is embarrassing and should be investigated by our regulator as it is very misleading and in the long term truly independent research from around the globe shows that the reverse finding is true and the most important factor in long term returns is the fees. Essentially we have fund managers advertising while masquerading as editorial. Shameful stuff on the part of the media for publishing such clap trap and fund managers (advertisers) for peddling hope to punters rather than good advice based on sound research.
On 5 December 2016 at 10:30 am Brent Sheather said:
My view is that this research is very poor and adds little to the debate on fees. The Sorted website lists 38 growth funds and the highest performers over five years, by a country mile, are the Milford Active Growth and the AON KiwiSaver scheme which feeds into the Milford Active Growth Wholesale Fund. These two funds have returned about 13.8% pa for five years versus an average of about 7.78% pa for the 21 funds which have been going for at least five years. The third best performing fund returned 9.3% pa for five years. So why has Milford done so well I hear you ask? Is it because it has high fees? The answer to that question is very simple and it should have been obvious even to managed fund researchers. It is simply because the Milford fund has, over the five years, had a much higher weighting in NZ shares and not much at all in international stocks whereas the other funds have had a much higher weighting in international stocks. This asset allocation is typical of NZ fund managers who tend to concentrate on the NZ stockmarket as they have limited resources and expertise as regards investing offshore. The outperformance is simply due to the fact that over the five years ended 30 April 2016 (the latest Sorted data) the NZ stockmarket returned 15.6% pa versus 8.4% pa for the world stockmarket in NZ$ terms. Indeed it is hard to see any correlation between fees and returns because the Milford and AON funds have average fees of about 1.5% pa versus an average fee for the group of 1.59% pa. There are two further caveats to the Australian research that investors should be aware of and that is firstly, that the funds with really high fees, and there are funds that have fees as high as 2.95% pa, haven’t been going for five years which makes the “high fees equals high returns” conclusion look rather tenuous. Secondly, any academic will tell you that five years is much too short a time period to draw any conclusion as regards the impact of fees as luck and geographic asset allocation can be far more significant.

Lastly investors should remember than NZ shares don’t always outperform. Since 1900 the performance of NZ shares has broadly matched that of the world stockmarket and there have been many periods of underperformance – to take an extreme example in the five years ended January 2000 NZ shares have returned a total of 53.5% versus 199.9% for the world stockmarket.

It’s actually a bit of a worry that the silly old Commission for Financial Capability didn’t pick up on this error and instead made its usual, non-helpful, non-informed comments.
On 5 December 2016 at 4:28 pm Graeme Tee said:
The debate on active versus passive management took a turn for the worse last week with active managers, notably Milford trumpeting the results of the Super Ratings, so called independent research and followed up by Brian Gaynor’s analogy of passive equity funds with the finance company debentures debacle – really!

There was a brief moment when I thought the new Financial Markets Conduct Act was going to clean up misleading claims by fund managers – obviously not.

What the debate has missed is that past returns are not indicative of future returns. Studies such as Super Ratings can be subject to selection bias, survivor bias, benchmark irregularities and short term time frames etc etc and they are historical. The simple point about fees is that, in the future, the more you pay the less you will get from your investments.

Relying on managers’ past records to trade their way out of a market correction to justify their high fees is foolish. Those flash managers probably won’t even be there five years from now so in effect you would be relying on some, as yet unknown, manager to look after your KiwiSavings.
On 6 December 2016 at 7:55 am sam.stubbs@simplicity.kiw said:
It's sad to see otherwise worthy fund managers caching in credibility by latching onto SuperRatings to justify their business models.

I wrote on this on our blog, check it out here
On 6 December 2016 at 3:47 pm henry Filth said:
The fees genie is out of the bottle. Well and truly.

There are large parts of the industry in denial about this.

On 8 December 2016 at 11:02 am Steven Popodopolus said:
HI Sam, how do you reconcile your current philosophy with your previous one :

In particular, to paraphrase, the fact that index provide lower returns over time?

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