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FMA finds room for improvement

Consumers still feel they are not getting enough information about the fees and costs associated with the financial products they hold, and why they are suitable choices.

Friday, July 21st 2017, 6:00AM 9 Comments

by Susan Edmunds

The Financial Markets Authority has released the results of its first annual survey of consumers' experience of financial markets conduct.

It follows the release of the FMA's conduct guide, which set out how it wanted providers to behave and what investors should expect.

This year, the report does not name individual providers but FMA director of external communications and investor capability Paul Gregory said it had been made clear to the industry that they would be identified in future.

Overall more than two-thirds of customers said their provider was knowledgeable and the information they provided was easy to understand.

For questions around fairness and professionalism the providers also scored well. However, only half of investors agreed their provider had explained the fees. Just 52% of respondents agreed their provider had helped them to understand why the product was appropriate for them.

One in five investors disagreed with the statement their provider “explained the fees.” These scores were even lower when focusing exclusively on KiwiSaver providers. Among KiwiSaver customers only 46% agreed that fees had been properly explained, and one in four disagreed with that statement.

People with an investment portfolio were significantly more likely to have received a communication from their financial provider in the last 12 months than all other investment types. People with life insurance or another type of investment were least likely to have heard from their providers.

Gregory said there were still concerns around whether providers were satisfactorily explaining why a product was suitable.

He said the conduct guide made it clear the FMA expected providers to help consumers understand.

In cases where providers were limited, either when they were a provider dealing only with their own products or an adviser with limited scope, they should determine first whether they had something that would be suitable for the clients' needs, and make clear that they had restrictions, he said. 

Gregory said it seemed that some investors were responding to questions about "investment portfolios" based on their dealings with advisers, rather than product providers.

The responses were good, he said,. Just over 70% were happy with fees explanations and 79% understood why their portfolios were appropriate.

Tags: conduct financial advisers FMA investment KiwiSaver

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Comments from our readers

On 21 July 2017 at 9:53 am Brent Sheather said:
Very strange that “consumers still feel they aren’t being told the full story about fees” yet the FMA and the CFFC are on record as saying all the fees are disclosed. Who is right? Unfortunately Mum and Dad are right because despite the Financial Markets Conduct Act, which we were told would sort out the dysfunctional fund management industry, much work has been left undone. Specifically despite the FMCA investors are still not told what the trading costs to buy and sell investments in their KiwiSaver funds are. These costs are material and regulators who understand that require those fees to be disclosed. That was one of the biggest developments in the FCA’s review of the fund management industry in the UK. Meanwhile back in NZ the FMA and the CFFC have stated in the media that all costs are disclosed. They are not and saying something is so does not make it so.

What is good news however is that Mr Gregory has said naughty managers will be identified in the future. To do this properly the FMA first needs to realise and acknowledge that material fees are being omitted. GoodReturns should ring Mr Gregory and ask him about this issue. If any financial advisor omitted to disclose his or her fees we would be before the disciplinary committee but the FMA and the CFFC are prepared to turn a blind eye when fund managers do it. This does nothing to add to confidence in the industry, does it?

There are still lots of other instances of bad behaviour – just yesterday I saw a fund manager’s performance data which disclosed its performance before the deduction of fees. The FMA previously told me that this is illegal yet it still happens.
On 21 July 2017 at 10:18 am Tash said:
"Gregory said there were still concerns around whether providers were satisfactorily explaining why a product was suitable." Really?

I thought this was the duty of advisers - even if employed by the provider. Did the survey include advisers as the "provider"?

If not, and clients with advisers were surveyed, what does this actually tell us?

I am 100% sure the insurance providers I use would not know and would have no way of knowing, whether or not a product their client had was appropriate - they don't know the client, their risks or needs. This is why we have (should have) advisers.

I'm sorry but general sweeping statements simply show a lack of clarity and understanding.
On 21 July 2017 at 11:33 am dcwhyte said:
Agree with Brent's comments - and would ask if the performance data cited has been forwarded to the FMA for action?
With regard to the survey, including life insurance in investment research is erroneous and confusing - no wonder Mr. Gregory opined that respondents answered relative to adviser input rather than product provider input. The vast majority of life insurance contracts are distributed via intermediation, not directly to consumers by product providers.
I'd also suggest that, if this is intended to be a longitudinal study, consumer focus group research is conducted to establish what the end-users believe are the important "performance" factors for them rather than those that the regulator believes to be important. Once these factors are identified, I suggest that each year they are ranked in order of priority/importance, then each provider is given a mark out of 10 by respondents, and the results tabulated so that those performing well from the consumer's perspective can be identified, according to their priorities. This whole deal is for the consumers' benefit, isn't it?
On 21 July 2017 at 12:44 pm Brent Sheather said:
Hi David

No I didn’t bother alerting the FMA re the performance data because, from memory, I had previously alerted them to that problem with that fund managers’ disclosure and whilst at the time they thanked me for the info either they haven’t contacted the fund manager or the fund manager has just ignored them. It’s pretty bad that fund managers can produce performance data and ignore their fees in this post-FMCA world.

This same issue is making the headlines in the FT at the moment where one fund manager said that most of its funds had outperformed the index but they had conveniently ignored their own fees and, wouldn’t you know it, after fees most of them underperformed. The FMA needs to realise that this is not a game, fake news is impacting investor decisions and people’s money and their retirement are involved. We need less rigged surveys, less talking, less smiling and more action.
On 21 July 2017 at 4:27 pm dcwhyte said:
Brent - I suspect you're not alone. I've heard of similar experiences and agree with the call to action.
On 24 July 2017 at 10:18 am thombentley said:
While I believe fees are only one part of an investment decision, I've often thought a good way to show retail investors the impact of fees would be to show what percentage of the investor's return was taken in fees each year.

For example, a low cost ETF strategy might charge 0.5% p.a., while a specialist absolute return active manager might have a 1.5% p.a. management fee plus 15% performance fee on all returns.

Assuming an 8% gross return for the ETF fund and a 10% gross return for the active fund, the ETF fund would deliver a 7.5% net return and take 6.25% of the client's return in fees.

The active fund would deliver a 7% net return but take 30% of the client's return in fees.

I think this method would allow investors and advisers to compare the impact of fees in a much more meaningful way.
On 24 July 2017 at 4:43 pm Pragmatic said:
Whilst I shudder everytime the fees debate erupts, I can’t help but make some obvious comments – looking through the consumer lens:

Investors simply want to achieve better returns through a portfolio of assets, than leaving their money in the bank – so in part – the most relevant benchmark is cash (albeit that I acknowledge that a comparative benchmark is critical when an active manager is putting their hands out for a performance fee).

The rationale behind investor / manager alignment through a performance fee is sound, and has been in operation for a lot longer than most of the industry participants. Unfortunately, the notion of performance fees continues to be abused, with non-relevant benchmarks, dodgy high-water marks, high management fees (regardless of performance) and exorbitant performance fees all examples of opportunism (at best).

And now my point: investors don’t seem to focus as much as the industry on what derives their performance, or who gets paid – as long as their after-fees returns (net by another name) are commensurate with the level of risk that they are taking, and are superior to their own benchmarks. To suggest that all performance fees are bad is misleading, and kinda misses the point – as is coming up with meaningless calculations to help justify high fees and relative under-performance.
On 25 July 2017 at 8:57 am Brent Sheather said:
You are on the right track Thom but your numbers are a bit wrong. Uncompromised academics reckon, and the Gordon Growth Model confirms, that prospective returns from global equities and Australasian equities will average around 6.0% and 7.5% respectively. Let’s be charitable and assume that pre-fees the active manager does as well as the ETF. Therefore the 25 basis point fee on an ETF accounts for 4.1% of 6.0%. For your hypothetical absolute return manager a more realistic 200 basis point total of management and other fees including trading costs plus 15% of the 5.5% post-fee return means total fees would be around 280 basis points. This would represent almost 40% of 7.5%. Not a great deal is it?

But even that way is not really the right way to do this exercise. What we should be looking at is the extent to which the manager is appropriating the risk premium as that captures the impact of fees on return and risk. The manager is investing in equities on the basis that equities outperform bonds. Most academics reckon the equity risk premium today, equities over long bonds, is about 4% in NZ. So for your hypothetical absolute return manager the 280 basis point total expense ratio appropriates almost 70% of the risk premium. Effectively this product offers the risk of equities with the return of bonds. In fact it is such a bad deal that I don’t think you could really be putting client’s interests first by recommending this sort of risk reward scenario.

By the way I think the title of this story should have been “FMCA fails retail investors, again”. Remember when the FMCA came out – the FMA and the CFFC said “mission accomplished” and now we find that almost half of retail investors, who let’s be honest, don’t have a clue, are sufficiently conscious to realise that they still aren’t being told the full story.
On 26 July 2017 at 9:31 am thombentley said:
Thanks Brent, I wasn't trying for an accurate prediction of future returns, just a realistic example. The key point here is that the present way of presenting the impact of fees is clearly not leading to a good understanding among retail investors.

In the absence of any change to the current system, advisers who want to see behind the curtain can look up all NZ retail managed funds' annual reports on the Companies Office website, where you can clearly see the gross and net fund returns and how much the manager is making in fees.

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