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FMA not backing an investment style despite report

FMA director of regulation Liam Mason says the regulator won’t be drawn on whether an active or passive management style is better for KiwiSaver – but it’s clear that the issue of what fees are charged is a complex one.

Tuesday, August 25th 2020, 6:00AM 1 Comment

The FMA-commissioned MyFiduciary report into management styles and fees was released to the public on Monday.

It showed that there was no clear connection between investment style and fees charged. An active provider was the cheapest in the market and some passive funds were more expensive.

While the report generally found that schemes were doing what they said they would, in terms of their management style, there were some that claimed to be more active than they actually were. Mason said the FMA would follow up with them.

Most providers were taking little active risk in New Zealand equities, the report found. The active share in global equities had a wide dispersion.

“The key finding of our report is that there is no significant relationship between the level of active management employed by providers and the fees they charge. This finding is robust to differences in provider scale, the differing risk profiles that KiwiSaver providers offer in their schemes, and the differing ways we measure activeness.

“We would have expected to find that the less active providers would have lower fees, on average, than the most active providers. Compared with a passive or index-tracking approach, active management is more expensive to deliver in-house and the external funds, such as global equity managers, are more expensive for active than for passive management.”

The report did not take into account the advice offered by KiwiSaver providers.

“Providers quite reasonably noted that advice is a key component of their offering to investors, and that with the provision of advice (whether internal or via external advisers), comes an associated cost. We agree, but this report is unable to assess whether the amount and cost of advice goes up with the degree of activeness or the fees charged.”

Mason said he would have expected to see more fee difference between active and passive managers but that had not played out.

He said the complexity to be worked through put the issue in advisers’ “wheelhouse”. It was a good example of the sort of questions advisers could help their clients through, he said, and the data could be used to help inform advice recommendations.

“Most appear to be true to label … [the report] tells us there are some that we need to have conversations with.”

The FMA will engage with those managers where fees were high and the level of active management was relatively low.

Mason said it was not a straightforward area to navigate and the FMA did not have a view on whether active or passive management was better. If there was a simple answer, the consumer messaging would be much more straightforward, he said.

Tags: Active v Passive FMA investment KiwiSaver

« FMA releases active versus passive reportStubbs: Take KiwiSaver fees issue to court »

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Comments from our readers

On 25 August 2020 at 10:25 am Pragmatic said:
Comforting to know - as picking an investment style is well beyond the remit of the Regulator.

Incidentally, I once heard a Regulatory officer declare a preference for an investment style on stage at an industry event. When I questioned him offstage, he then contacted the participants to confirm that the views expressed were his own...

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