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FMA defends KiwiSaver fee guidance

The Financial Markets Authority says its guidance on KiwiSaver fees “was never intended to prohibit or proscribe fee level”.

Friday, February 5th 2021, 9:36AM 7 Comments

FMA director of investment management, Paul Gregory says more than 40 submissions were made on its KiwiSaver fee consultation document last year.

He says the guidance was done to ensure that members were getting value for money from the fees they paid their KiwiSaver provider.

“The guidance expects boards and management of KiwiSaver and other managed fund providers to regularly evaluate what they charge their members and investors, and why, and the value their members and investors receive in turn.”

Once that is done it needs to be “properly disclosed and discussed with members and investors to help them make informed investment decisions”.

Gregory said there was a need for the regulator to provide guidance on KiwiSaver; “From our perspective, a maturing but still inefficient market means a risk of harm to investors.”

“Harm from; paying too much, for too long, for too little; paying anything for something they are not getting; being in the wrong product. The market is not working if investors can be set up to fail.”

A number of submitters argued the markets will rule and members can switch providers if they are not happy. Gregory disagreed.

“We agree member mobility protects against poor value. If exercised soon enough. But members simply don’t have enough clear information to help them decide if they need to leave a poor-value provider and, if so, where to go instead.”

Gregory also had some strong words for those who said that the market would punish providers for any poor management saying; “This is like saying earthquakes are the best resolution for poor building standards.”

“So yes it will be the market, not the FMA, eliminating unreasonable fees and poor value. But we should – and will – help the market do it sooner. More transparency and better information for investors, our fellow frontline regulators, media and the public is how to do that.”

Tags: FMA KiwiSaver

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Comments from our readers

On 5 February 2021 at 4:55 pm w k said:
why even bother to waste everybody's time inviting submissions when you have already decided long before the direction you are taking??? i assume you are merely go through the motion to justify your decision.

look at the bottomline. that is, the net returns after fees and taxes. would you rather invest in a fund that charges a 0.3% fee and you get a 3% returns after fee, or a fund that charges 3% and you get a 10% returns after fee? for me, getting the 10% returns is value for money, NOT the 3%.

wouldn't it be more productive to compare various fund base on their returns after fee rather than just the fee itself?

if every car manufacturer has to work within a production cost guideline, a mini will run as fast a ferrari.

On 6 February 2021 at 10:32 am Austin Fisher said:
The flaw in your argument w k is the fact that you don’t *know* if you are going to get those superior returns for those higher fees. If it were that simple wouldn’t we all do it ?

On 6 February 2021 at 11:04 am w k said:
@austin fisher: tell me, how can low fees determine that a fund is going to perform then???

read 3rd para, do i need to emphasis compare historical returns, last 1-year, 3-year, 5-year, 10-year returns? i invest in managed funds, that's what is most important to me, not the fees. of course, it is not a guarantee to future returns, but it's a good guide. not difficult, isn't it?

maybe your approach is different, sell managed funds to your clients based on cheap fees.

On 6 February 2021 at 12:53 pm Austin Fisher said:
I have no professional skin in this game w k . High fees do not necessarily lead to high returns That’s all I’m saying.

On 6 February 2021 at 12:54 pm Gordon Gecko said:
Lets stop beating around the bush and either put a cap on the maximum fee a person can be charged or look at after tax, after fee risk adjusted returns.

The risk adjusted returns will tell you which managers are adding value on a risk adjusted basis and which are simply not.

This will show the market the true value of the active manager and whether they are justifying their fees. From my experience of having covered the KiwiSaver sector since inception and doing the research into risk adjusted returns that most managers do not add any statistically significant value on a risk adjusted basis.

I believe NZ Treasury have also come to the same conclusion in some of their analysis.
On 10 February 2021 at 11:37 am Pragmatic said:
A few observations around Kiwisaver:

Whilst NZ's Kiwisaver is relatively embryonic when compared to global equivalents, I believe that the time has come to depart from the 'default status' that is enjoyed by a few, and let the market decide whom they want to go with. Remembering of course that 3.7m consumers have already got their retirement savings underway - meaning that most of the low-hanging fruit has been captured.

We seem to always come back to the discussion on 'price' versus 'value'. Price is what you pay, and value is what you get. Rather than focusing on who provides the lowest priced kiwisaver product, perhaps the industry should spend more time looking at net returns (or even net risk adjusted returns). The current emphasis on price will deliver a homogenous kiwisaver for consumers - in which case it may as well be centralised.
On 11 February 2021 at 6:27 pm JPHale said:
Agree with Pragmatic. The race to the bottom on fees only creates suppression of growth.

You can argue about passive, index-tracking and full-on active till you're blue in the face. The preference is just an opinion as they all have relevance to different people in different markets with a different experience.

End of the day conservative and defensive doesn't need as much time and energy for the returns to manage, so fees should be lower. As you increase the risk, volatility and returns, then there needs to be an incentive for the manager to get it right and do better. And this should translate to greater net returns for the punter on the street.

We're not taking GameStop speculation here, it's pretty dull most of the time, actually, it should be dull. Exciting usually means something is going very very wrong.

Just like we get different views on managing risk approaching retirement, we need a better scope on options for punters.

In the new regime where only qualified advisers can advise on KiwiSaver, we should be seeing a very different approach to client education and outcomes too.

The problem is when it comes to KiwiSaver the only thing the FMA can focus on that is consistent across all providers and funds is the fees. Which is fine for the FMA to prove they are looking at it, at the same time it makes little difference to the punter on the street.

The punter on the street wants to know two things:
How much have I put in?
How much is it worth?
And if it's less why?

The rest they don't much care about.

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