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Buy/sell spreads will cost KiwiSaver members

Four of the six KiwiSaver default providers are passing on buy or sell spread costs, or both, to their members to reflect the cost of buying and selling underlying investments.

Tuesday, December 7th 2021, 6:53AM 6 Comments

by Matthew Martin

The Financial Markets Authority (FMA) has said it will be monitoring those costs and that they should be moderate - unless too many providers try to trade at the same time.

On Wednesday last week, the move to switch about 233,000 KiwiSaver default fund members to new providers got underway.

Of the six default providers, Kiwi Wealth, Booster, the BNZ and Smartshares have signalled they would be recovering costs from their members while the Westpac and Simplicity KiwiSaver schemes will be covering the costs themselves.

Kiwi Wealth said it would be charging the buy spread, for both its current default members and incoming default members, which will be around 0.12%.

Booster said it has "...minimised the costs involved as much as possible for members by synergising and netting any changes across all the other portfolios under management, including non-KiwiSaver funds".

"The actual figure is not yet known but will be approximately $0.05 for every $100 a member has invested."

Smartshares said it would charge an administration fee to members investing outside of the default fund and the costs of switching would be covered by the members moving into the default fund.

"We expect any costs will be outweighed by the extra savings members will receive from being a member of what is currently the lowest-priced KiwiSaver default fund," it said.

The BNZ said its scheme does have buy/sell spreads in place and members purchasing or selling units in a fund will incur a spread cost.

The buy spread for the BNZ KiwiSaver Scheme Default Fund is 0.0860% and for default members switching from its conservative fund to the default fund, it will be around 0.065%.

The FMA says it has told providers that "shifting" members must bear the cost unless providers bear the cost themselves.

"This is because members who have made an active choice should not be impacted by costs arising from shifting members who have not made an active choice."

It says some providers use mechanisms – like spreads – to ensure members in funds are not affected by members moving in or out of those funds.

"It’s business as usual for these providers to ensure that only shifting members bear the cost."

For providers without such mechanisms, the FMA has told them they must - estimate the cost, communicate that cost to members and report back on what the actual cost was.

Three outgoing providers, ANZ, ASB, and Fisher Funds, have decided they will meet the cost of the transition from their bottom line.

They will do this by reimbursing the funds the default members are transferred out of and because ANZ and ASB are the two largest providers, this will also reduce the overall cost of the transition.

The FMA says a long transition window will help minimise costs which will allow providers to space out their transfers and reduce costs for members.

"Providers are required to act in the best interests of their members throughout this process. The FMA will be closely monitoring this."

Tags: fees FMA KiwiSaver

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Comments from our readers

On 7 December 2021 at 8:24 am smitty said:
I've always wondered about the buy/sell spread. Its called a recovery of costs for the investment firm. Here's an idea: If it is solely a cost recovery charge, then how about refunding it to investors in the fund each year? Would that be possible, rather than another profit line item? I could be completely wrong though? Any ideas out there on this?
On 7 December 2021 at 8:25 am Pragmatic said:
The size of these buy/sell spreads can be dramatically reduced by employing the services of a transition broker. Whilst I haven't done the analysis, I suspect that a good chunk of the exposures will be the same...
Oh well - the scale of this shift will undoubtedly provide an exploitable moment for traders
On 7 December 2021 at 1:51 pm Sagacious Investor said:
To relieve your concerns Smitty, you will be pleased to learn that spreads are not paid to the fund managers but to the funds themselves so they can purchase/sell assets in the market. The Fund manager makes no profit from the implementation of buy/sell spreads. These spreads are there to protect the existing investors from incurring the costs of transacting investors. Hope that helps :-)
On 7 December 2021 at 6:31 pm Mr UCITS said:
To have a buy/sell spread in a fund you need two things: a buy price and a sell price.

The 'spread' is simply the difference between those two prices which means, technically, you can't "charge" a spread.

If your fund has a buy price and a sell price then it's doing a thing called dual pricing. If your fund only issues a single daily price then it's a 'single-priced' fund and the concept of a buy/sell spread doesn't apply because, as we have already established, a spread is the difference between two things and in this case you've only got one of those things.

Curiously, most NZ domiciled fund managers use single pricing so shouldn't be using language like 'buy/sell spread' anyway.

Instead they should be using swing pricing/dilution adjustments/dilution levies as these are the mechanisms available to single priced funds to pass on transaction costs and counter the effect of fund dilution.

Another interesting quirk of the NZ funds industry is that it's dominated by fund-of-funds - almost 70% in fact. What this means of course is that where the fund-of-funds structure is within the same fund house, retail funds aren't 'transacting' as such, they are buying/selling units in other (typically much larger wholesale) funds meaning there may not be any transaction costs to be passed on to anyone.
On 8 December 2021 at 9:10 am Michael Chamberlain said:
There are several principle-issues here. The first question is why did the FMA choose to issue an opinion or directive?

The people being transferred and for whom the transaction costs are being incurred, did not actively choose to transfer or change. They are changing because of a government decision. This is a public policy decision and presumably the government concluded that it was better for NZ and KiwiSaver as a whole. If there is a cost therefore, it is either a cost that should be born by the taxpayers, the KiwiSaver members as a whole or offset against the future gains the transferred members will now get. It is also reasonable for the default providers to pay if this was what was negotiated as part of their appointment. The fact that it was not negotiated implies that it was not something that the government thought about prior to the default provider selection process

You also have to ask why the FMA would tell providers to do something that falls outside the provider’s normal philosophy/process. This has the potential to create inequities.

It also raises the question of the role of the Supervisors. One assumes that they will do their job correctly and closely monitoring what is being done and having active discussions with the provider they are supervising, to ensure fairness to all. Does the direction of the FMA imply that it has lost confidence in the Supervisors to proactively do their roles?

Of all the things that the FMA could do to make sure that the markets are fair, transparent and efficient, issuing a directive on this issue would not have made my priority list. It might be better to ask questions and investigate after the event, to find out what actually happened and identify market inefficiencies.
On 8 December 2021 at 9:24 am smitty said:
Thanks all for the comments, and clarification - very helpful. Also thanks to MC for landing a great question.

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