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The regulator has run a pilot programme trialling its so called "value for money" guidelines with 14 managed investment schemes (MIS).
The participants were a mix of volunteers and co-opted and covered KiwiSaver providers, non-KiwiSaver funds, passive and active managers and banks and non-banks (but who took part in the pilot is undisclosed).
A number of themes are reported by the regulator with the two main ones being the use of benchmarks and commissions paid to advisers and others.
One area of praise was that MIS schemes "are showing repeatable performance, relative to appropriate market indices."
However, it then takes aim at them as argues many are using inappropriate benchmarks.
“A related point made during the pilot is passive funds are not a useful performance reference point for active strategies. This is nonsense.”
It also found fund managers commonly paid “substantial” commission to third parties for introducing new members to their funds, only some of which were financial advisers helping investors make good investment decisions.
Again the regulator is unambiguous: “Some MIS managers stated they, not members, met the cost of trail commissions because it was paid from management fee revenue. This is nonsense,” it says.
Managers clearly pushed back on some of the FMA's findings, but the regulator used phrases like "this is nonsense" to counter their arguments.
It has strongly pushed back on the argument that it is driving a race to the bottom and an endorsement of passive strategies.
"The FMA does not accept this argument. The guidance explicitly states value for money does not necessarily mean cheapest."
It says if a manager is not delivering value for money, then a "good outcome" would the for "serially underperforming active funds to change strategy to passive (and charge less accordingly); or for MIS Managers of serially underperforming active or passive funds to exit those products."
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Whilst I agree that consumers must focus on the after-fees value (net) that their investments have delivered, I would suggest caution around measurability timeframes and remind the regulator that the majority of benchmarks are irrelevant and developed ‘for the industry, by the industry’.