[The Wrap] Three things we learnt from the FMA Value for Money report

Here are three things we learnt from the Financial Markets Authority Value for Money report. While there is some good stuff in the report there are also things the industry should be worried about.

Saturday, May 21st 2022, 3:18PM 3 Comments

by Philip Macalister

I’ve read a lot of reports in my decades covering financial services, and the latest tome from the FMA on Value for Money is unique. Largely because of the way it is written.

Clearly the author(s) think they know more than fund managers – even though their experience as money managers is not disclosed.

To refute arguments with phrases like “this is nonsense” (used twice) isn’t a great way of winning an argument.

Likewise, the regulator telling the industry; “Objection to market indices not reflecting the impact of fees and tax fundamentally misunderstands the purpose of a market index.”

There is a sense, and this is backed up by managers, that the regulator has taken a view on various things and won’t be moved, even though it talks about feedback and consultation.

Many advisers should be worried

The FMA clearly does not like the fact that some (the minority) of managers pay trail commission to advisers and “other third parties”.

It claims commissions are a major cost and drag on returns, but it totally fails to quantify this allegation.

Oddly it makes some noise about supporting advice; “The FMA, supervisors and fund managers agree investors benefit from financial advice,” it says.

But doesn’t offer a suggestion of how this should be paid for.

Trail commission to independent financial advisers is just one distribution cost paid by managers. There are others to, including marketing and inhouse distribution networks.

If there are any thoughts, good-forbid, of regulating commissions then, maybe, it should extend to the salaries of staff, size of dividends to shareholders, and business margins.

The FMA says it “saw very few instances where the third party continued to provide advice or of members being made aware the fees they pay are inflated by the cost of commission.”
KiwiSaver is a pretty simple product. Not quite set and forget, but close to it,  unless a member’s circumstances change.

From what we hear managers who pay advisers also support them in providing on-going service and advice.

The point the FMA misses is if the initial advice given ensures a KiwiSasver member is in the correct fund for their risk profile then that is a substantial gain. We hear, all to often members are in the wrong funds.

The fee paid to advisers and the subsequent benefit to investors is ignored by the regulator

3. The FMA does not trust fund managers
The FMA circulated the report to fund managers sometime before its public release.

“Sharing the report prior was done substantially as a courtesy to industry, in recognition of all the other work and consultations underway at present.”

It was clear from fund managers spoken to that they were under no doubt that this report was provided on a confidential basis and not to be distributed.

However, at least one manager chose leak the report to a media outlet, which then published two stories before the public release.

The FMA are, understandably, ropable that certain individuals chose to take this action.

Particularly as it is the second time this happened.

When a leak was made of another report two years ago, then FMA chief executive Rob Everett wrote to chief executives of KiwiSaver managers to “express his disappointment that a firm, or some firms, could not be trusted to behave in an ethical and professional way.

It is understood the FMA does not plan to go in a witch hunt to find the leaker(s).

But whoever leaked it is an idiot.

There was nothing. Zero, zip, nada. Nothing to be gained from leaking the report other than to piss the regulator off and pull the whole funds management industry into disrepute.

Funds management is a business of trust. Unfortunately there are some people out there who don’t get it.

As for the future the FMA says it ”will consider how it engages with the sector based on its recent track record.”

Tags: Opinion

« Fund managers silent on FMA’s hard-hitting fees and commissions reportFund managers seek clarity on FMA’s expectations on fees and commissions »

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Comments from our readers

On 23 May 2022 at 4:56 pm Davidvs said:
Certainly not a great look for the fund industry when the regulator gives the appearance of being exasperated with it.

The fund industry, in KiwiSaver especially, has had plenty of opportunity to get rid of inappropriate performance fees where they exits as well as pass on their growing economies of scale through reduced fund and admin fees.

Add to the fact that 'active' managers more often than not are actively underperforming their benchmarks (that the manager selects) then its no surprise strong words are being said about Value for Money.
On 24 May 2022 at 7:44 am Murray Weatherston said:
Agreed the tone of the document was most un-public service like. The use of the blunt dismissal that the industry's view was "nonsense" makes it looks like an adversarial report. The FMA is the referee surely, not an advocate.
It would be interesting to learn who wrote the report, and what their background is. Have any of the authors any real funds management experience (and if so did it end badly!) or is what they are arguing learnt from books?
Also it would be interesting to know at what level of the FMA this report was signed off - department, CEO or Board.
It will be natural that fund managers will not put their head above the parapet for fear of retribution. In many respects FMA is monitor, investigator, leagal party in disputes, judge and jury.
Maybe those of us who have nothing to fear/lose have an obligation to get more vocal.
On 24 May 2022 at 8:21 am MPT Heretic said:
Mr Gregory is quoted in the report and presumably his perspective on value for money is shaped by his time at active fund manager PIE funds?

Of most concern is the fact the FMA states often that fund managers and advisers are free to determine the range of services they wish to provide (and for clients to decide value), but at the same time they continue to write reports such as this which clearly indicate a bias in the regulators perception of what is right and wrong.

As Murray suggests how will that play when the referee blows the whistle

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