KiwiSaver fund managers have been advised that they should undertake an annual review of their fees. Photo / File
KiwiSaver suppliers have been told that they need to review their fees annually and prove that they offer value for money or face potential regulatory actions.
The Autorité des Marchés Financiers has published advice to fund managers and their supervisors on fees because KiwiSaver members are not getting value for money.
About three million New Zealanders belong to KiwiSaver and have invested more than $ 76 billion in the program.
Last year’s FMA’s KiwiSaver annual report found that the Kiwis paid $ 538.9 million in fees in the year ending March 31, 2020, an increase of 12.3% from to the previous year. This is despite a 122% drop in return on investment during the year.
But as vendors manage more money, FMA research has found that they do not pass the benefits of scale on to members, there is no systematic relationship between fees charged and returns and no systematic relationship between the fees charged and the degree of active management of a system. .
Active management is where a person makes decisions about where the money is invested versus using a computer algorithm to track a market index called passive investing.
Most of the KiwiSaver providers are active fund managers, although there are a growing number that use passive management, which is a much cheaper way to manage your money.
The FMA study also found that active managers generally do not beat their benchmark, after fees, over significant periods of time, and passive managers generally do not faithfully replicate the performance of their market index after fees.
Paul Gregory, director of investment management at the FMA, said if the advice is focused on supervisors and fund managers, it should also provide more information to members and investors.
“In terms of what an investor should see, this is one of two things: Their provider is able to demonstrate strong support that the fees they charge are not unreasonable and that the value that the member gets in return is at least adequate. “
Alternatively, Gregory said the review process could result in changes to the managed fund to add value to the member or reduce fees or both.
Gregory said the guidelines did not create any new responsibilities or requirements for fund managers or supervisors.
“What it does is designed to help managers and supervisors respond to what already exists.”
While the FMA verifies the fees when launching a new KiwiSaver program, it is the responsibility of a system supervisor to verify that the manager continues to meet this requirement.
Under the new guidelines, fund managers will need to review their fees and value for money with their supervisor and prove that the review has taken place.
If the review finds that the fees are not worth the money, they will either need to increase their services, or reduce the fees, or do both.
If the fees are found to be too high, a provider may have to reimburse the fees overpaid to members.
The advice includes all providers of managed funds, not just KiwiSaver managers, to factor in fees and their value for money.
He established four principles against which they should assess their fees; risk and returns, the way they share the financial value of investment management, the fact that advice and services are not only offered and cause managers to review their own fees as rigorously as they would for the fees of the underlying managers.
Gregory said he doesn’t tell the industry what to charge.
“What we’re waiting to see is a lot more information and support on why fees are set where they are and the value members and investors get in return. It could be the return. investments where there are also non-financial returns that have value to members, we just want a lot more work to define what that value is. “
KiwiSaver suppliers have a legal obligation not to charge unreasonable fees. This does not apply to funds managed outside of KiwiSaver, but managers are still under an obligation to put the best interests of their members first.
“If there is anything more fundamental to the interests of the membership than not getting ripped off, then I don’t know what that would be,” said Gregory.
If the FMA finds a fund manager’s fees unreasonable, it can prevent a system from advertising and accepting new members, order a manager to comply, censor the company, modify, suspend or cancel their license or take legal action which may impose a penalty. or force a system to reduce fees and eventually reimburse members.
Despite years in which the regulator has highlighted fees charged by vendors and individual members have received information on their annual statements in dollar form, there is not much to show that members research and make decisions based on fees.
“While we have published information for KiwiSaver members on considering the value they receive for the fees they pay, research repeatedly shows that when it comes to financial products, l The regulatory effort is much more effective when it focuses on the product suppliers themselves, ”the guide notes.
KiwiSaver systems typically charge an annual fee and a percentage of funds under management fees.
But the document shows the regulator wants membership fees eliminated.
“As the membership scale and balance increases, we see little justification for plans to charge both a fixed membership fee and a base management fee (which is typically based on a percentage). tariff structures. “
He would also like the fees billed for counseling to be billed directly to the member and not to the plan, so members can opt out of these fees if they do not receive counseling.