The Financial Markets Authority (FMA) released a consultation document outlining a restored focus on lowering fees, amid concerns surrounding excessive charges to clients of KiwiSaver providers.In the statement, made on November 2nd, the FMA emphasised the fact that it has the right to issue ‘stop orders’ to KiwiSaver providers if fee standards are not upheld. This comes as the results of an independent report, undertaken by MyFiduciary, were received by the FMA, revealing insights into the costs that everyday Kiwis are charged by their KiwiSaver providers.
While they may appear low, fees on long-term investments, like KiwiSaver funds, can eat up large amounts of your returns over time. Hence, the FMA has, in previous years, looked to curb excessive fees charged by KiwiSaver providers through regulation. With little change over the years, the regulator has once again begun putting pressure on KiwiSaver providers who are not actively attempting to reduce fees. The FMA lists the following problem areas it has found, which need to be addressed by the providers:
- Economies of Scale: In the past, the FMA has indicated an expectation that as KiwiSaver funds grow in size, the average fees should reduce due to economies of scale. That is, the marginal costs for each additional dollar invested are lower. However, it has been shown that despite increases in the size of KiwiSaver funds over the years, fees have not been reduced as expected.
- Unreasonable Costs: Further, the FMA highlights their expectation that fees to clients should not be unreasonable. While this expectation is somewhat vague, it refers to a point where costs are much higher than the “commercial norm”.
- Membership Fees: The FMA stresses the importance of keeping membership fees low, due to the ability of these fees to disproportionately affect members with low balances. The FMA states that members must be treated equitably, with their interests put first.
- Rebadged Funds: A scheme manager who offers rebadged funds (funds from another manager) should reassess the fee levels and look into how they compare to similar funds.
- Buy/Sell Spreads: Where Buy/Sell Spreads (a type of investment strategy) are used, the FMA asserts that such strategies are to be actively managed to make sure that members are not treated inequitably.
- Fee Increases: If the fees of a scheme are raised, the FMA is to be notified “as soon as reasonably practicable”.
- Closing a Scheme: When a scheme is closed to new members, the provider is under the same obligations in regards to fees up until the scheme has been wound up.
Advice Fees and Trail Commissions
As well as the above problem areas, the FMA intends to make amendments to the breakdown of fees. The regulator states that when a KiwiSaver scheme charges a fee that is related to financial guidance given by the provider, this should be disclosed separately. Further, this fee should be charged to the member who is receiving the advice rather than included in a kind of ‘blanket’ fee for all members in a given scheme.
A Trail Commission refers to a fee charged by the provider that is related to ongoing (or active) reviewing of a members account, by an advisor. This type of fee is generally associated with advice given during the initial sign-up phase, however, this fee is sometimes ongoing regardless of a one-off consultation. In this case, the FMA asserts that this is likely to be deemed unreasonable and therefore a breach of the fee standards. However, if ongoing advice is given, then ongoing Trail Commissions associated should be ensured to be reasonable.
Possible Problems with Separating Fees
In theory, the idea of separating fees and disclosing them individually is great. However, considering the amendments the FMA intends to make to fees essentially means getting financial advice will be optional, some dangers may arise. Financial advice is hugely beneficial to new investors and investors without adequate knowledge of how to choose an appropriate KiwiSaver scheme.
Clive Fernandes, director of National Capital said, “It is proven that, one; financial advice can help improve retirement outcomes tremendously, and two; Kiwis do not value or understand the benefit of financial advice, and thus are averse to paying for it. This could mean a separation of fees could result in Kiwis DIY'ing KiwiSaver decisions or taking advice from friends and family and not getting advice from either providers or advisors.”
Because of these facts, many people will not be aware of the costs that arise when moving in and out of funds - a practice that has been seen more frequently throughout 2020, with increased volatility caused by COVID-19. It is reported that around 50,000 Kiwis panic switched into more conservative KiwiSaver funds during this time. ASB Growth and Westpac Growth funds were hit the hardest, losing around 6.4% and 6.87% of fund investors respectively. Further, it is estimated that the effect of the combined panic switches has the potential to diminish collective returns by up to $3.5 billion.
The potential for these reduced returns are largely due to the fact that when you switch from a high growth fund to a more conservative fund you will miss out on the higher potential returns associated with the higher growth assets in Growth funds. Hence, by making financial advice optional, the FMA may be putting many Kiwis at risk.