The New Zealand Financial Markets Authority (FMA) has decided to apply new rules that KiwiSaver fund managers have to abide by. It has now been brought to attention that fund managers must complete a yearly review of their fees in order to judge whether they are providing value for money. The guidance to the managed fund fees and value for money was posted on the second week of April, 2021 and it is the new authority to abide by when it comes to deciding the fees KiwiSaver providers plan on charging their clients.
Each review needs to come to the formal conclusion that the fees that are being charged to clients provide real value for money and if that is not the case said fees must be reviewed and must be reduced. Otherwise services to clients must increase or a combination of the two steps must be taken.
The FMA is aware that fund managers have a number of obligations and expectations that they must meet. This new guidance is designed to help the KiwiSaver managers to demonstrate how they meet said expectations and obligations when it comes to their clients. Licenced supervisors that actively inspect the jobs of fund managers and the supervisors themselves answer directly to the FMA. The FMA has brought out this new guidance containing a list of questions designed to help the supervisors determine whether the fund managers are charging fees that are fair, reasonable and reflect the true extent of their services.
There are four trends in the KiwiSaver market that the FMA and other researchers have noticed that are also relevant for other, non-KiwiSaver fund managers:
- Despite there being benefits of scale in some cases, said benefits typically do not seem to trickle down to the investor
- Not enough precision in the relationship between the fees being charged and the returns to the investors
- The degree of active management is not directly proportionate to the fees being charged
- Active managers, on average, do not seem to outperform the market, given a meaningful amount of time (the minimum recommended amount of time for their investment to see the suggested returns) and passive managers do not match closely enough with the performance of the market index they are trying to replicate. All this after fees, making their fees hard to justify.
Paul Gregory, FMA Director of Investment Management, said: “The guidance does not tell managers what to charge and accepts managers can profit from competently managing investors’ money. But the guidance also recognises investors are paying the cost and taking the risk and, if high fees mean investors are not getting an appropriate share of that profit, the manager’s competence is far less relevant, and the investor should walk away.”
There are four key principles to the guidance:
- Risk and Return are critical - What this means is that there are two best indicators of value for money for investors. They are how well the skills and processes of the fund managers are minimizing the risk the investors experience and the returns they are receiving after fees.
- The financial value of investment management must be shared - the KiwiSaver member must also receive a fair return on their investment. The investment manager is doing the work but it is also important to recognise that the investor is providing the funds, paying the fees and therefore taking the risk.
- Advice and service is received, not just offered - the services and attributes that an investment manager extends are considered to offer value for money to the KiwiSaver scheme member when they verifiably help the member make better decisions in regards to their investments (for example; advice). It must also just as verifiably help the member’s account ( for example by the investment strategy helps minimize market risk for them, increase returns or a combination of both).
- Review yourself as you review others - when assessing the fees they charge and the value their services add to the member’s scheme they must do it with the same rigour they would use when assessing other, underlying managers.
The draft guidance was subject to consultation. It received 27 submissions, most of them from the industry. “Some submitters told us FMA intervention on fees and value for money was not necessary and the market would punish poor value before the FMA did,” Mr Gregory said.
“But the long-term nature of most investing means New Zealanders can be punished for long periods, perhaps irretrievably, before the market ever gets around to doing something. That’s not helped by New Zealanders’ ongoing low engagement in their investments, especially KiwiSaver.”
“Ultimately, of course it will be the market which punishes unreasonable fees and poor value. But the FMA can and should try to influence the industry’s approach to make it happen sooner. Guidance which introduces a stronger discipline of examination of fees and value for money is how to make that happen,” Mr Gregory said.
National Capital’s director, Clive Fernandes, also expressed his opinion on the new regulations. “It is certainly a good thing that the FMA is looking at Fees, but it is also important to note that a myopic focus on fees is not beneficial for anyone. Both the FMA and clients need to understand that fees are just one of the considerations when deciding on a KiwiSaver provider and strategy,” Mr Fernandes said.
Fernandes found the following snippet from the FMA guidance particularly worthy of comment;
“The simplest indication of whether a manager’s investment risk management capabilities provide value for money is whether they consistently exceed the return of their market index if active, or replicate it as closely as possible if passive.
If the manager is unable to do this over meaningful periods (the minimum suggested timeframe for holding the investment as set out in the relevant Product Disclosure Statement, and longer), supervisors should query whether the manager has sufficient investment risk management competence to deliver their chosen strategy. If the fund has been invested for less than its minimum suggested timeframe, performance relative to market index (and comparative funds) is still a useful basis for inquiry.”
“Particularly the last sentence, runs the risk of having unintended consequences to the detriment of NZ investors,” Mr Fernandes said.
“What the FMA is suggesting is that Fund Managers be judged by short term figures even though certain investment strategies (mostly those that work) require Fund Managers to be contrarian; which by definition means they would differ in returns from both the market index and comparative funds,” added Mr Fernandes.
“The last thing we want is all Fund Managers investing in exactly the same way to ensure they do not run foul of that guidance. This will not only mean lower returns for active investors, but also lack of diversification if every Fund Manager is doing the same thing,” concluded Mr Fernandes.