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FMA expects some investment fund fees to fall, as it releases guidance on how fund managers need to make the case they're providing value for money

FMA expects some investment fund fees to fall, as it releases guidance on how fund managers need to make the case they're providing value for money
FMA Director of Investment Management Paul Gregory

Fees on some investment funds, including KiwiSaver funds, are expected to fall, as the Financial Markets Authority (FMA) intensifies its scrutiny of the industry.

The financial market watchdog has released guidance to help fund managers and supervisors (like Guardian Trust) demonstrate how they're meeting existing obligations, statutory duties and conduct expectations when it comes to fees.

In effect, the guidance details what fund managers need to do satisfy their regulator they're providing investors value for money. 

FMA Director of Investment Management Paul Gregory told interest.co.nz he expected the guidance to prompt some fund manager to cut their fees and/or improve their services.

The FMA said fund managers aren't always passing on the benefits of scale to their investors. In other words, investors in large funds might be paying more than they need to, given the number of investors some fixed fund management costs could be spread across. 

The FMA said there are also no “systemic” relationships between fees and returns, and fees and the degree of active management.

And the FMA noted active managers typically don’t outperform their market index, after fees, over meaningful periods of time, and passive managers typically don’t closely replicate the performance of their market index after fees.

The FMA is publishing the guidance following consultation with 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,” 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…

“There’s nothing in the guidance we’d not expect the boards and senior management of managed funds to be doing anyway. They are certainly asking these exact questions of their underlying managers.”

The guidance also sets out how the range of tools the FMA can use if it determines a scheme’s fee is unreasonable, including:

  • stop orders, which can prevent a scheme from advertising and accepting new members,
  • direction orders, which can direct a manager to comply with the requirement to act in their members’ best interests
  • censures or action plans
  • altering, suspending or cancelling a license
  • court action, which can impose a penalty or force a scheme to reduce fees and potentially refund members.

The guidance is based on four principles:

  1. Risk and return are critical - the two key indicators of value for money for members are how well the manager’s process and capabilities appropriately minimise the investment risk the member experiences (i.e., through volatility and loss); and the member’s return after fees.
  2. The financial value of investment management must be shared – a member has not obtained the financial value of investment management if it is not shared appropriately between the manager doing the work and the member paying the cost, providing the capital, and therefore taking the risk.
  3. Advice and service is received, not just offered - a service or feature provided by a manager contributes to a member’s value for money if it demonstrably helps the member make better investment decisions (such as advice), or demonstrably benefits the member’s account (such as investment process reducing market risk, enhancing return or both).
  4. Review yourself as you review others - when evaluating their fees and value for money to members, managers should use the same rigour they would apply to assessing the same of any underlying manager.

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3 Comments

How about some scrutiny of the Reserve Bank / retail banks collusion on interest rate suppression which has seen them shaft deposit holders to an ever increasing extent since the GFC?

I concur, the thought experiment is would you rather:

(a) pay a manager 1-1.5% p.a. for some reasonable prospect of making a real (post-inflation) return on your capital

or

(b) pay the debtor-usurer complex 2-4% annual erosion of the real purchasing power of your savings, i.e. a guaranteed loss

It is not a trick question - suspect we won't see any meaningful policy or practical oversight on the true 500-pound gorilla until a small latte sails through $6 in downtown Wellington...

I have got my kiwisaver in a cash fund due to going to use it on a first home. But the fees exceed any return I now get due to the Reserve Bank reducing interest rates so much. Mot sure why the fees are so high on just a normal cash fund. IMO fees on a cash fund kiwisaver account should be minimal.