In April 2021 the Financial Markets Authority (FMA) released guidance for KiwiSaver scheme providers managed fund fees and value for money. What does this mean for you? Let’s find out!
In its guidance, the FMA made it clear that some schemes were not delivering value for money. KiwiSaver providers continue to generate increasing fee revenue each year on the back of growing KiwiSaver account balance. In the 13 months to March 2019, KiwiSaver Schemes earned millions in fees, and in the following 12 months, while members saw losses of over $820 million in investment returns, fund managers earned fees $538.9 million. So, with the FMA guidance now in place, have KiwiSaver providers actually made any changes to their fees?
First, let’s take a look at the common types of fees you could be charged.
Types of Fees
There are a few types of fees that providers charge their clients and it is important to understand what these mean for you.
Set fees
Some KiwiSaver schemes charge a set fee, commonly called an ‘administration’ or ‘member’ fee. These are a set amount, no matter your balance or or the KiwiSaver fund you are invested in. While some schemes still charge set fees, others have removed them as their schemes have grown in size.
Percentage based fees
Another type of fee, which most KiwiSaver providers charge, is the management fee. This is typically a percentage of your fund balance. The management fee may include costs that the KiwiSaver Scheme incurs, such as investment management costs, supervisor’s fee, auditor’s fee, and account servicing costs.
Since the dollar amount of management fees fluctuates with your fund balance, the amount you will pay over the course of a year won’t be known until the end.
Performance fees
Performance fees are also percentage-based fees, but only paid if your fund’s investment returns exceed predetermined target. Performance fees are designed to incentivise the fund manager to achieve better returns, so they are often calculated as a percentage of returns that exceed a certain benchmark. These fees tend to be more common in higher-risk or actively managed funds.
Active versus Passive Fund Fees
KiwiSaver schemes offer actively managed or passively managed funds and sometimes a combination of both.
Active Funds
Actively managed funds make decisions based on research, market forecasts, and economic analysis to try to outperform the market. They may buy and sell assets more frequently in an attempt to generate superior returns.
Actively managed funds tend to have higher management fees because of research and analysis involved, and potentially performance fees if the fund achieves above-market returns.
Active funds may also provide services such as access to financial advisers and planning software. For some, these extra services make the higher fees worthwhile, regardless of investment performance.
Passive Funds
Passively managed funds track a market index, such as NZX50 or a global benchmark, with minimal active decision-making. The goal is to match the market’s performance, rather than beat it.
Passive funds usually have lower management fees, as they do not require the same level of research or frequent trading.
What can the FMA do if KiwiSaver managers charge unreasonable fees?
There are already rules in place to protect investors from unreasonable fees. The KiwiSaver scheme rules prescribe that the manager of a KiwiSaver scheme must not charge a fee that is unreasonable. The definition of ‘fee’ includes all fees charged either directly or indirectly from a member’s KiwiSaver account.
The obligation is implied into the KiwiSaver scheme’s governing documents and is an ongoing obligation in accordance with both the KiwiSaver Act 2006 (KiwiSaver Act) and the Financial Markets Conduct Act 2013 (FMC Act).
As the regulator of KiwiSaver Schemes, the FMA has a wide range of enforcement options available under the FMC Act. For example, a stop, which can prevent schemes from advertising, and prevent transfers of new members. The FMA may also issue a direction order. A direction order may, for example, direct the manager to comply with the requirement to act in its members’ best interests from a value for money perspective and/or not to charge an unreasonable fee, or stipulate steps that must be taken for compliance (e.g. making changes to add value to members and/or reducing fees). They can also take court action against the KiwiSaver Scheme provider.
Have KiwiSaver Managers listened?
Yes, and there has been a trend toward lower KiwiSaver fees over recent years, driven by several factors:
-
- Increased competition: As the KiwiSaver market has grown, there has been increased competition between providers.
- Regulatory pressure: The government and the Financial Markets Authority (FMA) have encouraged greater transparency and lower fees to ensure better outcomes for investors.
- Passive investment strategies: Some KiwiSaver schemes have moved towards more passive investment strategies, which generally have lower management fees compared to actively managed funds.
- Size of funds: Some larger providers, managing significant assets under management, benefit from economies of scale, enabling them to lower fees while still maintaining profitability.
However, while fees have generally been trending lower, it’s important to note that fees vary depending on the type of fund (e.g., conservative, balanced, growth) and the investment strategy. It’s always advisable to compare the total cost (base management fees, performance fees, and any other charges) when choosing a KiwiSaver scheme. At National Capital, that’s what we do for you.
Its about Value for Money
As mentioned earlier, some funds are more expensive because they are actively managed requiring more resources to manage. It’s not a guarantee of better performance versus passive investing but may represent good value for money if active management delivers superior returns.
Value for money may also come through additional services provided such as financial advice to assist member in their fund selections. National Capital can help you choose the right KiwiSaver fund for your circumstance and make the switch happen through our digital KiwiSaver advice process. Click here to make a start.
Published on: