The FMA has recently released a consultation document on KiwiSaver fees and value of money for all members.
They emphasise the importance of maintaining fair, efficient and transparent financial markets, and growing market confidence (Source: Financial Markets Authority). They also warn fund providers that they will be held accountable for charging unreasonable fees and regular assessments will be conducted.
The document outlines various sections on what reasonable fees are considered to be and the proposed regulations and consequences for fund providers. Although we agree with a lot of what they have laid out, I would like to discuss a few thoughts and considerations on one important aspect of the guidance.
The proposed fee guidelines stipulate that any advice fees “should be separately disclosed and charged to the member benefiting from that advice. It should not be incurred by the scheme and consequently all members of that scheme”.
Management vs Advice fees
Distinguishing between management and advice fees is definitely a step in the right direction, however, I believe that pushing a message that financial advice is optional for members might not necessarily be in their best interests. In fact, financial advice for KiwiSaver members is essential and the difference in balances between an investor receiving advice and an investor who is not has proven to be significant. A study undertaken by the Financial Services Council found that, on average, Kiwis who get professional advice end up with 4% better returns or 50% larger balances than those who don’t.
The difficulties in having optional advice
The value in getting financial advice is, however, not seen by the majority of Kiwis with 75% not understanding the positive impact of financial stability on mental health (Source: Financial Services Council). The industry has acknowledged the difficulty in delivering the message of the importance of seeking financial advice to people. This will not make things any easier.
I believe making advice optional will likely result in Kiwis seeing the ‘extra cost’ as not being worth it, preferring to handle things themselves. Instead of getting advice from reputable providers or advisers, a separation of fees may lead to members trying to DIY their investment or ask for, perhaps, questionable advice from family and friends. The outcome of this can be consequential and irreversible and result in balances looking much lower than what they could have been.
Fund movements in 2020 with vs without financial advice
The year of 2020 and the effects of Coronavirus are a perfect example of Kiwis making poor investments decisions without the help of financial advisers. The volatility in the market led to many KiwiSaver members making poor judgments which, frankly, may have caused them to lose a lot more than just a few extra basis points in advice fees. 50,000 members ended up moving their funds to a more conservative fund amidst the panic and are now likely to miss out on an estimated collective amount of $3.5 billion due to these rash decisions.
The switching and moving in and out of different funds is seen majorly by members who don’t have financial advice and was especially noticeable during the fluctuations this year exhibited. The largest movements of members were seen by big banks ASB (-6.4%) and Westpac (-6.87%) with the smallest being Mercer Growth (+2.3%) and Milford Active Growth (-0.4%). Thus indicating that KiwiSaver members who had greater access to advice were less inclined to switch (Source: NZ Herald).
Additionally, frequent changes in fund selection actually have a negative impact on the remaining members too – the ones who have stuck it out. This being due to substantial costs, such as transaction fees, that take place when switching funds. In addition to this, it forces managers to make trades they may not have otherwise made to recover from the loss.
The FMA’s proposed guidelines aim to make sure fund managers act in the best interests of all investors and treat them equitably. Yet, in my opinion, by having optional advice, this isn’t fulfilled. Making sure all members are getting sound financial advice would be one way to act in the best interests of all members, give them the assurance they need and, in turn, help each other out.