The Financial Markets Authority (FMA) has 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 2nd November 2020, the FMA emphasised their right to enforce rules if fee standards are not met. This comes as a results of an independent report undertaken by MyFiduciary revealing insights into the costs that everyday Kiwis are charged by their 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 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: The FMA has previously indicated that as KiwiSaver funds grow, average fees should decrease due to economies of scale—since the cost of managing each additional dollar invested is lower. However, despite the significant growth of KiwiSaver funds over the years, fees have not declined as anticipated.
- Unreasonable Costs: The FMA highlights that fees charged to clients should be reasonable. While this expectation is somewhat vague, it implies that costs should not substantially exceed the “commercial norm”.
- Membership Fees: The FMA emphasises the importance of maintaining low membership fees, as these can disproportionately impact members with smaller balances. It asserts that all members should be treated fairly, prioritising their interests above all else.
- Rebadged Funds: A scheme manager offering rebadged funds (funds from another manager) should review their fee structures and evaluate how they measure up against comparable funds.
- Buy/Sell Spreads: When Buy/Sell Spreads (a type of investment strategy) are employed, the FMA insists that these strategies must be actively managed to ensure that members are treated fairly.
- 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 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.
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