Advisers: Fee move will make little difference
KiwiSaver investors will soon see the fees they pay displayed in dollar terms - but advisers are not convinced it will have any effect.
Wednesday, March 28th 2018, 5:59AM 
6 Comments
by Susan Edmunds
From April 1, fees will have to be made clearer.
If a customer has a balance of $10,000 in their KiwiSaver account, until now they might have seen the fund manager’s fee expressed as 1.28%. That will now be spelled out as $128 per year. According to the KiwiSaver Fund Finder tool on the Sorted website, total fees on $10,000 in a balanced fund range from $52 to $174 per year.
Adviser Stephen O'Connor said that would make fees stand out more to investors.
But he said few people were interested specifically in what their KiwiSaver manager was charging them. They were more interested in the overall return.
"Provided the return is reasonable, given the market, they're not too worried about the fee."
Another adviser, Simon Hassan, agreed it was usually the outcome that mattered.
He made fees clear to clients and explained what they could expect to get in return.
David Beattie, chief investment officer of Booster, said the change would be challenging, from a perception perspective.
Booster's fee includes a component to cover the cost of personalised advice for each client.
"Consumers struggle to ascribe a value to that."
He said the recent long run of strong market returns made it harder for pricier active managers to outperform. But when markets turned, they could be expected to show the benefits of their approach.
Having fees expressed as a dollar figure would lead people to think they were more significant than they were, he said.
Some investors had a mistaken belief that everything in the investment world could be commoditised.
Beattie said fund comparison tools already in the market put an emphasis on fees because other factors were harder to put a value on.
"Transparency is a good thing but it needs to be contextual."
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Comments from our readers
I'm in favour of consumers have all the information visible and available to assist with making informed decisions - even it it leads to some tough conversations around value propositions.
The fees charged by KiwiSaver providers is just one small element of an investment strategy yet it has been given a lot of press recently. Some providers are starting to dine out on this and I believe it will confuse consumers rather than enlighten them.
An example of this could be a provider that states, "join our KiwiSaver, we have no annual fees". They transfer a clients $50,000 KiwiSaver to their medium risk fund currently returning 7.8% after tax and fees.
The old provider, who has just seen their client leave, had the client invested in a fund with a similar risk profile that returned 8.35 last year with an annual fee of $180.
By only considering the fees paid, and transferring to a 'nil annual fee' fund, the consumer could be, if the difference in returns continues next year, $80 worse off.
I hope, but won't hold my breath, that the regulators will hammer this point and advise consumers to look at all aspects of their KiwiSaver investment and not just concentrate on annual fees.
Oh, and before I get reminded that in some cases, higher fee charging providers have performed worse than those with lower fees, that is not a reflection of the fees but rather the investment strategies of the provider.
It might be correct that disclosing fees in both percentage and dollar terms is becoming common practice but what investors need is useful information ie some perspective – is a 2% annual fee high or low? Is $516 a year in fees fair or not? Mum and dad wouldn't have a clue and to be honest neither fund managers nor the MBIE nor the FMA seem to have any interest in adding to the debate beyond saying "you must read the prospectus" blah blah. What the regulators need to do is say stock markets are priced to return 6% pa so a 2% annual fee extracts one-third of returns or they could say the equity risk premium today is 3.5% so a 3% annual fee delivers the risk of equities with the return of bonds. They could also quote Morningstar and say, all other things being equal, fees are the best lead indicator of relative returns. That they don't either indicates ignorance, regulatory capture or both.
By the way if you are "in favour of consumers having all the information" you will no doubt be concerned that all the fees aren't disclosed in NZ, ie trading costs which can represent an annual impost of 1% pa, are excluded from the MER calculation in NZ. The FMA, unlike the FCA, chooses to ignore this fundamental omission and instead trumpet the non-event of disclosing the dollar value of fees. This whole area needs a good clean out starting with the MBIE and the FMA.
To expand on my comments: full transparency on fees (something that I think we both agree upon) permits the consumer to make an informed decision around "value" that they are receiving (as opposed to the price that they are paying).
A consumer may find that it's acceptable to pay away their equity risk premium for the benefit of receiving a net index return. I don't, but then again there are plenty of consumers who follow celebrity investors in this country to suggest that folks really don't understand that it's the net returns that are most relevant (...without getting into a conversation about gouging, appropriate benchmarks etc)
I also believe that dollar-disclosure permits consumers to understand (and question) the value being provided by other components of the value chain. For example: the concept of providing a 'set & forget' portfolio, with the adviser living off the ongoing revenues will quickly be exposed when the consumer starts questioning value for money.
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