What’s more important for KiwiSaver members? Net returns or fees?
One of the big debates, particularly in KiwiSaver, is what should customers focus on? Net returns or fees. The regulator’s answer may surprise you.
Wednesday, August 14th 2019, 6:00AM 
13 Comments
This debate is one of the loudest in the market as a number of new players in the KiwiSaver market are selling their funds, predominantly on their low fee structure.
While many KiwiSaver managers believe net returns are the most important factor for investors, the regulator is not so sure.
The Financial Markets Authority don’t think it’s a simple answer.
“I’m not sure it’s that simple,” chief executive Rob Everett says. “You would think it’s net returns.”
He uses the example of ethical investing, saying some people are prepared to give up returns in exchange for investing ethically, although a lot of research says applying responsible investing screens can add value.
“In some places people are willing to potentially give up some net returns for being in a fund that has stripped out (companies and sectors).
He says that is active management; “Once you start stripping out any more than the basics, then you really are into portfolio selection.”
“I think performance after fees is where you begin, but we acknowledge that not everyone seems to be solely driven by that.”
FMA director of regulation Liam Mason says: “One thing we see is that some people really value certainty. Knowing that they’re not going to pay a lot of fees no matter what the market does is comforting to some people, and they would prefer that.”
“I’m not sure it is for us to say this is the thing that is best for you.”
KiwiSaver managers at ASSET Magazine’s KiwiSaver Round Table last week are clear that net returns are more important than fees. A number also argued that fees aren’t just for investment management but they also help pay for services like education, member services and other tools.----------------------------------------------------
The managers at ASSET’s Round Table were: ANZ, ASB, Kiwi Wealth, Milford and Booster. Russell Investments, which manages funds for Aon were also part of the discussion.
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Comments from our readers
On 14 August 2019 at 10:15 am cdouglas23 said:
I agree with the sentiments of the regulator here (on fees at least). It's not that simple.
Yes, net after fee returns are important. But at the same time, I think the fee level of a fund says a lot about the fund companies who offer them. Fees are the one area a fund manager can control and excessive fees do eat into the returns that investors receive and as a result have a material impact on how much they save for their retirement (or how much they can spend in retirement).
A lot of the larger KiwiSaver providers have very similar asset allocation policies, so fees will play a key role in the performance of a fund. It's definitely an area worth paying attention too and we need to keep the pressure on to see fees come down.
On 14 August 2019 at 3:23 pm Denis said:
The default funds' conservative asset allocation/low fee structure is only a problem according to fund managers. That doesn't mean it's an actual problem. Please stop insulting us by pretending it's about financial literacy.
I would be open to a riskier asset allocation if the fund manager guaranteed, as a minimum, to deliver the return that would have been achieved by the Default Funds (they could even call it the "default return"!).
Why won't they do that? It's too much of a risk. They might lose their shirts if there's a big downturn in the markets.
So...why is it OK for an individual investor do this with their life savings in KiwiSaver?
On 16 August 2019 at 3:02 pm JPHale said:
I agree with cdouglas23. The net return is the important piece that is the actual meat in the sandwich, the rest is often noise and fluff.
That said, clearly, a provider gouging fees should be steered clear of, and one that is able to provide sustainable returns at a similar level with lower fees should be considered. But the whole story leads back to net return whichever way you cut it.
And it isn't simple. For those in conservative and defensive positions, they know the returns are lower, so the fees have a greater impact, and thus are more of a focus. Those in the balanced to growth areas are taking on more risk for returns, and thus may want more active management for higher returns and better security on managing or reducing losses, this comes with an increased cost, so the fee isn't so relevant, the net return is far more the goal. As they say, keep the eye on the pie... my two cents
On 16 August 2019 at 3:15 pm JPHale said:
@Denis from your comments it sounds like you're not in the financial advice space, and your comments suggest you're not understanding how funds and financial markets work.
I don't mean that unkindly, but it speaks to the financial literacy comment you have made.
What most people outside financial services don't understand is there are no guarantees on anything to do with savings and investments.
The money you put in the bank has no guarantee, nor does the default conservative or defensive fund in KiwiSaver.
Though they are talking a minimum level of guarantee with bank saving accounts presently. There is no guarantee with KiwiSaver and I doubt there will ever be.
What there is, is an expectation that there are unlikely to be losses in a default KiwiSaver fund, but these funds could return negative values. It is possible if the financial markets are really bad.
Frankly, my view is my money is better off in a diversified fund than it is in a single bank's saving account.
Especially with the rules around bank liquidity; where if they are in a financial crisis and the bank is at risk of failing, the funds of the savers with the bank can have a haircut, bail the bank out and things carry on. This is effectively a direct loss to the savers.
Your comments also demonstrate a significant level of risk aversion, which is common when people don't understand the tools, instruments, and structures, of the financial markets. I too once had a similar view, education solves many fears and aversions to risk.
There are plenty of resources on the Sorted, FMA, and Financial Advice NZ websites for people looking to learn more.
And I'm sure many of the advisers here who do investment planning work would be happy to chat and help you better understand how all of this stuff works.
On 16 August 2019 at 9:58 pm Denis said:
@JPHale. Sigh. The guarantee I am referring to is the return that a default fund would have achieved, positive or negative. At no point do I say that I expect a totally risk-free investment.
Once you take that on board, the rest of your post comes across as a wee bit condescending.
On 17 August 2019 at 7:54 am Pragmatic said:
Fees v net returns is really price v value. Whilst the financial services industry generally acknowledges that high fees in exchange for mediocrity is a bad thing (and sadly all too common), consistently good investment managers will continue to charge a premium for their services. And yes... these managers do exist (albeit requiring a bit of digging to discover who they are).
Unfortunately some participants in the financial services industry have an obsession on price rather than value, choosing not to research the various options, or simply selecting the lowest priced option to assist in preserving their own fees. The true victims from this approach (both at an individual level and from a societal perspective) are the investors who have ended up in long term low-priced conservative retirement savings schemes, which will fail to meet their investment & lifestyle expectations... all under the guise of “saving on fees”.
On 19 August 2019 at 9:43 am rosconz said:
As an adviser in the investment space I have to say @Denis raises some very valid points - clients (product users) are covered by a small bit of legislation called the Consumer Guarantees Act - in particular that the goods / products are 'fit for purpose'. If a fund manager charges a management fee (generally a premium) to provide a more agressive or riskier fund option with an expectation of a superior longer term return and then cannot deliver this return, then surely the product is not fit for purpose? Why can we not have fund managers benchmarked against an industry average of some sort - if your fund outperforms then you can justify your fee with a premium, if you meet the average then the base fee is charged, however if you underperform then fees are reduced accordingly. This is not providing a guarantee of performance just recognising that consequences of underperformance should not just be borne by the investor. Surely if we are looking for better client outcomes we need to align the interests of the fund managers and the clients?
I also have an issue with this obesession of shfting clients from default funds into more aggressive portfolios. With (usually) much lower fee structures in default funds - for many clients their net return after fees (after all this is the important bit, isn't it?) is often higher than a conservative or balanced fund and with much less volatility which suits many investors. I think the important bit of the conversation is the active choice part - clients understanding their risk tolerance and preference, understanding risks and fee structures and engaging with the investment choice. The constant chatter about investors 'missing out' on higher returns because they are in a default fund is a bit simplistic.
I should also point out @JPHale that if we do have a financial crisis - the loss by the savers at a bank will likely be significantly less than that experienced by investors in a 'diversified' fund exposed to global markets.
Just my thoughts.....
On 20 August 2019 at 6:42 pm JPHale said:
@Denis apologies. Not intended as condescending, more the comments and intent don't align with the wording used. Guaranteed gives a wide interpretation and one that typically implies no capital losses.
@Rosconz, yes, likely to be less of an initial haircut than the fund. However, so long as the fund doesn't go bust, and the investor doesn't crystals the losses by pulling what's left, the fund has the opportunity to recover unlike the haircut.
As we have seen in the more recent financial ripples.
GFC saw all sorts of carnage, Personally, I was sitting high-risk internationals, left it to ride and it's up well over double what it was for what was there at the time. Yes, horrible at the time in terms of losses, but history shows it recovers eventually.
And as you said it's about active choice and knowledge about that choice, as my comments prior are about. Knowledge helps ensure better choices are made, but doesn't imply guarantees or performance, that's just part of the risk you take when you get up in the morning...
From what I have seen with good investment advisers is a balance of education plus advice that means a client is presented with a plan that takes onto account their risk tolerance and the needed level of risk to achieve the goals.
If there's a gap between risk tolerance and risk needed there's a conversation. If the risk tolerance is more that the risk needed, excellent, there's a buffer on risk or there's a higher expected return for the plan, for a different buffer.
As you've pointed out moving from default to aggressive just for the returns is far too simplistic. And a default fund may be very appropriate, unlikely for those under retirement age, but possibly appropriate. Comes down to a good advice process.
On 21 August 2019 at 11:56 am Denis said:
@JPHale - thanks, no worries.
@rossconz - thanks!
The default funds debate isn't just about what we think the best asset allocations are. Like it or not, a large amount of that money has been automatically put there by the IRD as part of the KiwiSaver enrolment process for employees.
The default members have not given their permission to take risks with their money. As it stands, the current asset allocation and the low fees should deliver a modest but dependable rate of return.
If we allow the default asset allocation to be more risky, we know that the member's account balance is more likely to go backwards.
When/if that happens, what do we say to them? Do we frown and say "Ooh - that's weird..." or something along those lines? How do you think that will go down?
We invested their money in riskier assets (and higher fees were paid to fund managers) and it turns out they would have been better off in the original default fund!
The regulator will be battered balck and blue for allowing that to happen.
The current system is fine. It's a solid berth for default money until the member is ready to make their own decisions.
On 22 August 2019 at 7:44 am MPT Heretic said:
Denis default members did not give their permission to take risks, but neither did they give their permission to not take sufficient risk. There are thousands of investors who would be materially better off right if they had been invested appropriately... what should we say to them? On 22 August 2019 at 11:39 am Tash said:
MPT Heretic - we should say..."start taking some interest in your finances, failing to take advice can be very expensive" On 22 August 2019 at 1:25 pm Denis said:
@MPTHeretic - what Tash said.
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What Everett needs to concentrate on is the amount of money still sitting in the default funds. If he is not willing to attack this the major issue in the investment department , then we need to find somebody who will.
The loss to kiwi investors could be as high as $130 million pa, that is using the returns of a Balanced Fund as opposed to a Default Fund.