Advisers’ part to play: FMA KiwiSaver fee guidance

The FMA has released its long-awaited guidance on managed fund fees. Director of investment management Paul Gregory says advisers have their part to play.

Wednesday, April 14th 2021, 6:00AM

by Daniel Smith

Paul Gregory

The FMA’s long-awaited guidance for investment funds calls on fund managers to annually review their fee structure and value for money, and to prove that they have done so to the FMA.

But one of the most notable aspects of the guidance is the removal of the regulator’s hard line attitude to advice fees. The proposal in the draft guidance that stipulated KiwiSaver providers would have to charge members individually for advice fees rather than having the cost spread equally over the entire scheme, has been dropped.

Director of investment management at the FMA, Paul Gregory, told Good Returns that rather than a hard line, the regulator’s approach across all aspects of the guidance was designed to be “a principles based approach because we didn’t see any point in specifying what fees had to be or to tell managers that they couldn’t make a profit from managing people’s money”.

Those principles are listed below.

Risk and return are critical.
The financial value of investment management must be shared.
Advice and service is received, not just offered.
Review yourself as you review others.

All aspects of the guidance are designed around these pillars which are aimed at fair fees for consumers while allowing managers enough wiggle room to successfully do their job.

Gregory says, “What we are really trying to encourage here is transparency from fund managers to substantiate why their fees are reasonable, and more importantly the value that the members get in return for those fees.”

Advisers have an important part to play in the guidance, Gregory believes.

“The guidance says that managers and their supervisors need to have a regular process of going through a proper review of their fees and their value for money. If you are an adviser who is putting those clients into those funds then you would want to make sure that you are seeing those reviews are being done, and what the results of them are.”

In some of the submissions, Gregory says, businesses were fearful that the guidance would deter people from seeking advice. He dissuades this line of thinking, saying that, “For advisers the number one thing to consider is that this guidance really does recognise the value of advice.”

Overall, Gregory does not believe the guidance will cause an undue burden on the industry.

“We are not asking managers to do anything that they don't already have a statutory duty to do. If you are a fund that has underlying managers, you will already be doing this, because you will be holding them to account.

“Whatever fund managers are doing for their underlying managers they need to do to themselves.”

Chris Douglas, is the principal at MyFiduciary, whose research in collaboration with the FMA into the active and passive management of KiwiSaver Funds, and the lack of correlation between fees, had a great deal to do with spurring the FMA towards this guidance.

The key finding of the MyFiduciary report published in August 2020, was that “there is no significant relationship between the level of active management employed by providers and the fees they charge”.

Douglas says that in trying to remedy this issue, “taking a pragmatic approach on fees is important especially from the FMA’s perspective”.

According to Douglas, the FMA’s decision to require fund supervisors to review the value for money performance of their underlying management “is very similar to the superannuation markets in the US. They have these fund board structures that are on the hook to make sure the fees are set at an appropriate level. I think it is a good move for the FMA to bring KiwiSaver in line with this.”

Douglas also agrees with Gregory in that advisers have a part to play in the changing landscape of KiwiSaver fees.

“Advisers are critical. We need advisers to be involved with KiwiSaver because it is the KiwiSaver members who largely don’t get advice, who can be in the wrong risk profile, who switch out at the wrong time. Advisers are absolutely critical to this process and making sure they are heavily engaged is a good move from the FMA.”

Tags: fees FMA KiwiSaver managed funds MyFiduciary