KiwiSaver providers and fund managers will have to review fee settings at least once a year under new provisions confirmed by the Financial Markets Authority (FMA) this morning but the regulator has eased its previous hard line on embedded advice fees.
The FMA ‘Managed fund fees and value for money’ final guidance released today puts heat on providers to justify charges across the board including investment and advice costs.
Under the regulatory guidelines, KiwiSaver and other licensed investment schemes must review fees annually and when making material alterations – such as changing underlying managers or strategy – in consultation with their supervisors.
While the FMA has stuck by most of its draft proposals first floated last November, the final iteration drops an earlier provision that would have seen KiwiSaver providers charging members individually for advice fees rather than spreading the cost over the entire scheme.
According to the guidance, the regulator wants “to avoid a situation where fees for advice are embedded within broader fees paid by all members, are not transparent to members, and result in schemes competing to make offers to advisers to ‘buy’ members from them”.
Despite these concerns, the FMA will now continue to allow embedded advice fees in KiwiSaver in a pragmatic compromise between its preference and the need to encourage access to financial advice.
“We prefer that fees for advice are charged to the member, not the scheme, or are otherwise structured so members can choose not to pay the fee. We acknowledge, however, that the KiwiSaver market is still maturing – balances tend to be lower than for other managed funds, and even a moderate, optional fee for advice may dissuade KiwiSaver members from using or seeking it,” the guidance says.
“Consistent with our principles-based approach, we are not prescribing how fees for advice must be charged. We expect, however, that schemes not already charging members directly for advice will move to do so as balances increase, the value of advice is established, and the industry as a whole matures.”
Similarly, schemes will still be permitted to levy fixed member fees in spite of FMA worries.
“Membership fees were intended to cover costs when scale was low,” the regulatory guide says. “As scale and member balances increase, we see little justification for schemes to charge both a fixed membership fee and a base management fee (which is typically percentage-based).”
But the wide-ranging FMA guidance expands on the draft proposals both in the level of detail and ambit, branching into previously unexplored regulatory realms such as ‘tax leakage’ and transaction costs.
Scheme managers and supervisors should regularly review fees based on four principles, the FMA note says, including:
- risk and returns;
- the financial value of investment management must be shared;
- advice and service is received, not just offered; and,
- review yourself as you review others.
Paul Gregory, FMA head of investments, said investment managers should already be reviewing fees and value for money as a matter of course under current legislation.
Gregory said the obligations, which begin today (April 14), should not impose extra costs on providers.
He said the FMA carries several powers ranging from stop orders to court action to enforce the fee provisions.
In a release today, Gregory said: “The guidance does not tell managers what to charge and accepts managers can profit from competently managing investors’ money. But the guidance also recognises investors are paying the cost and taking the risk and, if high fees mean investors are not getting an appropriate share of that profit, the manager’s competence is far less relevant, and the investor should walk away.”
The final FMA guidance also more explicitly corrals the wider funds management industry inside the fee fence compared to the KiwiSaver-focused first draft. KiwiSaver is governed under a specific ‘not unreasonable’ legislative fee standard while other licensed fund managers face similar restrictions through the Financial Markets Conduct Act.
Late in 2019 the regulator launched a KiwiSaver fee and ‘value for money’ enquiry, hiring Auckland consultancy firm MyFiduciary to conduct an analysis of active and passive management costs.
According to the FMA release, the MyFiduciary report and other evidence has found:
- where scale exists in the industry, its benefits are not typically passed on to investors
- no systematic relationship between fees charged and returns to investors
- no systematic relationship between fees charged and degree of active management; and,
- active managers typically do not outperform their market index, after fees, over meaningful periods i.e., their recommended minimum investment period in their periodic disclosure statement (PDS); and passive managers typically do not closely replicate the performance of their market index after fees.
Gregory, who joined the FMA last November after a stint at boutique firm Pie Funds, said the regulator incorporated industry views in its final guidance after digesting some 27 formal submissions.