The Financial Markets Authority (FMA) is likely to tighten up rules around embedded advice fees and use of cash-based performance indices in the wake of its recent ‘value-for-money’ pilot program.
According to industry sources, the FMA has earmarked both in-built investment product advice fees (or commissions) and fund reference benchmarks linked to the cash-rate as ‘areas for improvement’ in the wake of its value-for-money test project.
While the regulator green-lit the use of embedded commissions (that apply to all fund or KiwiSaver investors regardless of whether advice is given) in its ‘Managed fund fees and value for money’ guidance last April, it is understood the FMA is seeking tougher compliance procedures following the test run.
In particular, the regulator appears primed to push for better disclosure of such embedded trail commissions (especially common in KiwiSaver schemes) by managers as well as requiring providers to ensure underlying members actually receive advice for fees,
Despite allowing in-built fund commissions, the FMA clearly signaled a preference for providers to offer targeted advice fees – charged directly to members receiving advice rather than all scheme investors. The regulator is also looking to discourage licensed managers (especially KiwiSaver schemes) from using trail commissions to ‘buy’ investors.
Furthermore, fund managers relying on cash-plus performance benchmarks rather market-linked indices may came under pressure to drop the practice under the refined FMA value-for-money guidance, sources suggest.
The regulator ran a pilot study with 14 fund managers (in association with underlying supervisors) to establish pragmatic ways to implement proposed value-for-money practices across the industry.
According to the 2021 guidance, the FMA expects all licensed fund managers to review their current fees against the value-for-money guidelines at least annually.
Through the pilot project, the regulator is expected to release a value-for-money review tool. The first annual manager reviews using the new tool should be due for completion by the end of next May.
It is understood that managers with complex fee structures – including performance-based or trail commissions – will face tougher value-for-money review hurdles.
Paul Gregory, FMA investment management director, said in April last year: “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.”