KiwiSaver

Smartshares is launching a new KiwiSaver structure today that allows advisers to set the fee their clients pay for their advice.

Head of funds management Hugh Stevens said there was a lot of discussion in the market about how KiwiSaver advice could be provided to those who wanted it.

He said the old structure of trail commissions and other fees built into the overall amount investors paid made the fund charges more expensive and not well targeted.

“Everyone pays whether they are receiving advice or not. The control is not with the member but with the manager. The adviser and member don’t have much say in how that’s structured.”

He said Smartshares wanted to make its low-cost KiwiSaver scheme available to independent advisers and their clients.

Advisers can access a range of model portfolios or customise their own KiwiSaver solution for their clients, using Superlife’s more than 40 investment options.

The adviser would then agree with their client what was a suitable fee. Smartshares would then deduct the fee from the member’s account and pay it at the end of each month.

“We sign an agreement with each adviser. They agree to undertake ongoing monitoring of the account and provide an opportunity for an annual review of the investment strategy. In return we do all the fee collection.”

Advisers agree to contact their clients at least once a year.

The fee could be set at anything up to 50 basis points or $500 but Stevens said his organisation was willing to work with the Financial Markets Authority and the industry to determine what was reasonable.

There was strong interest in the idea, Stevens said. Although the product officially launched on Tuesday there were already three agreements ready to go by the end of last week.

He said it would be difficult to justify charging for KiwiSaver advice if advisers were only guiding members into a conservative, balanced or growth option, but Smartshares allowed advisers to take a more granular view of members’ needs and piece together the best KiwiSaver solution.

Members could also opt to receive no advice and pay no advice fee.

KiwiSaver investors will soon see the fees they pay displayed in dollar terms – but advisers are not convinced it will have any effect.

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.”

New Zealanders’ KiwiSaver savings would do more for the country if they were used in private equity deals, fund managers say.

Finance Minister Grant Robertson, speaking at Russell Investments’ annual conference, said New Zealand needed to do better at keeping KiwiSaver  money in New Zealand.

He said central and local government could help by packaging up projects such as infrastructure development so fund managers could get the yield they need. Work was under way in that area, he said.

John Berry, of Pathfinder Asset Management, said he would not support moves to push fund managers to invest their money in any particular location.

“That’s the fund manager’s call – they’re acting in the best interests of their clients. They need to assess the risk and return relative to that. You can’t just politically mandate a certain percentage to be held in New Zealand.”

But he said there was merit to the idea of more private equity investment.

“The money that is invested in New Zealand should be accessible to small-to-medium businesses and high-growth companies.”

Some KiwiSaver managers are already doing this – Booster and Milford are two. Booster last year took stakes in two wineries through its Booster Tahi fund.

It was a way to help members’ returns and support New Zealand business, chief investment officer David Beattie said.  About 5% of Booster’s KiwiSaver funds on average would go to direct investments but that would increase over time.

“We think KiwiSaver does lend itself to being able to support unlisted businesses in New Zealand.”

KiwiSaver was a long-term investment vehicle so Booster could use that certainty to allocate funds to less-liquid direct investments with a reasonable degree of confidence.

But he said it would not be able to put a lot in to private deals because the scheme allowed members to change at will and there was the requirement for daily unit pricing.

“The concept is one that is a natural benefit that KiwiSaver money should be able to be used to support New Zealand.”

It was a more expensive approach, too.

Beattie said there was a lot of talk about the growing size of KiwiSaver putting pressure on fees but he said instead of automatically defaulting to the need for those fees to drop, the market could consider what more could be done.

The newest player in the KiwiSaver market is due to launch its offering in two weeks’ time.

Nikko Asset Management will enter the market with an offering using eight of its funds.

While it may seem late in the piece to be joining KiwiSaver, managing director George Carter says a window of opportunity has been opened now that roboadvice can be used. The FMA is currently accepting exemptions from providers who want to make use of its exemption to allow roboadvice, before the introduction of the Financial Services Legislation Amendment Bill makes it legal.

“We want to be in the first wave,” he says.

Nikko plans to have its robo tools available for KiwiSaver members in July.

Members will be able to use digital advice tools to select funds and portfolios and to work out how much they need to save to reach their savings targets.

Carter says this rounds out Nikko’s offering and is complimentary to its financial advice distribution strategy. He says it won’t “cannabalise or compete with advisers”.

Nikko can’t give advice if a member asks. “It will help advisers to sell what their edge is.”

The third leg of Nikko’s distribution is with institutional investors.

As part of its launch Nikko is planning to waive management fees on its funds until March 2019.

However there will be a $30 annual membership fee.

Nikko is offering four balanced funds, plus four sector funds: NZ Core Equities, Enhanced Cash, Global Shares and its Options fund.

Fellow provider, Booster, which is a default provider, has been offering the Options fund to its members, but earlier this month withdrew it from its platform.

It is likely to be a competitive strategy to prevent the loss of members to Nikko.

Carter admits Nikko is not a well-known brand in the market. However, he believes its digital strategy, fee offer and strong fund performance will make a compelling proposition for potential KiwiSaver members.

He expects members will come from other providers as well as people who are not yet KiwiSaver members.

Carter says Nikko has strong support from its parent company to back its entry to the KiwiSaver market.