KiwiSaver

Are KiwiSaver fees too high – or to fund managers deserve to be rewarded for offering something a bit extra?

The fees charged by fund managers, particularly in the KiwiSaver scheme, have been in the spotlight since ANZ released its whitepaper and survey to mark 10 years of the scheme.

In it, it said that there was a growing focus on fees, particularly among younger investors, and that could come at the expense of returns.

But that was criticised – AUT researcher Ayesha Scott said, over the long term, most managed funds performed in broadly the same way and the key differentiator for investors’ outcomes was the fees charged.

Adviser Brent Sheather said KiwiSaver schemes charged two or three times the average fee levied by US 401K schemes.

He said the Financial Markets Authority had been too reluctant to draw a line in the sand publicly for what it thinks a reasonable fee should be.

Switching from a KiwiSaver provider that charged 1.4% a year in fees to one that charged 0.4% would have the same effect as increasing contributions from 3% to 4%, he said.

Management fees can range up to about 1.3% a year and providers charge other fees on top of that, such as administration costs, which can add another $30 or $50.

“What we should be looking at is the extent to which the manager is reducing the extra return we get from shares over and above the return we could get in bonds as this captures the impact of fees on both return and risk. Mum and dad invest in shares on the basis that shares outperform bonds.”

Clayton Coplestone, of Heathcote Investment Partners, said fees were a red herring.

“In life, I find you get what you pay for. It’s not the fees that are the concern but what you’re getting for the fees.”

He said anyone who charged a fee, whether that was a fund manager or an adviser, needed to be clear about how they added value.

“If you’re going to do a cookie-cutter portfolio and not a lot of thought or IP has gone into that, the opportunity to put your hand out for a significant fee is zero to none… But if it’s something a bit unique or over and above, they deserve to be paid for that.”
Murray Harris, of Milford, agreed with ANZ that there had been more focus on fees.

“Without the right context or education for the end investor the focus on fees alone is dangerous. As the saying goes – cost is only an issue in the absence of value. If the client is getting value for the fees they are paying then there is no issue. That is true of anything they purchase,” he said.

“There is plenty of data from the likes of Mercer, Aon and MJW that shows NZ managers have added value after fees versus a passive approach. The issue with even a low-cost passive approach is you are always guaranteed to underperform the relevant benchmark because passive will deliver the benchmark return less the fees.“

Chris Douglas, of Morningstar, said he did not think there was too much focus on fees.

“We have seen fees come down from providers like ANZ over the past few years, and I would like to think the focus on fees has been one reason for that.

“For me the most important factor is ensuring you are in the right KiwiSaver scheme to meet your long-term objectives. That will have a big impact on your future returns.”

 

Fund managers have a tough job claming that their returns justify higher fees, researchers say.

Members of AUT’s Auckland Centre for Financial Research took issue with comments from ANZ in relation to its recent white paper and survey.

It said that young people in particular were putting too much of a focus on fees, sometimes to the detriment of returns.

“Choosing a fund solely on fees means members may miss out on greater returns and a larger balance in the long term,” ANZ said.

But Ayesha Scott, a finance lecturer at AUT, said that was potentially misleading.

She said the long-term performance of most managed funds within the same risk category tended to be “roughly the same”.  “They all perform in a very similar way.”

That made fees more important, she said. “Think of it as fixed cost versus variable return.. in almost all cases you’re better off long-term choosing a lower fee structure.”

She said fees would vary according to the providers’ fee structures. An online provider would have lower costs than a large-scale one with offices across the country.

“Whether you’re getting much in terms of return for fees is debatable. Some offer more in the way of service.”

It comes as new research released at the Financial Services Council’s conference shows support for increasing KiwiSaver contributions.

Almost 70% of those surveyed supported increasing employer and employee contributions from 3% to 4% by 2021.

“After ten years of KiwiSaver we are maturing in our understanding and appreciation of the scheme. Given the universal support this research shows we now need to have a constructive policy debate on contribution levels and how we can increase them in a sustainable manner,” said Richard Klipin, chief executive of the Financial Services Council.

“With support for strengthening KiwiSaver so high there is a clear challenge for our political leaders two weeks out from the election to show their roadmap for backing what voters want and growing KiwiSaver.

“It is important that these findings are given serious consideration at policy level.”

He said there was widespread support for KiwiSaver members being able to choose automatic increases in contribution rates, and to have extra choices in what they contributed. Most also wanted people over 65 to be able to join.

When is a ‘balanced’ fund not a balanced fund? When it takes the risk of a growth fund, one researcher says.

AUT professor of finance Bart Frijns wrote a research paper in which he said the way KiwiSaver funds’ risk levels were described could be misleading.

“When you look at the risk profile of a ‘balanced’ fund, there was a very large dispersion in the risk profile that those funds have. Some balanced funds turned out to be more risky than growth funds,” he said.

“This different level of risk exposure by funds indicates that in the long-run investors in such funds could end up with significant differences in the values of their final portfolio endowment.”

He said it required more transparency from KiwiSaver providers.

When a fund said it was a particular style of investment, investors needed to be able to look at the risk profile and see how it could be expected to perform. 

“Some detailed classification or risk scale would be really helpful for people. There are very easy ways to measure these things. But it’s something a normal investor doesn’t readily understand. Some standards need to be set.”

Providers are now required to use risk indicators in their reporting to clients but these have been criticised because they are based on volatility experienced over the previous five years.

Tim Murphy, Morningstar director of manager research, said his firm categorised funds according to their asset allocation, not what they were called.

But he said it was not common for funds to end up in a different category.

Nikko, ANZ, Booster and OneAnswer all have balanced or balanced growth funds that end up in Morningstar’s growth category.

Booster, Generate, Fisher Funds, Kiwi Wealth and Mercer all have growth funds that Morningstar categorises as aggressive.

“It’s a bigger issue in Australia,” Murphy said.

He said Morningstar would consider a growth fund one that had between 60% and 80% growth assets. But over time a 60% growth fund would be expected to have a different outcome to an 80% one.

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was a function of New Zealand having a smaller investment market.

“There is a challenge around making sure everyone is true to label. Part of that is because of the number of funds in the market.”

It should be expected that would change over time, he said. “It’s worth noting and being aware of.”

Richard James, chief executive of NZ Funds, said he did not see an issue. “The rules around fund names and descriptors and the risk indicators are pretty robust.”

Advice is important to make sure New Zealanders get the most out of KiwiSaver, the country’s biggest provider says – but it suggests much of it should be supplied free.

ANZ has released a survey and whitepaper to mark the 10th anniversary of the retirement savings scheme.

It called for the scheme to be made compulsory, for providers to be required to offer free savings advice to members and help for those in the decumulation phase.

It said the need for advice was apparent in the results of a survey of 1000 people,  which showed most had not even worked out how much they were likely to have saved by 65. More than 20% said that was because it was too difficult to do so.

The survey found 28% of respondents said it was best for KiwiSaver funds to be made available as a lump sum at 65. Another 19% thought it was best in installments. More than 40% said a combination would be best.

Almost 30% said they wanted their KiwiSaver provider to give them a set of regular withdrawal options to choose from at retirement, but 62% wanted access to free professional advice.

ANZ said roboadvice would play a bigger part in future advice for KiwiSaver members.

A third of respondents would prefer to get retirement savings advice from a person and 31% said they would use a sophisticated online calculator, either alone or with someone helping them. Just under 20% said they would prefer just online tools and 16% wanted a DIY approach.

Members with little knowledge about KiwiSaver were more likely to want advice from a person, at 47%.

ANZ said the government should also provide some guidance around assumptions and parameters regarding roboadvice to make sure there was consistency in the provision of mass-scale advice.

“At ANZ, we offer free financial advice to ensure members can continue to benefit from exposure to markets, with the right risk profile for their retirement circumstances,” ANZ said.

“We also promote use of the regular withdrawal option to discourage people from impulse buys or reallocating their money to misguided investments. While this is a good first step, there’s still plenty more the government and financial services industry can do to help educate New Zealand’s ageing population on how best to decumulate to achieve a comfortable retirement lifestyle.”

ANZ recommended that KiwiSaver providers be required to check in with members a year after they withdrew money for a first home and encourage them to seek advice. 

It said providers should also encourage female members to get personalised advice.

“The government and financial services industry should work together to enhance the financial capability of New Zealanders receiving NZ Super. This could be in the form of a comprehensive information pack that accompanies SuperGold cards, with directories on where to access financial advice, and a range of investment and decumulation options available to them.”