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Fund managers are expected to annually review their fees and value for money with their supervisors and prove to the Financial Markets Authority (FMA) the review has happened, as a result of final guidance on fund manager fees and value for money, published today.
Each review will formally conclude the fund manager’s fees are not unreasonable and represent value for money for their investors or, if not, will prompt concrete remedial steps including increasing services, reducing fees or both.
Managers of KiwiSaver schemes and other managed funds have existing obligations, statutory duties, and conduct expectations about their fees and value for money. The guidance is intended to help fund managers demonstrate how they are meeting these obligations and expectations.
Licensed supervisors are the frontline regulators of managed funds and actively oversee managers’ performance of their functions and responsibilities. Supervisors must act in scheme members’ interests when overseeing managers and are themselves overseen by the FMA in this respect. So, the guidance helps supervisors review managers’ fees and value for money, by framing a list of questions supervisors can ask about fees and returns; and about advice and other services which should be included in a more complete evaluation of value for money.
The FMA has published the guidance given ongoing trends in the FMA’s and others’ research on the KiwiSaver market, which is also relevant to non-KiwiSaver managed funds:
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
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
Paul Gregory, FMA Director of Investment Management, 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 guidance is based on four key principles:
Risk and return are critical - the two key indicators of value for money for members are how well the manager’s process and capabilities appropriately minimise the investment risk the member experiences (i.e., through volatility and loss); and the member’s return after fees.
The financial value of investment management must be shared – a member has not obtained the financial value of investment management if it is not shared appropriately between the manager doing the work and the member paying the cost, providing the capital, and therefore taking the risk.
Advice and service is received, not just offered - a service or feature provided by a manager contributes to a member’s value for money if it demonstrably helps the member make better investment decisions (such as advice), or demonstrably benefits the member’s account (such as investment process reducing market risk, enhancing return or both).
Review yourself as you review others - when evaluating their fees and value for money to members, managers should use the same rigour they would apply to assessing the same of any underlying manager.
“There’s nothing in the guidance we’d not expect the boards and senior management of managed funds to be doing anyway. They are certainly asking these exact questions of their underlying managers,” Mr Gregory said.
The draft guidance was subject to consultation and received 27 submissions, mostly from the industry. “Some submitters told us FMA intervention on fees and value for money was not necessary and the market would punish poor value before the FMA did,” Mr Gregory said.
“But the long-term nature of most investing means New Zealanders can be punished for long periods, perhaps irretrievably, before the market ever gets around to doing something. That’s not helped by New Zealanders’ ongoing low engagement in their investments, especially KiwiSaver.
“Ultimately, of course it will be the market which punishes unreasonable fees and poor value. But the FMA can and should try to influence the industry’s approach to make it happen sooner. Guidance which introduces a stronger discipline of examination of fees and value for money is how to make that happen,” Mr Gregory said.
Note for editors
The guidance sets out how the range of tools the FMA can use if it determines a scheme’s fee is unreasonable, including:
stop orders, which can prevent a scheme from advertising and accepting new members,
direction orders, which can direct a manager to comply with the requirement to act in their members’ best interests
censures or action plans
altering, suspending or cancelling a licence
court action, which can impose a penalty or force a scheme to reduce fees and potentially refund members.
