Are KiwiSaver members being ripped off?

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.”