Really?
For a start most new KiwiSaver members join via the banks and any employee of the BNZ who started telling new clients who rolled into his or her office to join the ANZ KiwiSaver because it had lower costs would probably be looking for a new job very quickly.
We can thus conclude that banks selling their own KiwiSaver scheme generally don't offer independent advice. Financial advisers who are not employed by banks who can be bothered with KiwiSaver are potentially compromised too because most recommend KiwiSaver products which pay commission.
The banks have been able to get away with not providing independent advice in respect of KiwiSaver because they got dealt a "get out of jail free card" by the bright sparks who devised the "new" environment for the delivery of retail financial services.
Advisers are typically remunerated by the KiwiSaver manager in two ways - an upfront fee and a trail fee. The upfront fees in the funds we looked at ranged from $40.00 to $300.00 per new client. Trail commissions were more common and potentially more lucrative. They ranged from 0.15 per cent to 0.25 per cent of the client's balance. To put the 25 basis point fee into perspective consider that a low cost Vanguard S&P 500 exchange traded fund charges just 5 basis points.
The banks have been able to get away with not providing independent advice in respect of KiwiSaver because they got dealt a "get out of jail free card" by the bright sparks who devised the "new" environment for the delivery of retail financial services.
These people, who probably now work for banks, dreamed up the idea of qualifying financial entities (QFEs). QFEs aren't subject to many of the same standards AFAs working for non QFE's are including, it seems, picking the best products from the total universe of products in respect of KiwiSaver.
This raises another issue with KiwiSaver and that is that most investors with a KiwiSaver account have all their funds with the same manager. This is absolutely at variance with best practice - most pension funds spread their money over a number of managers and the structure is also different to the US version of KiwiSaver, popularly known as the 401(k) plan, where investors spread their money over a large number of fund managers. This mistake in the structure of KiwiSaver could cause problems down the track.
The issues highlighted above are important for two reasons; credibility and results. First up credibility - one of the prime objectives of the Governments point man in matters financial, the Financial Markets Authority, is to foster confidence in the financial markets however having government ministers and government websites saying things which are obviously wrong looks like a huge step in the opposite direction.
Now let's look at results. Power said that "I am confident that transparency will ensure Mum and Dad can make informed decisions". Wrong again. Academic research shows that transparency doesn't in any way shape or form guarantee sensible behaviour from investors. Furthermore and more importantly KiwiSaver fees are hardly transparent.
For example some KiwiSaver schemes pay commission but don't readily disclose the fact. Those that do state that "we may pay your advisor a portion of our management fee. These payments are not an additional cost to members."
Really?
If these commissions are not an additional cost to members then one would conclude that it is the KiwiSaver provider who is paying the commission. This is partly correct but as the following analysis shows it seems that those schemes which pay commission charge higher annual fees and it is these fees that fund the commission payment.
A number of major fund managers run default KiwiSaver schemes with relatively low fees. These default schemes generally don't pay commission but the same firms manage other schemes which do pay commission and perhaps not so coincidentally these have much higher annual fees.
The average annual management fee, including the membership fee, across all the growth oriented KiwiSaver schemes, according to the Sorted website, is 1.64 per cent pa. The weighted average fee on the same basis of the default schemes was even lower at an estimated 1.49 per cent. We then looked at 12 KiwiSaver growth funds which do pay commission and the average fee on the same basis was 1.79 per cent.
The reality appears therefore that commission payments are an additional cost to members. Again this sort of financial sleight of hand does nothing to engender confidence in our industry and it is all the more important because so many people are into KiwiSaver.
Now let's put that 1.79 per cent fee into context. If shares can be expected to return 10 per cent then maybe losing 1.79 per cent in fees isn't the end of the world but unfortunately global equities are, according to most experts, priced to return just 6 per cent pa. Therefore a fee of 1.79 per cent means that 30 per cent of returns are being lost to fees.
This understates things somewhat because some studies reckon trading costs ie the cost to buy and sell stock within the KiwiSaver portfolio can be as high as .5 per cent pa and these costs are excluded from the 1.79 per cent.
The FMA's prime objective is to promote fairness in financial markets. Is it fair that Mum and Dad take all the risks and are left with less than 4 per cent and the fund management industry has no risk and receives more than 2 per cent?
It is thus a little unfortunate that neither the Retirement Commissioner nor the FMA looked more closely at the statement made by so many KiwiSaver providers that "these payments are not an additional cost to members".
Brent Sheather is an Authorised Financial Adviser. A disclosure statement is available upon request. Brent Sheather may have a financial interest in the companies mentioned in this article.
