We hear a lot in media sources about high fees for KiwiSaver. We also hear how people are not getting enough advice about financial products like KiwiSaver. Who is correct?

Key Points:

• What do your pay for?
• What the Regulators (and industry) wants
• Who decides?

What do your pay for?

What are the fees, what do you get and where is the value?

There are commentators who advise we should always go for the lowest fees when selecting our KiwiSaver provider. There is sense in this because fees, compounded over time, will take a slice out of your end balance. The greater the fees, the greater the slice.

However, things are not always as simple as that. Not all providers are the same. How they invest, whether they are passive or active investors, how diverse their investments are and what percentage of the total portfolio is allocated to each particular asset class or which geographic markets they are in… there can be quite a list of differences. All of which effect your end balance. I have written about the passive vs active debate before, so will not revisit that here.

There was a report recently by MyFiduciary on behalf of the FMA (August 2020). One of most interesting things for me were the key findings saying that just because a fund claims to be ‘active’ and charge high fees accordingly, it may not be much more active than a standard passive fund.

So what are you paying for? The theory goes that you pay higher fees for active fund management.  Not just to ‘buy low and sell high’ in timing and speculation, but to take long-term positions on trends across diverse markets. These active managers also take positions that can mitigate the downside risks, from events such as what we’ve seen this year.

If you are paying for an active fund, yet that fund is basically passive, then yes, that is cause to be upset.

But what if you don’t know the difference between passive investing across index funds and active funds management? What if my previous couple of paragraphs are all gibberish to you? That’s fine, but in that case how do you go about getting advice? How do you discuss those differences to see if you want to invest this way or that?

And that’s the rub.

If you want to know more about your KiwiSaver, who do you call? When was the last time your KiwiSaver provider called you, or sat you down to have a good conversation with you about your investment (in some cases, possibly the biggest investment in your life)?

What the Regulators (and industry) wants

Our financial services industry is going through another massive regulatory change. Two reasons for this (not the only two) are a) the knock-on effects from the Australian finance sector debacle a few years ago, and b) a desire from the regulators that clients have a better understanding of the financial products they are buying.

Just today, I read another article lamenting the low financial literacy in New Zealand. Many of us in the industry know that we must do better. To educate and guide our clients. My observation of many advisers suggest that this is part of good behaviour and is done be many anyway. Yet how does this effect KiwiSaver clients?

We know from an FMA report a few years back that only 3 in 1000 KiwiSaver clients were being ‘serviced’ or called and engaged with regularly. So how do clients learn more about their investments when they have such low and infrequent contact with their providers?

One solution to this is to use financial advisers like myself. We tend to have far more regular engagement with our clients. Many of us will provide other services (such as life insurance), and so have a deeper connection than a bank might with their typical KiwiSaver client.

However, there is a cost to service these clients. Banks and large providers factor their own costs and work on volume. The more clients they have the lower the fees, yet also, typically, the lower their engagement with clients.

The FMA, the regulators, the media commentators and industry want consumers to be more informed and have more understanding about the products they engage in. Great. Who is going to pay for that?

All these regulatory changes are supposed to help the consumer, and this is a good thing. Yet… who pays for that advice? Everyone wants to have more engagement and face time with clients, yet many people also want low fees.

To be blunt, you get what you pay for.

Who Decides?

The clients decide, by where they go, how much engagement and professional advice they want. If they don’t want advice about their KiwiSaver fund, if it still meets their needs, if their circumstances haven’t changed, then sure, a low-cost service is fine. But don’t then complain that this person is not getting enough client love.

If you want people to get advice, someone needs to pay for it. If you don’t want providers charging high fees, fine – but don’t then expect consumers to have a load of regular contact with their provider.

There are providers who charge high fees, who upon closer inspection, are not as active as they purport. But we also have a huge amount of market choice for consumers. What is needed is greater education around all factors within that market choice, not just discussions about “passive investing” or “low fees”.

DISCLOSURE – Bolster Risk Management provide Class Advice on NZ FUNDS & BOOSTER KiwiSaver.