Final guidance on managed fund fees

On Wednesday 14 April, the Financial Markets Authority (FMA) released its final guidance on managed fund fees. The guidance, entitled 'Managed fund fees and value for money', is designed to help fund managers and supervisors demonstrate how they are meeting existing obligations, statutory duties, and conduct expectations in respect of fees and value for money. Although primarily targeted at the supervisors and managers of KiwiSaver schemes, the guidance, especially its focus on acting in members' best interests from a value for money perspective, will be relevant to all other managed schemes.  

The release of the FMA's final guidance follows the circulation of draft guidance in November 2020. However, unlike its draft proposals, the FMA has opted for a principles-based approach in the final iteration. The proposal in the draft guidance to require KiwiSaver provides to charge members individually for advice fees rather than spread the cost equally across the scheme is also omitted from the final guidance.

The FMA has specified four key principles by which managers and supervisors are to regularly review their fees settings. The key principles are: 

1. Risk and return are critical;
2. The financial value of investment management must be shared;
3. Advice and service is received, not just offered; and
4. Review yourself as you review others. 

The FMA expects that such reviews will be conducted 'regularly'. This means:

• at least one formal review, where the manager and supervisor consider whether the scheme is providing value for money and is not charging unreasonable fees, annually; and 
• a review any time the manager updates their Statement of Investment Policies and Objectives (SIPO) or other governing documents because of a change that materially affects cost. 

In terms of enforcement, the guidance lists a number of steps that the FMA may take to review and monitor the fees and value for money of a registered scheme. This includes stop orders, direction orders, censures and, in cases of serious contravention, court action. A failure to comply with a direction or stop order, for example, is an offence and can result in conviction and a maximum fine of $300,000.

A potential industry concern raised by the guidance may be that the FMA's emphasis on 'value for money' prompts a race to the bottom for fees at the expense of active, innovative funds management and market diversity. However, perhaps anticipating this criticism, the FMA has stated that its guidance 'does not equate good value with cheapness… and recognises that competent investment management is valuable and managers profiting from it is not inconsistent with acting in members' best interests'. The FMA's decision to adopt a more principles-based approach to fees in its final guidance is consistent with this commentary.

In terms of fees for advice, the FMA made its preference for unbundling clear, stating that it wanted 'to avoid a situation where fees for advice are embedded within broader fees paid by all members, are not transparent to members, and result in schemes competing to make offers to advisers to "buy" members from them.' Although the guidance does not prohibit or prescribe any fee structure or the size or type of fees, it is the FMA's expectation 'that schemes not already charging members directly for advice will move to do so as balances increase, the value of advice is established, and the [KiwiSaver] industry as a whole matures.'

Overall, members' best interests, especially in terms of value for money, will be the guiding touchstone for managers and supervisors going forward. This will not only be the case for KiwiSaver schemes but all managed schemes whose managers and supervisors are subject to the overriding statutory duty to act in scheme participants' best interests under the Financial Markets Conduct Act 2013.

For more information on managed fund fees and value for money, the final report can be found here. The guidance can also be read alongside the related KiwiSaver performance fees guidance.

We look forward to discussing the implications of the guidance further with you.