MyFiduciary report on KiwiSaver active/passive management

The FMA has published a report commissioned from MyFiduciary into active and passive investment management styles used by KiwiSaver scheme providers, and their relationship with fees.  The report uses a range of metrics to test the activeness of KiwiSaver offerings and compares this against the provider's professed style and the level of fees charged.

Key findings

The report finds KiwiSaver providers are, on the whole, true to label in terms of style, in terms of the activeness promised - mainly passive, mixed or mainly active.  Most providers claiming a passive approach were found to have a level of low level of activeness.  However, a minority of providers claiming an activeapproach were found to be not materially more active than their passive counterparts.

The real focus of the paper, however, is on fees.  Contrary to the expectation that passive strategies should be cheaper, the key finding is that there is no significant relationship between the level of active management employed and the fees charged.  In addition, the report notes that KiwiSaver fees have not declined as expected despite reducing investment management costs globally, and the economies of scale as KiwiSaver has grown.  It suggests periodically benchmarking default provider costs against their fees to ensure they are earning a fair but not excessive rate of return.

The report also sounds a note of caution in relation to SIPOs - observing that some providers are possibly being equivocal in describing their investment style to ensure that they are compliant.

The FMA response

In its response to the report, the FMA has said it plans three actions:

1. To follow up through its supervision and monitoring, specifically engaging with those providers where fees were high and the level of assessed activeness was low.
2. To issue guidance on KiwiSaver fees, including on the statutory requirement that KiwiSaver fees not be unreasonable and FMA's expectations for this to be assessed on an ongoing basis (with the threat of enforcement action if that expectation is not met).
3. To require active and passive investment management styles to be more fully disclosed in product disclosure statements, in addition to existing disclosures in other documentation. This may be covered in the planned guidance on fees.

Our view

The focus on fees comes as no surprise.  The FMA has taken the lead of the UK's Financial Conduct Authority (FCA) in making 'value for money' a key theme of its regulatory work in the asset management sector.  The MyFiduciary research, and its core message about fees, were foreshadowed in the FMA's 2018 and 2019 KiwiSaver annual reports.  It also echoes international regulatory scrutiny on active strategies being 'true to label'.

Further fee regulation is here, more may come.  Late last year, new FCA rules took effect in the UK requiring authorised fund managers to have independent representation on their boards and to publish annual 'assessments of value' for investors.  The FMA does not have the same direct rule making authority as the FCA but it is using its 'softer' tools such as this research, guidance and statements of expectations to put pressure on the industry to reduce (or explain) fees. 

The report is subject to limitations and intervention comes with risks.  MyFiduciary's report is subject to a number of limitations.  For example, its analysis does not factor in the costs associated with financial advice or implementing Socially Responsible Investment (SRI) mandates. Regulatory intervention that is overfocused on lowering headline fees, without taking these factors into account, comes with the 'race to the bottom' risk of providers stripping out important parts of their offering to meet fee expectations.

While it and the FMA response will be of concern to some managers at the passive end of the spectrum who may be either charging higher fees or purporting to have a more active style, there is a glimmer of hope for active managers. The premise of the report acknowledges active management may justify higher fees.

For providers, the findings in the report are an opportunity to review both investment style and the manner in which it is disclosed to investors, and fees charged. The FMA has indicated that it will be looking at this issue in more depth with providers in the future.