KiwiSaver value for money not set and forget

Rajat Vats, founder of Nuvano, noted there was a wide range of fees being charged by KiwiSaver providers, from under 30 basis points at Simplicity and Kernel through to more than 1.3 percent at NZ Funds and AE KiwiSaver.

He said the average excess return compared to benchmark across funds with 10 years of data to report was -1.42 percent.

But on an absolute return basis, eight of the to 10 performers over 10 years were active managers, including OneAnswer,  QuayStreet and SuperLife funds.

“Most of the funds are actually not really even beating their benchmarks. But you have to then look at the further nuance … some fund managers would use indexes as their benchmark. Some fund managers would create their own composite benchmarks. And some don't really have benchmarks.

“Benchmarks don’t really take into perspective  tax and fees. So benchmarks are getting a head start in advance. it's really hard to beat the benchmark.’

He said the absolute return data showed that some active products had earned their fee over a full market cycle.

“The benchmark-relative data shows that most have not matched the public index on a gross-of-fees basis. A member in an active fund that both sits in the absolute-return top 10 and comes close to matching its benchmark net of its fee has a defensible placement. A member in a 1.20 percent fund that trails its benchmark by more than its fee does not.”

He said advisers should be encouraging clients to take a long-term view.  “People should be looking at that perspective instead of, oh, one year, the fund goes down… it was disclosed in advance that this is a longer duration fund, and there can be volatility, and don't panic.

“That’s the job of financial advisers to convey to the market, don't panic.”
He said wraps adder another layer of complexity.

“The wraps that deserve scrutiny are the ones that repackage a manager the member could already access directly, at a higher fee than the direct version.

“The question for an adviser is simple: is the wrap layer delivering something the member could not get by placing with the underlying manager directly? If the answer is ‘better reporting’ or ‘platform access,’ the 20-to-40 basis-point premium might be earned. If the answer is ‘none of the above,’ a direct placement is usually the cleaner choice.”

Adviser should think about the fee competitiveness of the funds they placed clients in, he said. They should also check what the impact of a wrap was.

“If an adviser is recommending Milford to one person directly the fee is going to be minimal… 1.05 percent if you go direct, if you go through the same fund though a wrap platform you’ll pay 1.25 percent. If you go to another fund, you’ll be paying 1.49 percent.
“A 1 percent fee difference can make up to $100,000 difference over 30 years…. The illusion that’s being sold there… is we diversify your KiwiSaver into multiple funds.

“But funds in themselves are diversified vehicles… in general they are very diversified. The narrative of wrap platforms is we will diversify your KiwiSaver across multiple managers…[but] then you are paying extra fees, you are double charging, double dipping, as well as you're paying wrap platform fees, which is more harmful than a perceived risk of single manager, these managers are government vetted and FMA regulated.

“Wrap detection is the fastest-growing blind spot. If you are placing a client in a wrapped version of a manager you could access directly, the wrap premium should be visible in the rationale. “

Structural changes in the market should also be part of annual reviews,  he said. “A workable annual review anchors on five questions for every placement: Is the fee still competitive within the category? Has the benchmark-relative excess return - accounting for the fee - held up? Has the underlying manager or structure changed? Does the asset allocation still match the client’s documented risk profile? And if the placement sits inside a wrap, does the wrap still earn its premium? If any answer is ‘no’ or ‘I do not know,’ that is where the adviser’s work for the year is.”

He said advisers would focus on their suitability analysis but the scoping of their advice would also be important.

“Sometimes a person just wants what fund I should go to, right?  And everything is going fine in my life.

“I just saw a 25-year-old… they may not need the whole holistic advice, they just want to know which fund is right.

“And based on risk assessment, and timeline, normally, it typically would be assisted growth. Because the KiwiSaver is not a brokerage account, it’s a retirement vehicle or for a first home.

“The scoping should match what sort of advice and your scope of disclosure statements of scope of engagement should define that as well.

“Advisers sometimes default to holistic advice, because it feels safer. So the default is, they're just going to be like six step advice process, because that feels safer. But it’s not really necessary all the time.”