I’ve read a lot of reports in my decades covering financial services, and the latest tome from the FMA on Value for Money is unique. Largely because of the way it is written.

Clearly the author(s) think they know more than fund managers – even though their experience as money managers is not disclosed.

To refute arguments with phrases like “this is nonsense” (used twice) isn’t a great way of winning an argument.

Likewise, the regulator telling the industry; “Objection to market indices not reflecting the impact of fees and tax fundamentally misunderstands the purpose of a market index.”

There is a sense, and this is backed up by managers, that the regulator has taken a view on various things and won’t be moved, even though it talks about feedback and consultation.

Many advisers should be worried

The FMA clearly does not like the fact that some (the minority) of managers pay trail commission to advisers and “other third parties”.

It claims commissions are a major cost and drag on returns, but it totally fails to quantify this allegation.

Oddly it makes some noise about supporting advice; “The FMA, supervisors and fund managers agree investors benefit from financial advice,” it says.

But doesn’t offer a suggestion of how this should be paid for.

Trail commission to independent financial advisers is just one distribution cost paid by managers. There are others to, including marketing and inhouse distribution networks.

If there are any thoughts, good-forbid, of regulating commissions then, maybe, it should extend to the salaries of staff, size of dividends to shareholders, and business margins.

The FMA says it “saw very few instances where the third party continued to provide advice or of members being made aware the fees they pay are inflated by the cost of commission.”
KiwiSaver is a pretty simple product. Not quite set and forget, but close to it,  unless a member’s circumstances change.

From what we hear managers who pay advisers also support them in providing on-going service and advice.

The point the FMA misses is if the initial advice given ensures a KiwiSasver member is in the correct fund for their risk profile then that is a substantial gain. We hear, all to often members are in the wrong funds.

The fee paid to advisers and the subsequent benefit to investors is ignored by the regulator

3. The FMA does not trust fund managers
The FMA circulated the report to fund managers sometime before its public release.

“Sharing the report prior was done substantially as a courtesy to industry, in recognition of all the other work and consultations underway at present.”

It was clear from fund managers spoken to that they were under no doubt that this report was provided on a confidential basis and not to be distributed.

However, at least one manager chose leak the report to a media outlet, which then published two stories before the public release.

The FMA are, understandably, ropable that certain individuals chose to take this action.

Particularly as it is the second time this happened.

When a leak was made of another report two years ago, then FMA chief executive Rob Everett wrote to chief executives of KiwiSaver managers to “express his disappointment that a firm, or some firms, could not be trusted to behave in an ethical and professional way.

It is understood the FMA does not plan to go in a witch hunt to find the leaker(s).

But whoever leaked it is an idiot.

There was nothing. Zero, zip, nada. Nothing to be gained from leaking the report other than to piss the regulator off and pull the whole funds management industry into disrepute.

Funds management is a business of trust. Unfortunately there are some people out there who don’t get it.

As for the future the FMA says it ”will consider how it engages with the sector based on its recent track record.”