Concerns over fund managers’ work, fees

Fees and commission costs are reducing the benefits of fund managers to investors, the financial markets watchdog says.

The Financial Markets Authority (FMA) has just published the outcomes of a pilot study, testing whether fund managers, such as those in charge of KiwiSaver funds, are providing value for money.

The FMA said the performance of funds shows there is skill present among some, not all, fund managers.

Fund managers using both active and passive strategies performed ‘‘competently’’ relative to market indexes and comparable funds, it said.

‘‘However, the impact of fees caused the benefit of this competence to investors to disappear for most funds.’’

The study involved 14 selected fund managers, plus some volunteers.

It also found fund managers commonly paid ‘‘substantial’’ commission to third parties for introducing new members to their funds, only some of which were financial advisers helping investors make good investment decisions.

‘‘This has a significant, ongoing impact on fund costs, the fees paid by investors and, ultimately, on fund performance, which is the most important aspect of value for money to investors.’’

Value for money was also being undermined by some fund managers not using an appropriate market index as a reference point for the performance of their funds and to benchmark performance fees.

The FMA said it was pursuing specific matters with individual fund managers, and would engage with industry on the market index and third party commission issues.

Third parties include financial advisers and banks without KiwiSaver schemes.

The FMA in April set out its expectations that fund managers review their value for money at least annually. The first review is to be completed by mid-2023.