With the change in Government we are starting to see some genuine initiatives to address the excessive fees and charges the local finance sector extracts from retail investors.
First cab off the rank is the proposal to offer a low cost, government-run KiwiSaver scheme.
First, let's look at why this initiative is vital to help deliver improved outcomes for people saving for retirement.
The biggest reason is that the fees charged on most KiwiSaver funds are simply too high.
This is not surprising because the market is pretty much a monopoly and with the employer and government subsidy, fund managers know they can charge just about anything and KiwiSaver will still be a better investment option for most New Zealanders, apart from the self-employed.
As happens overseas, fund managers effectively take some of those subsidies for themselves via high fees. There is ample evidence KiwiSaver fees are too high, including:
Lack of competition
The average fee of a growth-orientated KiwiSaver fund at around 2 per cent a year including transaction costs is more than 20 times the average fee paid by institutional investors like the NZ Super Fund and more than four times the average fee prevailing in a more competitive savings market like that of the 401(k) in the US.
The Super Fund is paying under 10 basis points a year for the bulk of its equity exposure and the average 401(k) fee for equities in 2015 was 53 basis points and it has fallen significantly since. In a recent comment on KiwiSaver, two academics from AUT said "annual fees on KiwiSaver are far above international standards and not justifiable".
Returns too low
Paul Marsh of the London Business School said recently, "If returns are relatively low and you are charging 1-1.5 per cent on a fund you are probably gobbling up half of the expected returns. I don't think this is sustainable."
This is important because many people will not have enough saved for their retirement but there are two ways of improving savings outcomes — saving more or earning more.
The first option isn't available to many Kiwis but earning more is and as the chief executive of the California State Teachers Retirement Fund said recently "the best way to get better returns is to reduce costs".
Our computer model shows that for an individual starting with KiwiSaver using a balanced portfolio reducing the annual fees you are paying by 1 per cent will increase your terminal sum by roughly the same amount as if you increased your savings from 3 per cent of your salary to 4 per cent.
Odd man out
Last, fees in the managed fund space are declining around the world, except for KiwiSaver.
A Treasury report shows fees on KiwiSaver funds, despite huge growth in funds under management, have virtually flatlined since 2012.
Contrast this with the fees paid by the NZ Super Fund to fund managers which have fallen from 0.75 per cent in 2007 to just 0.12 per cent in 2017.
That high fees are inflicted on KiwiSavers is not surprising because, as a huge body of research shows, retail investors in general are unable to differentiate between complex products based on fees.
This is probably because their advisers tell them this isn't an issue as they can only sell them their bank's products.
Similarly, of the few independent advisers who actively advise on KiwiSaver, the vast majority only recommend one provider's products because it pays them trailing fees and those products have generally even higher fees than those of the banks.
The Financial Services Council, whose members include providers such as ANZ, BNZ and Westpac, predictably gave the thumbs down to a government-owned KiwiSaver product.
A spokesman said it was not clear what problems a government-run scheme was trying to solve as "KiwiSaver providers operate in a competitive marketplace, and are well-regulated".
That defies reality. The KiwiSaver market is neither competitive nor well regulated. In fact, by virtue of vertical integration, the KiwiSaver market is something of a monopoly dominated by the major banks.
The three largest providers, all of which are Australian banks, represent around 60 per cent of the KiwiSaver market.
Other evidence of the lack of competition includes the fact that the fee structure of the KiwiSaver offerings for a balanced portfolio from four of the largest banks is in a very tight range of 1.04 per cent to 1.17 per cent.
Hardly indicative of a competitive market and in fact suggestive of just the opposite.
That is "the problem a government-run scheme is trying to solve". AUT agrees and recently said "the KiwiSaver fund industry enjoys a near monopoly situation, with no exposure to international competition".
Monopolies need to be well regulated and the KiwiSaver monopoly needs a fee cap in each sector. That's another necessary change in legislation.
As regards KiwiSaver being well regulated, unfortunately that ain't right either.
The regulation permits vertically integrated providers to masquerade as advisers and just sell their own high-cost KiwiSaver products while at the same time "putting clients' interests first". Consequently most prospective KiwiSavers don't get independent advice.
Furthermore, the poor regulation around KiwiSaver permits fund managers to omit transaction costs and commission charges from the fee disclosure, thereby materially understating the cost of investment.
So it is pretty clear a government-owned, low-cost KiwiSaver fund is well overdue and it should be a default option for new KiwiSavers.
But the KiwiSaver horse has pretty much bolted already because most of the population who were going to invest are already with high-cost providers.
The real benefits of the new fund would be realised if many existing KiwiSavers switched.
As we noted earlier the poor regulation of KiwiSaver and the retail advisory area generally means that is highly unlikely to happen.
For example if an individual reads about the new government scheme and goes to their adviser they are most likely to be told they should not shift.
Any bank employee who said otherwise would risk losing their job therefore for the new KiwiSaver scheme to get some traction more changes are needed in the retail advisory legislation space.
- Brent Sheather is an Authorised Financial Adviser and a personal finance and investments writer.