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In 1895 an executive at the US Patent office declared that "everything that ever could be invented has been invented," and he argued that the Patent office should be shut. Fail!
Similarly so much has been written on fund management fees locally that you might think the subject has been done to death and full disclosure of fund management charges are now a given. Fail! In NZ the main source of fee information for retail investors in open-ended managed funds, apart from KiwiSaver, is the investment statement but this document merely provides part of the answer and anyone who wants to fully understand the total fee impost needs to do a lot more work. Most don't.
Managed funds - also known as unit trusts - have been around locally at least since I started work in the early 80s so it is an indictment of all concerned that some 30 years later Mum and Dad are still very much in the dark as to what they are paying in annual fees.
For some perspective on this imagine buying a car and being told that it was $20,000 then six months down the track getting a bill from the car dealer for another $10,000 ... in fact reality is worse than that in that you don't even get a bill from the fund manager ... they just take the money out of your account without advising you. Clearly an unsatisfactory position and a shame that the media needs to fill the regulatory vacuum.
Anyway what is the real deal on fees? Read that investment statement and you will see that most fund managers disclose the annual management fee by way of a percentage which is great, but as we will see fees are like icebergs - there is often a lot more beneath the surface and, like icebergs, they can cause problems if you don't see them.
One of several major deficiencies with investment statements is that they quantify the management fee in terms of per cent per annum but then they only describe the performance fee and other expenses without actually saying how much they are. A big enhancement to disclosure levels in investment statements would be to itemise total historic annual costs in per cent per annum and display this information prominently. The other vital improvement needed to bring NZ investment statements into the modern age is to compel fund managers to include a graph showing their historic performance against an appropriate benchmark index.
Most of the missing fee information is publicly available but you have to get a copy of the accounts of the trusts concerned to access it and then do some calculations. Given that most people don't even read the investment statement this is probably a big ask.
Getting the accounts was a mission but even with the statutory accounts in many cases all the annual costs are not detailed with the brokerage fees paid by the fund to buy and sell its portfolio often capitalised rather than shown separately. To enable a true and fair view of costs we had to contact some fund managers to get details of the brokerage costs. One particularly "on to it" unit trust client service desk said, when asked about the portfolio's trading brokerage, "that it could be up to 5 per cent". They were obviously thinking of the brokerage payable to a financial adviser for selling the product but the key piece of information here is that their lack of familiarity with the subject suggests no one asks these questions.
This table compares the annual fees as disclosed in the investment statement with the actual fees calculated from the profit and loss accounts. The latter column includes management fees, administration fees, brokerage and performance fees. Incidentally admin fees can include the cost of the fund manager instructing a top Auckland law firm to warn a journalist not to produce a report critical of a "fund manager of the year's" fees or he would be sued. The irony here is that presumably it is in the interests of the unit trust investors to see the report but they themselves are paying a lawyer to keep it quiet.
Anyway back to the topic. The disclosed management fee can be as low as one quarter of what unit holders have actually paid in a year. Before any fund managers reading this lose their cool completely a good deal of the additional fees are due to funds outperforming their benchmarks but even here investors have a problem because many fund managers, even though they invest in shares, have decided that their performance fee should kick in if they outperform a very low, fixed interest related benchmark.
For example fund manager number 9 substantially underperformed the NZ stockmarket in the 12 months ended 30 June but despite this, because the fund manager's performance fee is based on the 90 day bill rate which is 2.63 per cent plus a margin, the fund manager got fees equivalent to 2.8 per cent of the value of the fund. Better than working! This is not an isolated case as everybody with a brain can see that performance fees are the best get rich quick scheme since Charles Ponzi had that revelation in the 1920s.
So until we get some decent laws it is worthwhile doing some work and researching those fees. In addition knowledge of the brokerage a managed fund pays to stockbrokers to buy and sell securities in a fund gives additional insight.
For example managed fund number 4 sustained brokerage fees of $372,000. If we assume brokerage was paid at 0.5 per cent then this means the fund manager turned over the portfolio by more than 60 per cent in a year.
Now fund managers like to say how they benefit from lower brokerage rates than mum and dad which is all well and good unless you trade like a maniac. Knowing the turnover of a managed fund also gives you an idea into the trading strategy of the fund manager. Needless to say the equivalent of investment statements in more enlightened countries details the turnover of portfolios without nosey parkers like this writer having to ferret out this information.
In a perfect world Continuing Professional Development (CPD) for advisors from legitimate providers like universities would fill this information gap so that advisors could give their clients a correct picture of the costs of the products they recommend. The problem with this, of course, is that most financial advisors aren't hugely incentivised to provide a "true and fair" view so no one would be buying this sort of CPD.
Vastly more popular are sales pitches for products and courses on improving the profitability of your financial planning firm which masquerade as CPD. Unfortunately even with the recent review of the Code of Professional Conduct for Authorised Financial Advisers the Code Committee is still endorsing ridiculous non-training.
The bottom line is that the public is constantly being told by the finance sector to "save for retirement" but high fees can mean you are actually saving for someone else's retirement.
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