Bonuses for fund managers may not deliver the hoped-for results. Photo / 123RF
OPINION:
Q: Many people have complained this year that their KiwiSaver value has dropped, with losses on the investment plus over $500 in fees.
This is even worse for people retired with no new contributions. So with no work to be done in their case, their fees should drop to half, say $250 a year. That is much fairer to members and surely covers the small cost of sending out a statement for the year?
A: What you say sounds so reasonable, but I don't think it would work well for two reasons.
First, a provider's costs don't vary much from one member to another. Work related to contributions is mostly done by computer, at very little cost per transaction.
And in any case, many retired people are making regular or occasional withdrawals, which quite possibly cost more than deposits.
The major cost for providers is labour — fairly highly paid people who run communications with members, check the government's rules are being followed and so on.
Actively managed funds also hire researchers and strategists who decide where the money should be invested and when to buy and sell. This cost is much lower for passively managed funds, whose managers simply invest in all the shares or bonds in a market index — which is why passive managers' fees are nearly always lower.
Then there are all the workplace costs: rent or building ownership, maintenance, admin, insurance etc.
It's fair that all these costs should be shared among all investors — although in most cases those with higher balances pay more.
Second, what you're suggesting amounts to providers charging performance fees — they get more when their investments do well and less when they do badly.
Some providers do this by charging a regular fee every year plus a bonus fee when their investments do particularly well. They don't reduce the regular fee in bad years, though, as they still have to run the place — and there are actually more member queries and communication issues in down times.
As I've said before in this column, performance fees have their problems:
• They can incentivise managers to concentrate on short-term performance, when the long term is what matters for investors.
• Managers might be tempted to take inappropriately high risk in the hope they will be in luck and will earn extra fees. If their "bet" goes the wrong way, they still get the ordinary fees. They are not penalised.
• The fees must be structured so managers are not rewarded if nearly all KiwiSaver funds at the same risk level do well in a period, but only if they rise above the pack.
The Financial Markets Authority is keeping an eye on KiwiSaver performance fees.
It says fund managers must set a "hurdle rate of return", based on the risk level of their fund. They have to earn more than that rate to get the performance fee.
The managers also have to set a "high water mark" — at their highest performance level.
If the fund's unit value drops from there, they can't claim a performance fee until it rises above the high water mark. This prevents providers from being rewarded for simply recovering from a fall.
Performance fees tend to be charged only on middle- or higher-risk funds. Providers that use them on some funds include Fisher Funds, Investnow, Milford and Quaystreet. For details, find your fund in the Smart Investor tool on sorted.org.nz, and click on Details below the fee information.
While some say performance fees are fair enough, I'm not a fan, for the reasons listed above. So I'm afraid I don't go along with your suggestion.
Can I just add — without coming across as mean — that KiwiSaver members have had it so good for so long. Apart from the sharp market plunge and recovery when Covid-19 started in 2020, members have benefited from incredibly steady growth since the global financial crisis in 2007-09.
Those of us who have watched the markets for decades have worried about how KiwiSaver members would react to a downturn. As we feared, some people are moving to lower-risk investments. They are the only ones who are actually suffering losses. If you just stay put, in due course you'll find you won't have lost anything.
Q: I write in defence of the person in your column who took money from his KiwiSaver for a year, and will then reassess the situation. I've been a DIYer for decades and that is exactly what I would have done. All the signs are that the markets are some way from the bottom.
Now I know that may be wrong but in life you have to make decisions that feel right for you. Let's tumble some numbers. We'll say that person is down 12 per cent and his $100,000 is now $88,000.
My pick is that it has another 10 per cent to go from the $100,000, say by year-end. His investment would then have been worth only $78,000, but our friend will have his $88,000 intact to repurchase not only the units he had before, but $10,000 more at that price. When the original fund regains the lost 22 per cent he will be $12,200 ahead of the pack.
I so look forward to year-end, even if you delight in saying I was wrong. But knowing you Mary, you will be just as quick to acknowledge if I'm right.
A: I love a challenge, but I'm going to skip this one. The trouble is that it's just one example. The chances are somewhat higher that I will win, but there's a pretty good chance you will win.
And if you do? Other readers might be encouraged to make similar moves.
Proper research, which looks at many people in many situations, shows that those who try to time markets — picking when to buy and sell depending on market trends — almost always do worse over time than those who get their investments right and then sit tight.
Financial research company Dalbar, for example, says that over the 30 years ending December 2021, the average annual return for the S&P500 — the main US share index — was 10.6 per cent. Meanwhile, the average for individual share fund investors was 7.1 per cent.
That's a huge difference. Over 30 years $10,000 at 10.6 per cent grows to $231,000. At 7.1 per cent it grows to just $83,000.
The difference was largely because investors move their money around — often based on your assumption that whatever the current market trend is, it will continue for some time.
We know the economic outlook is worrying right now. But that might already be reflected in share prices. It might even be over-reflected, and share prices start recovering tomorrow — while our friend is out of the market. Only time will tell.
Q: To the family in last week's column considering selling their rental property privately — there is an interesting psychology in buying and selling houses. We did not recognise this when we went to sell our own rental property privately, having had heaps of experience with agents who did not appear to do much for their commission.
For a potential buyer, it's a bit awkward to engage and negotiate directly with the owner. In a buoyant market with FOMO this is easily overcome, but in a market downturn where buyers are cautious and there is no rush to purchase, the offers don't come in without a bit of a push. That, paired with unrealistic price expectations from vendors, will tank the whole thing.
Real estate agents walk this tightrope between vendors and purchasers, and we have reluctantly accepted that it is best to just hire the professionals for this job.
A: I've been there too, when selling a house without an agent years ago. Negotiations with buyers were awkward. I've since learnt, though, that you can hire a lawyer to handle the negotiations for you. Their fee will be much less than an agent's commission.
However, your point about an agent being there to give a would-be buyer "a bit of a push" is a valid one.
Q: How do I check if ezmarkets.io is a scam? The guy has been ringing me for weeks and I can't find any info about them.
I clicked a link that I thought was on the Herald site about a month ago that was talking about the new Chinese Bitcoin, and I ended up being rung by a guy called Ben from ezmarkets.
I invested US$250, and he traded for me and I made about $80 profit. I then withdrew my capital and it has been returned to my Visa account.
Now he wants me to invest US$2000. But it's got to be done through a third party who will open a bitcoin wallet.
When the guy rings me it always comes up on my phone as an 07 number and my screen says Hamilton, but of course it's not, so they also must have a diversion number from somewhere overseas.
I am not sure if this is an elaborate scam or not.
A: Nor am I. But I don't like the look of it. As I said recently, a common scamster tactic is to rig things so you do well at the start with a small amount. Comforted, you put in more, only to lose some or all of it.
One quick way to test for a scam is to Google the company name and the word "scam".
When I did this for your company, it didn't come up with a definitive answer — such as a recommendation from a government agency to stay away.
However, there were comments on various websites, including a couple giving glowing reviews. Be wary of that. A sophisticated scam could easily pay hundreds of people to make positive assessments.
But there were also comments such as, "After taking a look at their website, it shows that they do not fall under any regulating agency. That is a MAJOR RED FLAG!! That should be enough for you NOT to invest with them." To which I would add, "hear, hear".
On the link from the Herald website, Duncan Bridgeman, head of premium business content, says, "This is likely a fake link. We have encountered scammers creating web pages that look like they are Herald articles but are complete fakes. We have been sending them to the FMA and they are trying to shut them down." For more on dodgy online info, read on.
Q: I got sucked in with a report from a breakfast TV programme about easy money from a bitcoin investment of about $400. I thought I could have a bit of fun seeing I could afford to lose $400.
So I went to sign up online. Can't quite remember why I got a bit wary and bailed out. Anyway my mobile number must have been entered.
For the next couple of months I got calls every evening and in the middle of the night from overseas numbers. I didn't answer as I don't have fans all around the world, but I did answer once and quickly told them to stop ringing me.
Some people who are lot more tech savvy than me are having fun with bitcoin — but my experience, without even getting past step one, was a bit hair raising.
A: Indeed. And there was more dishonesty going on than you realise. It sounds as if you saw a fake online story about Breakfast presenter Hayley Holt praising bitcoin — something that didn't happen.
What's more, the story is supposedly written by the Herald's Bridgeman — but it wasn't.
The moral of these two stories: be very sceptical about what you read online about investments.
The FMA has good info about scams at fma.govt.nz/investors/scams.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
Insurance Fraud Bureau flags fraud trends.