Fees, commissions and trails that you should know about in any investment
KiwiSaver turns 10 years old this year and with a $40 billion balance, there's plenty to celebrate.
More than 2.6 million Kiwis have an account now. New Zealanders are taking more interest in and responsibility for their retirement. It's also been a great savings tool to help more Kiwis get into their first home. Last year, close to $500 million was withdrawn from KiwiSaver accounts putting Kiwis into their first home.
Despite all that, and the fact, that KiwiSaver has become a household name, it remains a poorly understood product. Basic concepts like risk versus return, diversification and fees still cause a lot of confusion. And despite the choice of providers, more than 20, 17% of all KiwiSaver remain in default funds. These are funds they're put into automatically by their employer because they did not make an active choice themselves.
To address this problem, the Financial Markets Authority, devised a three-year strategy in 2015 to build investor understanding. They also mandated default providers to do more in the area of financial literacy.
Simplicity is not a default provider but financial literacy is a priority for us. We believe knowledge gives choices, and more choice provides dignity in retirement. We educate our members and prospective new members by using simple language, by designing a member website that makes it easy to see your balance, contribution rates, returns and fees. We want our members to be engaged, enthusiastic and informed about their investments.
In that spirit, we came up with five questions you should ask of your KiwiSaver provider, or other parties you are invested with.
1) What will you or are you paying in fees?
This is not as complex as some providers may lead you to believe. As well as an annual fixed fee, providers charge what's called a management expense ratio (it includes all the expenses such as investment costs, trustee fees, administrator fees and lawyers fees among others. This is the figure you'll want to be aware of because of it comes out as a percentage of your funds under management year after year as long as you are invested.
At Simplicity, you can see what you pay in fees in real dollar terms any time you want. Our fees are the lowest on the market. That hasn't come at the expense of performance either. Last quarter, we were rated the second best performing fund by research house Morningstar NZ.
At Simplicity we don't pay any commissions. All our staff are on salaries. We don't have any agents selling you our product in return for a fee or kick back. Some have asked and we've said no. Be sure that you understand the payment structure of the firm that you place your trust in to manage your money so you understand where your investment returns are going.
3) What's their communications style and method of keeping you (the investor) informed?
Research house Morningstar, in its latest KiwiSaver performance report, highlighted communications as one of the top factors (alongside fees) in choosing a provider. How often do you hear from your provider? How long does it take for them to return calls? Do you understand the communications you receive from them? Clear communication is the heart of most healthy relationships and KiwiSaver is no different.
4) What are you invested in?
The controversy last year over cluster bomb manufacturers being represented in some KiwiSaver portfolios, made it clear that Kiwis care about what they are invested in. Communications from your provider should make it easy to understand asset allocation, risk, and diversification.
At Simplicity, to be make it simple, we offer just three funds. Conservative, Balanced and Growth. Our fund section shows you exactly what the asset allocation of each fund is, and our fund updates break it down even further. We've also created some information for you (published on our blog) to explain how they differ from one another.
5) Who manages the investment?
Some providers outsource the management of their funds overseas to managers who get paid high fees. Others use local fund managers who are rewarded to above average performance which comes out of your returns. Simplicity uses nonprofit asset manager Vanguard for the international equities component of our funds. One of the reasons why Simplicity is the lowest fee KiwiSaver provider is because we only charge you what it costs us. We don't have shiny downtown offices, corporate cars, high overheads and an excessive workforce. We are 100% online and nonprofit so we can return to you more of your retirement savings.
The FMA, in a recent publicity campaign aimed at making investors smarter, said if a provider can't or won't answer some of these questions, you should walk away.