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Chapman Tripp – FMA Releases Guidance for fund managers to ensure their fees are reasonable

Chapman Tripp – Although the statutory obligation not to charge an unreasonable fee is specific to KiwiSaver schemes, the Guidance is directed at all fund managers to assist them to satisfy the FMA’s conduct expectations and its interpretation of their issuer obligations to act in members’ best interests and to ensure members are treated equitably.

The FMA expects all fund managers to determine with their supervisors whether their fees are reasonable and represent value for money for their investors or whether remedial steps are required, including increasing services, reducing fees, or both.

The Guidance follows an industry consultation in November last year.

Regular review

Managers are expected to undertake formal annual reviews of scheme fees and to conduct a review whenever they update the Statement of Investment Policies and Objectives or other governing document because of a change that materially affects cost. Examples provided include changes of strategy, asset allocation or underlying investment managers.

All reviews should involve the supervisor.  

Supervisors are expected to monitor fees and regularly to challenge the manager to ensure fees are not unreasonable or represent poor value for money. Evidence of these reviews should be provided to the FMA and the results communicated to members.

As context for fee reviews, the Guidance notes that good value does not equate with cheapness, competent investment management is valuable, and that profiting from investment management is not inconsistent with acting in members’ best interests.

The four key principles

The Guidance sets out four key principles on which fee reviews should be based. These principles will also be applied when the FMA assesses fee reviews and if the FMA conducts a fee review itself.

1. Risk and return are critical

The two key indicators of value for money for members are:

  • risk management – how well the manager’s process and capabilities minimise investment risk (i.e. through volatility and loss) measured by whether the fund’s returns exceed or replicate the market index (if active), and
  • returns after fees – assessing what proportion of the investment gains were taken by the manager as fees.

2. The financial value of investment management must be shared

The member’s share of the return must be appropriate for the risk they are taking, and the cost they have paid, compared to manager’s share (fees received).

3. Advice and service is received, not just offered

A service or feature provided by a manager contributes to a member’s value for money only if it:

  • helps the member make better investment decisions (such as advice), or
  • benefits the member’s investment account (such as an investment process that reduces market risk, enhances return, or both).

Offering advice and services does not of itself provide value for money. Managers should evidence that the advice or service was used or acted upon with a positive impact.

4. Review yourself as you review others

There is no justification for the quality of the review to be different between managers. Where differences in outcome result, the manager should explain and substantiate these results. 


The Guidance contains a comprehensive list of questions the supervisor may ask the manager to conduct a thorough evaluation of value for money and provides a number of broader comments related to fees, tax and advice.

FMA’s enforcement powers

The FMA refers to a range of tools available if it determines the law has been breached. These include:

  • stop orders – to prevent a scheme from advertising and accepting new members
  • direction orders – to direct a manager to comply with the requirement to act in the members’ best interests
  • censures or action plans
  • altering, suspending or cancelling a licence, and
  • court action – to impose a penalty or force a scheme to reduce fees and, potentially, refund members.

Our comment

Even though fund managers manage costs and set their fees in a highly competitive environment, the Guidance sets a clear expectation that fund managers must also be able to justify and substantiate the basis for those fees, both as to the profit derived and the value to investors.

While the KiwiSaver Act imposes an express requirement on KiwiSaver scheme managers to ensure their fees are reasonable, there is currently no similar statutory obligation on other fund managers. Instead, the FMA describes its Guidance as being principles based and in line with the general duty on fund managers to act in the best interests of members.

Whether management fees are subject to the manager’s best interest legal duty can be debated, but at a practical level the FMA’s expectations are likely to be accepted because many managers will feel their fees can be justified in the manner expected.

The Guidance evidences the FMA’s continued expectation that financial service providers be able to demonstrate good conduct and a customer-centric approach to the design and delivery of their products and services.

The Guidance may also signal an intention to treat fund managers as being subject to a fair conduct principle, similar to the one proposed for financial institutions and insurers under the impending Financial Markets (Conduct of Financial Institutions) Amendment Bill.

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