Cheaper not always better
By Carmel Fisher, Managing Director
25 November, 2016
Mirror, mirror on the wall, which is the fairest KiwiSaver scheme of all?
If you believe the media and some market observers, it's got to be the one with the lowest fees. But, as the Queen learned in Snow White, while cheap KiwiSaver schemes may be beautiful, there may be others that are a thousand times more beautiful, despite their higher fees.
Conventional wisdom says that when comparing similar funds, if all other variables are equal, cheaper should mean better. It is generally thought the lower the fees, the more money that will be directed to your savings account, leading to a higher balance over time.
But ratings agency SuperRatings has conducted some interesting research in Australia, Hong Kong and now in New Zealand — finding low fees are far from best.
In April last year, SuperRatings issued a media release that put the cat amongst the Australian superannuation pigeons. It said that, after 12 years of superannuation industry research, results continue to show fees are not the most important factor in comparisons between funds.
Chief executive Adam Gee was quoted saying: "Any assessment based on only one criterion is fraught with danger. Fees are, at best, only loosely correlated with value.
"Any assessment of a superannuation fund should be made using a broad range of criteria with net benefit — investment returns less all implicit fees and taxes — being the only meaningful basis for comparison of fees and investment performance."
This week SuperRatings released their 2017 KiwiSaver ratings report, awarding seven schemes its highest Platinum rating (one being the Fisher Funds TWO KiwiSaver Scheme).
In awarding ratings, it conducts a 'value for money' assessment by considering a range of factors beyond fees and performance, incorporating things such as member servicing, member education, advice, administration and governance.
In its media release, it noted similar findings for the KiwiSaver industry as those identified in last year's Australian superannuation research.
It said that, while fees are an important factor in assessing the competitiveness of a scheme, "there remains an unhealthy focus on fees within the KiwiSaver market, rather than the overall outcome delivered to members."
Having modelled actual returns achieved and actual fees charged by KiwiSaver funds over a five-year period, SuperRatings found "there is often an inverse relationship between fees and investment outcomes achieved by members."
The word 'inverse' is not a typo. The modelling showed that "those funds with the lowest fees will often provide lower investment returns than their higher fee counterparts".
What was even more interesting was the extent of out-performance. Gee confirmed: "... whilst fee savings will deliver some benefits to members, the associated reduction in potential investment earnings is often four to five times the level of fees saved."
In one table SuperRatings compared the net after fee and tax returns from six unnamed KiwiSaver schemes — the three with the lowest fees and the three with the highest after tax and fee outcomes. While members in the cheapest schemes "saved" $2,331 in fees over the five years to 31 March 2016 compared to the best performing scheme, they missed out on $10,334 in returns over that period, meaning they were $8,002 worse off on an overall basis.
Extrapolating these lost returns over longer periods of time could mean the difference between an okay retirement and an absolutely wonderful one.
In some products and services, cheaper is definitely better. But, for the important things in life, I'm prepared to pay more in order to get the best on offer.
I'm thinking my retirement lifestyle fits in that category.