NZ Herald 18 June 2022

AWhat you say sounds so reasonable, but I don’t think it would work well for two reasons.

Firstly, 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.

Secondly, 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 incentivize 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 penalized.
• 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 benefitted 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.

AI 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 economic outlooks are 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.

AI’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.

ANor 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.

AIndeed. And there was more dishonesty going on than you realize. 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 skeptical about what you read online about investments.

The FMA has good info about scams here.