Imagine taking a flight and having arrived at your destination, the airline asks you to pay an extra fee because they got you there safely.
All of us (I assume) would object to this. After all, the airline is simply doing what it is supposed to and that is what we pay in our ticket prices, so why should we pay more for them simply doing what they are supposed to?
It’s the same with investments.
Unfortunately, some fund managers charge performance fees (including KiwiSaver) for doing what they are supposed to. Personally, I think it’s a rip off but you may not actually know if this is happening on your investment. They are designed to only benefit the fund manager and provide no advantages for investors.
I have no issue with a fund manager being paid to do their job. Being paid fairly for what they do is okay but why should they charge extra when they do well? After all, it is your money that they are investing (not theirs) so if they get it wrong, it does not affect them. If they do get things wrong, they don’t reduce their fees or pay you, the investor, a penalty so why allow them an extra payment when the investment shceme performs well?
Fisher Funds, one of New Zealand’s largest KiwiSaver managed funds providers, charges a performance fee on its Growth Fund of 10% of any return above the official cash rate plus 5% (capped at 2% per annum of the net asset value of the Growth Fund). In periods of strong equity markets, they are potentially earning more even if their own results are barely above market average.
Milford are another example, applying a performance fee of 15% on returns above 10% on its Active Growth Fund.
If you are considering a fund with a performance fee, make sure you understand how it works. After all, if you went to buy a car, you wouldn't just say “I'll take the red one” and walk out, you'd look under the bonnet and find out all about it.
With any investment, you need to go into any fund with your eyes open so you know exactly what the fund manager will get out of it and what you will be paying.
If you find this alrming, and you wish to ensure that your KiwiSaver Scheme Provider is one that doesn’t line its own pockets with your hard earned dollars for doing the job we all expect of them, then contact me, Mike at foresight financial and I’ll advise on the right KiwiSaver provider for you.