Let’s hear it for the KiwiSaver upstart waging war on fees
Here’s to Simplicity, the non-profit firm pushing back against greedy providers.
‘ Predictions might be dumb, but I’m still going to make this one. . .
WHATwould you guess your biggest expense is, after food, accommodation and transport?
No doubt you scrutinise the monthly power bill and spend ages picking out the best mobile plan. But could you say without looking how much you pay in fees to your KiwiSaver provider?
Over a working life, you’ll shell out something like $50,000. This huge expense sneaks under the radar because it gets sucked straight out of your account, meaning there’s no pain point in having to actively pay a bill.
Fees also look deceptively trivial. A one-point-something per cent fee seems like pocket change, but it compounds like crazy over the decades. Unlike the market’s ups and downs, fees are one of the few elements affecting your nest egg that are within your control.
KiwiSaver fees were meant to come down as the scheme scaled up, but after almost 10 years nothing much has happened. Given the major players are making out like bandits, it’s no surprise they’ve been happy to maintain the status quo.
Enter Simplicity, the start-up scheme launched by former Tower Investments boss Sam Stubbs in a bid to shake up the industry.
The plan is simple: force the rest of the market to bring down its pricing by showing up just how much they’ve been overcharging. The average KiwiSaver fee is about 1.3 per cent a year. Simplicity charges 0.3 per cent, plus a $30 administration fee.
It estimates you could be $65,000 richer in retirement as compared to similar schemes.
As a not-for-profit with few expenses, Simplicity plans to reinvest income to bring fees down further over time. Fifteen per cent will go directly to a charity working to promote financial literacy, which is a nice touch.
Switching my KiwiSaver across took me literally two minutes, and I’m not the only one voting with my feet. Within a couple of months of its launch, Simplicity had already blasted past its 12 month target.
The incumbents are nervous, as they should be. It’s been amusing watching them squirm as they try to find ways to slag off the upstart. One of the arguments is that we haven’t seen its returns yet – but this is deliberately misleading.
Simplicity is basically a frontend for Vanguard, an enormous non-profit fund manager based in
the US. It has decades of history behind it for anyone interested in past performance, but that doesn’t even matter – past returns don’t predict what will happen in the future.
Making predictions might be dumb, but I’m still going to make this one: passive, low-cost funds will continue to beat the average performance of their activelymanaged counterparts.
Mucking around trying to pick hot stocks or sectors racks up all sorts of costs for research and transactions, not to mention stonking performance bonuses for the boys. By contrast, passive funds match entire markets by buying a bit of everything – each Simplicity fund has over 9,000 different investments in 23 countries, for example.
As more and more people realise the evidence for picking stocks is woeful, a passive investing revolution is sweeping the world. The movement was a bit delayed in reaching New Zealand, but we’ve seen some great progress recently and Simplicity is the latest welcome development.
It feels strange to be praising a financial services firm for once, but there’s nothing not to like about this situation.
Sam Stubbs came out of retirement to set the cat among the pigeons. He stumped up his own cash to fund the non-profit, and probably got scratched off a few Christmas card lists in the process. On behalf of us lowly consumers, I salute him and the rest of the Simplicity team. Here’s hoping a full-on KiwiSaver price war kicks off soon. Got a money question you’ve been struggling with? Email Budget Buster at richard.meadows@thedeepdish.org, or hit him up on Twitter at @MeadowsRichard. 123rf