Monday, April 15, 2024

Professor Robert MacCulloch: The Financial Markets Authority Board & CEO Should be Fired

The Financial Markets Authority Board & CEO Should be Fired for Defending the Billion $ Fees of Kiwi Saver Fund Managers-when the FMA's Job is the Opposite

From 2019-23 KiwiSaver Fund Managers took $3.1 billion in fees from the accounts of savers. The new Coalition swore its primary job was to reduce the cost-of-living that is blighting so many lives. So what is it waiting for?

Take on the supermarkets. Break up Fletcher Building that can't make a buck even though its a monopoly. Slash the rip-off fees of Big Banks. The time for cowardice is over. All of government should now be directed toward enhancing competition. How else is the cost-of-living going to fall? How can Kiwis function when the game is stacked against them? Take this latest example taken from page 12 of the Financial Markets Authority (FMA) Kiwi Saver Annual Report 2023:

Focus area - Value for money
Value for money in KiwiSaver does not mean fees must low.

That's untrue. Value for money in KiwiSaver damn well does mean fees should be low. Let's call that headline in the FMA's report out for what it is - bald faced misinformation that is to the detriment of savers and to the benefit of the fund managers. If the Board of the FMA won't defend the public interest by writing such outrageous lines then the whole lot of them should be sent packing by the new Coalition. There are thousands of articles by the world's leading finance gurus proving that what the FMA writes above is nonsense. A good place to start is Eugene Fama, Professor of Finance at Chicago University who won the Nobel Prize - he's ranked as the 9th-most influential economist of all time & is regarded as "the father of modern finance". Here is part of an interview he did:

FAMA: "Active management in aggregate is a zero-sum game - before costs. Good (more likely just lucky) active managers can win only at the expense of bad (or unlucky) active managers. This principle holds even at the level of individual stocks. Any time an active manager makes money by overweighting a stock, he wins because other active investors react by underweighting the stock. The two sides always net out - before the costs of active management. After costs, active management is a negative-sum game by the amount of the costs (fees and expenses) borne by investors".

FAMA: "After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that .. even the top performers are expected to be only about as good as a low-cost passive index fund. The other 97% can be expected to do worse. [Consequently] an investor doesn’t have a prayer of picking a manager that can deliver true alpha".

Nearly every KiwiSaver Provider - 97% of them - will underperform the market over time, after fees. Of the 3% that do outperform, the extra return will be gobbled up in fees - you won't see a buck of it. In other words, the $3.1 billion of fees that Kiwi Saver providers sucked out of NZ'ers over just a five year period is a big, fat rip-off. The FMA board should be fired for stating the industry is "value for money" when it is not. Put your funds with a low cost passive index fund costing no more than around $50 a year and ignore the FMA.


Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.


And/orsum said...

Peter Stevens
IIRC a chimp throwing a dart at a board of stock options has as much success as the experts

Richard C said...

Robert I generally agree with your assessments, but to call Fletcher Building (FB) a monopoly is ludicrous. Because of their acquiring a private Civil Engineering Contacting company I worked for them in their Cement and Concrete Division for about 8 years, after spending 11 years in Academia (AUSE) I then provided consultancy services in resource consenting for a further 9 years.

I would argue that the only division of Fletchers that might be considered a Monopoly is Wallboards with their Gib product, but their is a lot of lobbying history in clear public sight that could not be applied to monopolistic behaviour.

IMO failure of FB started with Hugh Fletcher's appointment as CEO after Ron Trotter's departure from the Fletcher Challenge ahead of his non academic older brother Jim who went on to lead Dominion Breweries successfully until his untimely death in a burglary. It may have been forgotten but during Hugh's reign FB was the 5th largest construction company in the world.

In my time there were several CEO's like Mike Andrews, then next(?) a former Simpson Grierson lawyer whose name escapes me, Warwick Chandler (Project Manager of construction of Australia's Parliament House) and the list goes on and on. It would be interesting to plot a timeline of CEO's and Fletcher share price. I can't remember where the Swede (?) from Norske Skog who was appointed but never started, fits in, with his only legacy a $10,000 desk

Howver the most recent disaster can. again imo, be laid at the feet of Ralph Waters, an Australian from a whiteware manufacturing company. He was appointed when there was only one way the share price could go, remembering FB is made up of many small business units making a quid.

Anyway the manufacturing mentality became entrenched. After Waters who immediately remained for several years as a Director overseeing / influencing the appointment of Jonathan Ling - nice guy, but construction is not manufacturing - then that total disaster Mark Adamson from Laminex who from his published comments on his opinion of the usefulness of Boards, should have seen him sacked, got the job ahead of Mark Binns, again legal background, but understood the risks and allowances one needs to make in building and construction work. Meridian Energy were lucky to have him as their CEO.

So finally we have Taylor, who "got it" and has been unlucky to have timing of Covid, Convention Centre fire etc, on top of a grim legacy left by his incompetent predecessors. But at the end of the day the incompetent Directors of the Company, bankers, accountants, lawyers, who could measure money, but not risks of weather, ground conditions, labour constraints ....
I hope FB and the former division I was with survive and thrive. The skills and capabilities in them keep the world turning.

Anonymous said...

i find it pathetic that hardly any of the kiwisaver options offer a basic index fund. on top of that, most index funds are so expensive when it comes to costs - and you can't even blame the usual 'duopoly' for that!