KiwiSaver providers are allowed to sell members’ investments to cover their fees if the process is clearly disclosed, Financial Services Complaints Ltd (FSCL) says.
FSCL is one of the external disputes resolution schemes that serves the financial services sector. The schemes deal with complaints that cannot be resolved directly between the customer and financial services provider.
In a case it dealt with recently, a man complained about his KiwiSaver scheme.
It is one of the small number of providers that allows investors the option to select their own securities, including shares in specific listed companies. The man chose the investments he wanted and from time to time there was little cash left in his account, because it had all been committed.
One month when the KiwiSaver provider’s monthly management fee was due, and there was not enough cash available, the provider sold small amounts of his investments to cover the fees. He then discovered it was not the first time this had happened.
The man said he should have been warned this could happen when his cash balance became too low, and contacted for approval before the sale happened.
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He said the repeated sales generated multiple additional brokerage costs, foreign exchange costs, and market losses and he wanted compensation from his KiwiSaver provider for these costs.
FSCL said the man confirmed he had received and accepted the scheme’s disclosure documents when he had signed up to the scheme.
“These documents clearly explained that management fees would be recovered monthly from available cash in his account and, if there was not enough cash, by selling investments within the portfolio. The KiwiSaver provider had therefore done exactly what the scheme documents said they could do. We accepted that selling investments more frequently would increase costs compared with less frequent sales.
“We also accepted that notifying customers before selling investments would not appear to be impractical, and was a practice commonly seen elsewhere in the financial services industry. For that reason, we suggested that the KiwiSaver provider could consider introducing notifications as part of their service offering. However, that was a commercial decision for the provider, not something FSCL could require.
“We considered it important that the provider had clearly disclosed their fee recovery process and had reserved the right to sell investments when cash balances were insufficient. While alternative approaches may have been more customer-focused, we could not rewrite the parties’ contract or require the provider to adopt different business practices.”
FSCL said it was fair for the provider to recover its management fees in the is way.
FSCL does not identify the providers that are complained about.
Ben Brinkerhoff, head of advice at Consilium, which offers the self-select KiwiWRAP scheme, said its documentation allowed for fees and tax obligations to be met from available cash balances and, where necessary, investments could be sold to meet those obligations.
“As part of our operational process, we actively monitor low cash balances and engage with the adviser where cash levels may be insufficient to cover upcoming fees or tax liabilities. This gives advisers an opportunity to address the situation, including raising cash or converting foreign currency where appropriate. While the scheme retains the ability to recover outstanding fees in accordance with its governing documents, our expectation is that adviser involvement means these situations are typically managed proactively before any sale of investments becomes necessary.
“To be honest I haven’t seen this come up as an issue.”
At Sharesies, general manager of super and funds Mat McPherson said although Sharesies allowed for investors to select some investments, the money was in unitised PIE funds. “We took this approach as it is more tax efficient than members holding the securities directly. It has other advantages too: management fees are built into the unit pricing system, and any fees are deductible expenses. This approach means our members don’t need to worry about managing a cash balance for fees.”
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