Ex-Tower CEO Sam Stubbs sets out to 'disrupt' high fees KiwiSaver plans

The former chief executive of KiwiSaver provider Tower, Sam Stubbs, is turning from gamekeeper to poacher with the launch of a new KiwiSaver fund he says will charge fees at half the rate of most existing schemes and he pledges to keep fees falling as the fund grows.

Dubbed Simplicity, the online-only fund launches today but will not be open to the public for a few weeks of "friends and family" users to put the online-only investment fund through its paces but Mr Stubbs hopes to reach $500 million of funds under management "fairly quickly," he told BusinessDesk last week.

The fund will operate on a non-profit basis, commit 15% of its annual management fee to charities its fund members will help choose, and use only passive investment techniques.

All but its local market investment decisions will be farmed out to Vanguard, one of the largest global fund managers, which operates on a low fees, mutual model akin to not-for-profit and provides service to numerous competing KiwiSaver funds already.

"If we get this right, we will literally be putting millions of back into the hands of Kiwis and to charity," said Mr Stubbs, whose career before Tower included time with local merchant bankers Fay Richwhite and an international career with Goldman Sachs before he returned to New Zealand wealthy and decided it was time to "give back."

Backing the new venture with $1 million of his own money on an interest-free loan and taking no salary himself, Mr Stubbs says he is "working for love," along with just six salaried staff and a cohort of senior New Zealand businesspeople.

"All of that money would otherwise be sitting in profits for funds managers, so why not?" he said of the venture, which seeks to challenge the 85% of the KiwiSaver market held by just six players, four of them Australian-owned and booking profits of $150 million annually, which Mr Stubbs says will be $1.3 billion by 2030, based on current fee structures.

Key to its success, says Mr Stubbs, will be New Zealanders realising that it is easier than is widely understood to switch KiwiSaver provider, and that fees rather than investment returns are the single greatest factor in determining the life-long earnings of a retirement fund.

Simplicity will start by offering conservative, balanced and growth funds at a single fee rate of 0.65%, compared with an industry average of 1.34%.

While most KiwiSaver schemes charge more for higher-risk funds, Mr Stubbs says all Simplicity's funds will charge the same.

"Our funds will have the same fee, irrespective of risk level because it costs the same, so why would you charge more?" said Mr Stubbs."We're about 65 basis points cheaper (than the average KiwiSaver fund's fees). Even over five years, that's 3% or 4%. On a $200,000 KiwiSaver account, that's $8000."

Over the course of a lifetime's saving in an average KiwiSaver account, savings would be about $65,000 higher than returns from a fund operating on average current fees in New Zealand , Mr Stubbs said.

The key to the offer is the belief that fund managers can't beat the market over time and that passive investment strategies will yield the most reliable returns.

"Passive index tracking is common and mainstream," Mr Stubbs said. "On the assumption that you save as much as you can, the single most important factor in how much you earn is fees. That body of literature just grows and grows."

The only reason no one else has launched such a venture in New Zealand is that no one had had an appetite to try a not-for-profit model.

"The very large banks and insurers, they're staffed by wonderful people, they're all our friends," said Stubbs. "But they're trapped in business models which are very demanding in terms of profits, so I'll be interested to see how they respond."

(BusinessDesk)