• Trustees Corporate Supervision

Mar 21, 2023

Integrated Financial Products and Value for Money

Non-financial factors must add value for investors

Managed investment scheme (MIS) managers and their Supervisors have until the end of June 2023 to complete the inaugural round of managed fund value for money (VfM) assessments. One wrinkle in this VfM work that might not be fully appreciated is the particular way in which the VfM regime applies to integrated financial products (IFPs).

IFPs are defined in the FMA’s December 2020 guidance note (Note) Disclosure framework for integrated financial products as follows:

This guidance collectively refers to financial products that incorporate non-financial factors alongside financial factors as ‘integrated financial products’. These integrated financial products typically take one of two forms:

  • debt securities such as ‘green bonds’, which fund projects or organisations claiming positive environmental impacts; or
  • managed investment products (including some KiwiSaver funds) claiming non-financial impacts.

Our choice of the term ‘integrated financial product’ reflects that other terms for the concept, while commonly used, do not have commonly shared meaning (including the terms ‘ethical’, ‘responsible’, ‘sustainable’, ‘green’ and Environmental, Social and Governance (ESG)).

(Note, p. 4.)

Notably, IFPs are identified as distinctively having both (i) financial factors and (ii) non-financial factors to take into account, whereas non-IFPs only have financial factors for consideration.  This dichotomy between financial and non-financial factors is important when it comes to examining VfM assessment procedures for managed funds. As with all other managed funds that are subject to the VfM regime, managed fund IFPs (MF-IFPs) must be assessed for the value to investors of their financial factors. But in addition, MF-IFPs must also be assessed for their non-financial factors to determine their VfM utility for investors. This latter point can easily be overlooked.

Embedded in the middle of the FMA’s Guidance Managed fund fees and value for money (Guidance) beneath Principle 3, Advice and service is received, not just offered, is the following passage under the heading “Other value-adding services”:

We recognise that services other than advice can provide value for money to members. This guidance regards broader services as valuable if they add value to the member’s account – either financially, or by better aligning the scheme with member values or non-financial expectations, and ideally both. Like advice, offering a service does not mean it has value to members.

(Guidance, p. 11)

The passage goes on to state, under the heading, “Other value-adding services – useful questions for managers and supervisor”:

  • If a scheme claims its asset stewardship, including taking account of non-financial factors within an integrated financial product, adds value, can they substantiate it by demonstrating how it fits member values? Or how it benefits investment outcomes? For example, does it reduce risk without reducing return, enhance return, have quantifiable non-financial impacts, or shape company behaviour?


Two core criteria for assessing the VfM of MF-IFPs

The passage quoted above from the Guidance makes clear that the non-financial factors of MF-IFPs are to be assessed for VfM using two core, non-mutually exclusive criteria for adding value that investors actually receive:

1.  Alignment/fit of the investment product with

a.  Investor values

b.  Investor expectations

2.  Quantifiable benefits to investment outcomes that are either

a.  Financial

b.  Non-financial

It may not always be obvious as to how these criteria are meant to apply to performing VfM assessments on MF-IFPs. Let us consider quantifiable benefits first. Quantification is a form of measurement used to report on financial matters. Financial benefit to MF-IFP investors should not be hard to find and quantify, if it exists, by reference to past fund performance, both absolute and relative to applicable market indices, and peer fund comparison. In essence, the same as is done when assessing financial factors of non-IFP managed funds, which should not be controversial.

Non-financial benefits can be more complex to identify, observe, analyse, verify and quantify within a VfM context. The Guidance clearly expects that non-financial benefits must be quantifiable for VfM assessment purposes, which implies that non-financial benefits that are non-quantifiable may be irrelevant to such assessments. Then there is the added complication of shaping company behaviour as an investment outcome, which implies a degree of shareholder activism on the part of MF-IFPs in order to bring about desired corporate changes. Because this latter example keeps company with quantifiable items such as risk reduction, return enhancement and non-financial impacts, presumably it is intended to be quantifiable as well. The onus on non-financial benefits under VfM assessment is therefore to provide quantification of these benefits as the basis of demonstrating that they do, in fact, add identifiable value actually received by investors.

Second, let us examine alignment or fit, which relates to something wholly subjective in investor values or expectations, psychological phenomena that may not be readily identifiable short of polling the investors concerned. A proxy for investor values and expectations could be the terms of the disclosures made by managers of MF-IFPs, on the assumption that, for example, a disclosed objective for an MF-IFP to donate a specified percentage of investment returns to native reforestation projects will attract investors who either value such reforestation or expect to contribute to that activity by investing in the fund and are willing to sacrifice some part of their returns for that altruistic satisfaction. The actual track record of donating could be evidence for VfM assessment purposes, but alignment or fit might not always be so easy to prove as providing VfM that investors receive.

Of note is the assumption that non-financial investment outcomes must be quantifiable for VfM assessment, whereas no such claim is made for investor values or expectations. Thus there could be non-quantifiable but perfectly valid VfM factors arising for investors, at least where values and expectations are concerned. The question arises as to how it can be demonstrated that such factors are providing investors with something that is relevant and assessable within a VfM context.

Example 1: Quantifiable VfM benefit

As an example to bring some of these VfM considerations into sharper focus, suppose a shareholder activist MF-IFP invests in company XYZ Corporation’s shares. Further suppose that the investment causes XYZ Corporation to reduce risks associated with non-sustainable activities and invest more capital into sustainable projects for higher profitability. In such case, an investment outcome – decreasing risk and increasing return – can lead to quantifiable financial benefit and thereby VfM to investors. Proof that the actions of the MF-IFP’s manager have added value in this instance would need to be quantified in terms of material financial contribution to investor returns and/or demonstrable reduction of risk exposures.

Example 2: Non-quantifiable VfM benefit

Imagine instead that the MF-IFP’s investment causes XYZ Corporation to introduce effective policies for staff diversity and inclusion. Such an investment outcome might not produce any quantifiable benefit to investors, even if rationalised as contributing to reduced staff turnover at XYZ Corporation to the benefit of the company’s productivity, but could help satisfy their values and expectations. In this latter instance an alignment – improving corporate culture to the standard that the MF-IFP’s investors value and/or expect – could produce a non-quantifiable investment outcome for the MF-IFP that has arguable VfM assessment significance. Lack of quantifiability for such an alleged value add would necessitate some alternative kind of supporting evidence to be provided for VfM assessment, such as surveys of the MF-IFP’s investor satisfaction levels or analysis of its disclosure documents for reference to achieving positive corporate culture change through shareholder activism, including credible criteria stated for proving that the MF-IFP manager is actually achieving this fund objective.

There are other ways to slice-and-dice how the two criteria of alignment/fit and quantifiable benefits could be teased out for the purposes of VfM assessment, but the fundamental point is that managers of MF-IFPs must be able to provide satisfactory evidence sufficient to support any claims that they may make concerning the VfM that investors in their funds are actually receiving. Wishful thinking, green-hued verbiage, and unsupported assertions will not cut the mustard.

Special expertise will be required by MF-IFP managers and their Supervisors

One thing is obvious from how the Guidance tackles the question of VfM assessments for MF-IFPs: no such assessment is complete unless all of the non-financial factors of the investment product have had the VfM ruler run impartially across them, with the results quantified where possible and recorded evidentially. MIS managers of MF-IFPs must become experts in assessing the VfM dimensions of non-financial factors of their investment products, including potentially obscure matters like investor values and expectations, and corporate evolution in the face of MF-IFP investment policies. This expertise requirement could have knock-on effects for how MF-IFP MIS managers make disclosures about the non-financial factors of their products.

Arguably, if a non-financial factor cannot be demonstrated to add any quantified material VfM that investors receive, or indeed any quantifiable VfM at all, then should the product’s MIS manager continue to promote or claim credit for that factor in its disclosure documents? If so, on what non-quantifiable basis? A counterargument could be that VfM assessment of MF-IFPs should not succumb to knowing the price of everything and the value of nothing in diminishing or dismissing the significance of non-quantifiable alleged benefits that investors might still somehow expect or value. However, that position would need to be adequately explained and buttressed with suitable evidence concerning the compelling merits to investors of non-financial factors that did not result in quantifiable VfM investment outcomes for an MF-IFP.  

Part of clearing the hurdle to imparting genuine validity to VfM assessments of MF-IFPs is to cut effectively through the potential hype and clutter of MIS manager sales and marketing language that may shroud and distort the real facts on the ground about these types of products. Simply repeating such wording in MIS managers’ VfM assessments may not be enough to demonstrate decisively to the critical eye of a third party such as a Supervisor or the FMA that true, material and quantified non-financial benefits are actually being provided to investors, let alone any non-quantifiable benefits that are alleged to add received investor value.

The Guidance makes plain that it is not just MF-IFP managers but also their Supervisors who will have to hone their expertise in posing the right questions about exactly how MF-IFPs under assessment are delivering VfM that is received by investors. Whilst the onus lies on MF-IFP managers to evidence sufficiently the validity of VfM claims made for the non-financial factors of their funds, the burden falls on Supervisors to test, probe, and if necessary challenge these claims and their supporting evidence. The outcome of such interactions between MF-IFP managers and their Supervisors could not only affect the way in which the non-financial factors of MF-IFPs are conceived of and understood in VfM terms, but also how they are disclosed to investors, supposing such factors are interpreted to be investor benefits at all.

Relevance of disclosure and fair dealing to validating VfM claims for MF-IFPs

A starting point for understanding the linkage between VfM and non-financial factors of MF-IFPs could be to consider what the FMA has already published on IFPs outside of the Guidance. Two documents are critical in this respect:

Disclosure framework for integrated financial products (Note, December 2020)

Integrated financial products: Review of managed fund documentation (Review, July 2022)

Neither of these two documents are specifically pitched at VfM assessments for MF-IFPs, but they contain material directly relevant to such activities. In what follows, these documents will be sampled non-exhaustively for VfM-related content.

The 2020 Note has already been quoted from at the beginning of this article. It is principally concerned with IFPs viewed through the lenses of FMCA Part 2 fair dealing and Part 3 disclosure provisions.

The Note states that:

Integrated financial products face common challenges in terms of disclosure. Ultimately, the purpose of disclosure is to aid decision-making by investors. By their nature, financial products that incorporate any non-financial factors need additional explanation for investors. Issuers need to fully explain the features of the product that are important to their investors and also avoid ‘greenwashing’, or selling the product on the basis of misleading labels and hype.

(Note, p. 6).

As a broad statement of principle, the passage quoted above provides guidance that can be applied to MF-IFP VfM assessments. If disclosure for an MF-IFP conforms with the statement, then the information it provides should help contribute to the evidence required to substantiate the MF-IFP manager’s claims that investors receive VfM from the product. Indeed, the view could be maintained that good disclosure and VfM are inextricably linked, in that the disclosure for an MF-IFP should contain adequate explanation and sufficient evidence for both the financial and non-financial factors that could also be used as at least a partial basis for VfM assessment.

Regarding fair dealing, the Note further states:

Substantiate your claims

The fair dealing provisions generally require representations to be substantiated, although some exceptions exist (such as for representations in a disclosure document or a register entry). Substantiation requires having a reasonable basis at the time the representation is made. Anecdotal evidence, unsupported opinions and/or assumptions do not constitute a reasonable basis. We are particularly interested in representations regarding the nature, suitability and characteristics of an integrated financial product.

A representation that was unsubstantiated at the time it was made will remain unsubstantiated, even if the representation turns out to be true or is subsequently substantiated

(ibid., p.8)

The substantiation principle is a common thread between disclosure and VfM assessment for MF-IFPs. If care is taken to ensure that evidence is compiled to substantiate disclosure claims, then that same evidence should be available to support VfM claims. It should be noted that retrospective substantiation is not acceptable in disclosure and that the same standard would likely apply to VfM assessments.

The Note then goes on to provide detailed guidance on disclosure analysis topics relevant to MF-IFPs (pp. 9-13). These topics can potentially be used as a checklist for VfM assessments of MF-IFPs.

Note’s list of topics potentially applicable to MF-IFP VfM assessments

  1. The standard ‘vanilla’ elements of the integrated financial product
  2. What does the integrated financial product purport to offer beyond a standard financial product?
  3. Measurement and evidence of non-financial performance
  4. Governance framework
  5. Internal audit or external assurance provided
  6. Risks or costs associated with the integrated financial product
  7. Consequences of failure

MF-IFP disclosures review leads directly to VfM-related considerations

Turning to the Review, it is a report on an analysis that the FMA conducted across 14 KiwiSaver and non-KiwiSaver MF-IFPs to determine how well the standards set out in the Note had been adhered to. This analysis covered product disclosure statements (PDSs), statements of investment policy and objectives (SIPOs), other material information documents (OMIs), separate policy statements (IFP policy statements), and websites and advertising. The Review comes with an important disclaimer that the FMA did not attempt to verify specific claims by MF-IFP managers about their products, whereas of course for VfM assessment purposes, verification would be essential.

Overall, the FMA reports in the Review that it was decidedly underwhelmed by what it found in the MF-IFP disclosure documentation it surveyed. All of the MF-IFP documentation showed faults of one sort or another, sometimes multiple flaws. The Review provides a list of eight areas in which the documentation studied fell short of what the regulator expects as stated in the Note. The deficiencies listed can have direct application to VfM assessment, for example:

  • In some cases, descriptions of the fund’s non-financial benefits or objectives were so high level or subjective that they provided almost no value, for example saying that “the fund’s returns will be financial and a reduced climate impact”, or that the fund will have a “climate impact” or engage in “active ownership”.
  • Consequences of breaches, measurement of performance, and reporting were all areas where a significant majority of IFP Funds failed to provide adequate information. Investors would find it difficult to understand what a fund would do in the event of a breach of its IFP policies, and how, or even if, a fund is meeting its IFP objectives.
  • Managers frequently market their IFP Funds with reference to some external provider that may provide measurement standards, endorsement and even assurance, relevant to the fund’s IFP characteristics. However, we found most funds fail to explain what these external provider references mean in practice or their value to investors.

(Review, p. 5)

Like the Note, the Review goes on to provide a list of findings analysis statements, supported by detailed observation, that can be applied to VfM assessments of MF-IFPs:

  1. Investor decision-making is complicated by relevant information being scattered, partial or lacking
  2. Investors need better information about what IFP Funds exclude and why
  3. Investors need better information about risk and return trade-offs
  4. Investors need better information about the benefits of an IFP Fund
  5. For non-financial outcomes to be meaningful, the consequences of failing to achieve them should be clear
  6. Investors must be able to understand the purpose and value of organisations providing assurance, measurement standards or endorsement

(Ibid., pp. 6-15)

Some of the analysis of MF-IFP disclosure documentation is very telling if viewed from a VfM vantage point. For example, under the heading, Investors need better information about risk and return trade-offs, the Review states:

Our review found all 14 Managers failed to adequately explain the financial performance implications (positive or negative) of integrating non-financial factors into investment decisions. Most fund documentation said nothing about financial performance implications at all, although two funds at least noted there were risks arising from the reduced investment universe, and one noted that the “fund may be impacted by ESG issues impacting companies”, an explanation which is too vague to provide assistance to investors. 

None of the Managers of IFP Funds disclosed any risks of failing to achieve non-financial objectives or outcomes. Given that investors in an IFP Fund are seeking both financial and non-financial results, Managers should explain any risks to the fund achieving its desired non-financial outcomes or objectives, and how it monitors for and manages that risk. 

None of the Managers of IFP Funds we reviewed explained the fee implications of integrating non-financial factors into investment decisions, such as additional external assurance costs, additional operational costs, or extra fees required for non-financial analysis.

(Ibid., pp. 10-11)

The above passage and many others like it in the Review clearly have VfM assessment implications if read within that value adding (or detracting) context. Just as VfM assessments undertaken by MF-IFP managers are subject to Supervisor review and, if need be, critique, so too does the Review envisage something similar concerning MF-IFP disclosure where the FMA writes:

We have clearly stated our expectations for IFP Funds, and the reasons for those expectations. This report has established that Managers of IFP Funds have a lot of work to do and we now expect them, assisted by their supervisors, to take the necessary care not to mislead or confuse investors with greenwashing. This is an area the FMA will continue to monitor to prevent complacency and the entrenchment of poor disclosure. 

(Ibid., p.5)

The anti-greenwashing stricture of the Review points to a need to enhance MF-IFP managers’ disclosures concerning non-financial factors of their investment products. The Review’s requirement for better evidencing and, where relevant, supporting quantification for these factors has direct implications for what MF-IFP managers and their Supervisors should be looking for when respectively undertaking the production and review of VfM assessments for such funds.

Looked at from this perspective, the Note and the Review should be closely examined by MF-IFP managers and their Supervisors when seeking guidance on the level of standards expected, and the criteria applicable for evaluating and verifying non-financial factors, within a VfM assessment framework. There is an overarching logical connection between what the FMA requires for disclosure and fair dealing in the specific case of MF-IFPs, and what the regulator expects for satisfactory VfM assessment of these investment products.


“VfM assessment of MF-IFPs should be guided by the FMA’s publications to date on disclosure and fair dealing for IFPs,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.

“In both the FMA’s Note and Review there is extensive and substantial supplementary material available to help unpack the Guidance’s short but dense reference to assessment of how VfM is received from non-financial factors by MF-IFP investors.”

“Of particular importance in all three of these publications is their common intense focus on rigorously evaluating the evidential bases for any claims made by fund managers about non-financial factors allegedly attaching to their investment products."

“MF-IFP managers must be able to provide sufficient and satisfactory evidential substantiation for any non-financial factor claims they make - whether in the context of disclosure, fair dealing, or VfM - and typically that evidence will need to be quantifiable, with some possible exceptions in the cases of investor values or expectations.

“Expertise in analysing and critiquing non-financial factors and their evidential bases will be required for both MF-IFP managers and their Supervisors alike to enable them to undertake their respective roles in producing and reviewing valid VfM assessments for MF-IFPs.”

“If that expertise is lacking, then it will need to be developed.”

“Close study of the Note and the Review is a good starting point for acquiring such expertise, even if not enough for all that will be needed.”

 “MF-IFPs represent an innovative and potentially beneficial part of the New Zealand managed funds market, and should be encouraged, but not at the expense of permitting greenwashing to intrude into matters of disclosure, fair dealing or VfM assessment.”

“As a Supervisor, Trustees Executors will be keeping a close eye on the claims that its supervised MF-IFP manager clients make about the non-financial factors of their investment products and engaging constructively with these clients where improvements can be made.”

“In the present round of reviewing VfM assessments, that means that Trustees Executors is paying attention to how the non-financial factors of MF-IFPs it supervises are demonstrated to be adding real value that is actually being received by investors.”

For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt Band at [email protected].

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