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The super fee rort

14 September 2014  |  Super

RortPerhaps the best business to be in today is the super fund business. Not only are you gauranteed an inflow of 9% more funds each year, you can charge a per centage as your fee, not a flat amount. That means that your income keeps soaring no matter what you do.

What a business! Income is not tied to performance, and it keeps rising. That is why the Treasury estimates that the $21 billion going on super fees is about three times what it should be. It is also why the number of SMSFs has burgeoned, as people have realised that, as long as they have sufficiently large super, it is better to pay the fees to yourself.

The AFR points out that the Murray inquiry into the financial sector is really heating up in this area:

 

"The latest fee survey to come across this reporter’s desk, from research house Rainmaker, suggests that the introduction of no-frills MySuper products in January this year is having the desired effect. Total fees paid by members as a proportion of assets under management have fallen to an average of 1.12 per cent from 1.24 per cent in 2013 and 1.33 per cent in 2009, the year the former Labor government commissioned the Cooper Review into super. It is a significant fall, but thanks to asset-based fees and the enormous growth of the industry, the fee take has soared.

The Rainmaker findings suggest that the total fee take has risen nearly 60 per cent to $21.3 billion in since 2009. Little wonder that financial services accounts for more than 10 per cent of Australia’s gross domestic product.

Setting aside that not-so-small gripe, it appears that the fee gap between the for-profit and not-for-profit sectors has narrowed substantially, at least for employees of large-ish firms. This year members of master trusts are paying 0.12 percentage points more than members of not-for-profit funds, such as industry schemes. Five years ago they were paying 0.27 percentage points more. For anyone reading this column who is a personal member of a retail fund, they would be wise to re-think their arrangements. Without the benefit of discounts provided by large employers, they are paying an average fee of 1.59 per cent.

Admittedly the premium for being an individual member has fallen sharply over the past few years, but that is still a lot to be giving away to a fund provider for no extra services."

 

There is also the whole question of whether you pay your fund manager to be active or passive. In theory passive investment should be a lot cheaper, because nothing much is done. But equally active investment can be too expensive because it is very arguable that it actually works, and the transaction costs, because of the increased trading, are higher. The research indicates that it is diversification, rather than being active, that gives the bigger funds an advantage:

 

"Chant West, another research firm, has also waded into the fee debate, this time looking at the old nugget of passive and active management.

Passive management, which utilises computer programs to track underlying indices, is becoming increasing popular as super funds and private investors become more cost conscious and tire of paying hefty fees to fund managers who take only small bets on shares. For individual investors, this approach makes sense, notes Warren Chant, a director of the firm. Individual investors are typically charged anywhere between 1.75 per cent and 2.25 per cent for the privilege of investing in an actively managed Australian shares vehicle, where professional investors try to outperform the underlying market. “Essentially, at the retail level, active managers’ higher fees cancel out any excess returns they generate,” Chant West argues.

But the same cannot be said for super funds, which, because of their size are able to put the squeeze on investment management fees to, say, between 0.3 per cent and 0.5 per cent for actively managed Australian equities.

The Chant West analysis shows that the 10 largest balanced super products, which oversee assets worth a combined $364 billion, gained 7.2 per cent annually over the past 15 years, against a 6.4 per cent annual gain by a “passive benchmark”.

That is a significant difference. But it is not all about performance.

The research house calculates that about one third of the uplift is due to the ability of active fund managers to beat the relevant index. By far the bigger reason for the outperformance by the 10 big super funds is their ability to run a more diversified portfolio. Asset classes such as unlisted infrastructure, hedge funds and private equity, where there is no ability to invest passively, have performed well in recent years."

 

This is a salutary lesson for SMSF managers. Look for diversification.

 



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