These fees don’t account for the income earned from securities lending, cash and forex management, thereby misrepresenting the true cost of super funds’ business with master custodians. This provides funds with an opportunity to publish low expenses for custodial services despite larger true costs. Another accrual of indirect costs occurs when funds invest in index products with a zero management expense ratio. The super fund pays no management fee, but any outperformance eked from the replication process – “the cream off the top of the product” – is pocketed by the manager, Elvish says. “In this situation, the manager gets the fee from the process, but in a published sense they provide a zero-fee product.”

These indirect fees are earned in all aspects of a superannuation fund’s operations, including product design, asset allocation, investment strategy, investment management, transition management, broker relationships and custodian arrangements, Elvish says. The exclusion of indirect costs from fee statements is legally permitted because the enhanced fee disclosure regulations were written at a time when super funds ran simpler portfolios consisting of equity, fixed income and property managers. Funds now implement far more complex investment strategies.

They allocate to an array of managers across different asset classes, own assets directly, use various investment interests while custodians perform a range of functions beyond record keeping. Fee disclosure rules are now out of step with reality. As a result, it is possible to “knowingly or inadvertently disclose vastly different fees for products which have very similar true costs,” Elvish says. The legislation aims to expose the additional costs taken on by super fund members, such as custody and brokerage, which they would not incur to if they invested their savings directly. In an industry built to support the financial wellbeing of millions of people in their retirement, and one that enjoys a guaranteed customer base, low-cost products should be the norm.

To achieve this, an accurate comparison of the true costs is required. But the existing Treasury regulations clearly don’t enforce this: they need to be improved to make it compulsory for funds to state these costs. Elvish says a good starting point would be for industry businesses to “pay their own way” and start disclosing indirect costs. “But it’s just like tax legislation. They change something and smart people manoeuvre around it. This is the same situation,” he says. Because indirect costs are never fixed – can a custodian predict how much money they’ll net from foreign exchange rate spreads during a three-year contract? – precise comparisons of the true operating costs of super funds are almost impossible to make.

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