Frontier expects that the superannuation industry will comprise fewer, larger funds over time and this presents challenges for the funds management community, which, to this point at least, has seen considerable proliferation of funds managers offering funds management services. There will be increased competition for clients’ investments, and managers who offer innovative solutions on alignment of interest and fees are likely to be in stronger contention for these mandates going forward. This is a material change in the dynamics of the funds management industry and will have profound consequences for some funds managers. The changing nature of the industry presents an important opportunity for clients to take more control of how they align their interests with those of people who manage funds on their behalf, to consider how much they are prepared to pay for these services and how they can structure fees to maximise this alignment of interest. Frontier has proposed an alternative here but recognises that successful implementation will be critical. Most of the criticism about this proposed model so far surrounds the flat dollar fee. Our view is that it is the combination of the flat dollar fee with a performance based fee that will align interests and we are not suggesting just a flat dollar fee. That would be too radical! Managers with confidence in themselves and their processes ought to be more comfortable with this new fee arrangement as the performance component would enable firms to pay performance-based salaries to staff and to reinvest in their businesses. From a client’s perspective, a greater focus on performance-based fees may lead to higher fees being paid at a time when markets are weak and overall fund sizes have fallen. This will increase the overall management expense ratio at a time when members and sponsors are likely to be facing poor and even negative returns. This will need to be addressed by way of fee structures and pay-out periods, but also by ensuring that members and sponsors understand the nature of the fee structures employed and their long-term expected outcomes. Finally, it is worth noting that this discussion applies to the payment for prospective generation of additional returns in excess of the index, often called “alpha”. By far the greatest contribution to a total portfolio return is the performance of the combination of market-based asset classes or “betas”. Getting the asset allocation (i.e. the mix of betas) right over time will make a far greater difference to an investor’s end result than adding value from fund manager outperformance. Ironically, most super funds spend much, much more of their “fee budget” on getting alpha than getting beta. It would also be opportune for clients to review the totality of fees paid and determine whether they should be more appropriately allocated.