Asset-based fees: not just pennies from heaven

One of the most curious aspects of the Cooper Review’s final report was that whilst its overall focus was on cutting costs, very little was done in the way of making recommendations about investment costs, even though they are the largest cost for any fund. Plenty of recommendations were made about administration, efficiency and governance, writes AIST CEO Fiona Reynolds.

Then of course there was the MySuper proposal, but investments seemed to have slipped under the radar – despite the fact that Jeremy Cooper set his panel the task of considering a new fund management model. Having said that, he did make some rather interesting observations along the way. Not many people will have read the whole final report – I recommend you do, there are some definite gems of facts, figures and wisdom woven into the 500+ pages that make up the final report. One such wisdom is that the panel saw asset-based investment fees as being taken for granted across the industry, while also noting that they were ‘sub-optimal’, and likely to result in massive revenue growth with no corresponding increase in effort or value.

The panel noted the almost total lack of submissions on alternative approaches to setting investment fees. Yet Cooper’s only recommendation on investment fee structures is to require performance fees – which he also doesn’t like – to meet a ‘performance-fee standard’ if they are to be part of any MySuper structure. The requirement for this standard is part of the Federal Government’s election policy on MySuper, and has to be developed by APRA in consultation with industry. We think the need is wider, and so we’re going to be agitating for a general investment fee structure, with industry consultation as the first step. As it happens, AIST’s submission included a proposal for a new approach to fees, but we took Cooper’s point that there needs to be more debate about fee structures, as well as about fee levels and net return to members.

We don’t think it’s enough to just recognise that there’s a problem that results in members paying more than they should. As trustees of our members’ money, we should do something about it. AIST therefore commissioned Rice Warner Actuaries to work with us on investment fee research to help us kick along the debate. Not surprisingly, the research supported Cooper’s grave reservations about asset-based fees. Our modelling included a comparison of a fixed-dollar fee (with AWOTE indexation) with an asset-based fee for a $100 million Australian equity index fund using actual ASX data from 1999 to 2009.