Using reasonable assumptions about growth and the asset-based fee, and with the same dollar fee being paid in year one, the assetbased fee would have cost $2.5 million more than the indexed fixed-dollar fee over the decade. That is, the asset-based fee would have given our hypothetical fund manager some 80 per cent more! Looking at index portfolios, we see no justification for assetbased fees, and recommend that fees should be set on an indexed fixed-dollar basis. The bulk of fund manager costs are not size-related, and there’s a natural upper limit to fees that super funds should pay.

For even very large Australian equity index mandates, funds shouldn’t be paying much more than $300,000 a year. Performance fees can also have hairs on them. The trick is to have a low fixed=dollar base fee, with a hurdle set at the right level to reward out-performance from skill rather than higher risktaking. Rice Warner Actuaries has recommended a risk-adjusted performance fee model. The formula behind the model requires both the volatility of the portfolio and its benchmark to be calculated, and so it’s best suited for listed assets. Our research recommends the development of a fee disclosure accounting standard, and we’ve commenced the process of talking to the accounting industry about this. The more consistent and standardised data generated using the standard should be published by APRA, and help funds know where they stand.