Fundie fees the easiest target When he was financial services minister, Nick Sherry aimed to drive the headline superannuation fee across the industry down to a cap of 1 per cent. Jeremy Cooper, in the end, did not advocate such a limit on fees, despite some early rhetoric which appeared to favour indexing as an investment approach, with more emphasis on beta generation from the asset allocation in a ‘lifecycle’ fund framework. His talk of a complete ban on crosssubsidisation, including between a low-cost My Super fund and more sophisticated investment options run by the same trustee, also did not come to pass in the final report. He made it clear, however, that there was some fat to be cut from the system, and that fees paid to funds managers, both for management and performance, would be part of the trimmings. Michael Rice, founder and director of Rice Warner Actuaries, says cost savings from investment fees are the benefits which can most readily be passed on to members.
Funds management fees account for a large part of the costs paid by each member and, particularly after a period of widespread poor performance during the financial crisis, are an “easy target” for reduction, he says. Hurt by investment losses and wary of financial engineering, funds and members want certainty, and because future investment returns can never be accurately forecasted, fees are up for negotiation. “Investment performance is a promise,” Rice says. “For that reason, costs have a disproportionate emphasis because people compare what they can.” So they focus on costs. “You do want some sort of benchmark for costs. But [focusing on] costs in isolation actually distorts things. “If cost became the primary consideration, it might distort the long-term investment strategy and could be detrimental to member returns. “Fees are just a small part of after-tax, after-fee investment returns.” And if lowering up-front fees becomes the priority, then some asset classes and investment styles which contribute to longterm performance, such as active management and unlisted assets, will be off-limits for funds.
“Then there are all of the services provided by funds which are discretionary: limited advice, call centres and data analytics, which alert funds to members who may want to increase contributions or buy more insurance. “The focus of the fund will be more of a cheap service, rather than on providing long-term value – but funds will say they are trying to do both.” If super funds in Australia began heavily indexing their Australian equities portfolios, close to half of the ASX would consist of passively managed money, Rice says. “You would get liquidity issues and you wouldn’t get a dynamic trading market.” Funds would also be exposed to the euphoria and panic of asset bubbles. Some high-alpha managers, particularly those with global businesses, would inevitably focus their capital on other markets in Asia. The low-cost trend will, in time, change the way funds managers in Australia are paid.