“What I suspect is that we’ll get a restructuring of fees so they are more aligned,” Rice says, so lower base fees and bigger performance fees become the norm. In the process, funds will try to impose claw-back provisions so that performance fees are calculated over three-year periods, but this will meet resistance from managers, whose staff are customarily paid annual bonuses. But it’s still early days in the fee debate, which is being driven by influential asset advisors Frontier Investment Consulting and JANA Investment Advisers, which have united in the campaign for a cost-recovery plus performance fee structure in funds management pay. In 2010, there were 131 investment managers operating in Australia, according to Austrade. Few of them consistently deliver brilliant returns, Rice says, and the vast majority of managers are comparable to another manager, so it’s likely they will compete on costs. Some will “break ranks” to adopt this fee structure and win mandates, but exceptional managers with limited capacity can still command bigger fees, he says.
Already, big funds managers are discounting quite heavily to get or keep mandates – but aren’t disclosing this outside negotiations – and at least one super fund has stipulated lower fee terms are mandatory in recent tender documents, he says. Since bigger funds can feasibly run more sophisticated investment strategies and member services at lower costs, the race-to-the-bottom on fees will spur more mergers. But even large funds find it difficult to prevent increasing costs being passed on to members. Rice points to AustralianSuper’s 50 per cent hike in fees in 2008 to $1.50 per week as evidence of this. “That’s about $30 million a year going into product distribution, marketing and services. That’s what happens when you get bigger and don’t necessarily pass cost savings on.” As memberships shift into the decumulation phase, funds will also need to provide a range of investment, engagement and advice services for retirees. E-mail communications and, in time, online contribution payments will improve productivity, but there are some services that funds will need to beef up, such as the call centres run by administrators. “Retirees have a lot of time on their hands. Some call their super fund each day, and they will spend 30 minutes on the phone instead of 30 seconds,” Rice says.
Canaries in the coalmine When pundits express their fears for a bland, passively-managed MySuper universe, they are often thinking of a handful of products that already exist. The one that has received by far the most airplay has been AMP’s Flexible Super, launched with considerable fanfare in the middle of last year. The ‘Core’ Flexible Super balanced default option, with 70 per cent growth assets, promises a fee lower than the default option of most not-for-profit funds – just $403 per year for a member with a $50,000 balance, compared to $508 for the average ‘balanced active’ industry fund option (the comparison uses Chant West numbers and does not include insurance premiums or transaction costs). There is one important difference between ‘Core’ Flexible Super and that average industry fund default option, however. While most of the industry funds use a ‘core-satellite’ approach, combining passive beta with active management and alternative asset classes such as private equity, AMP’s product is indexed all the way. It doesn’t even look externally for the manager, with AMP Capital Investors doing the honours.