2 responses to “Fees not fair enough yet”

1. 

   Jake Rogers

   10/09/2013

   Price and value are two very different concepts, and the focus of Australian superannuation funds on the former rather than the latter is slowing migrating from amusing to concerning (with MySuper the poster child in this regard). The above article contains proof points that the focus on price is compromising the investment choices of funds and thus retirement outcomes for Australians. One only needs to look at family offices (who truly manage their own money) and their focus on net returns rather than price to illustrate a more objective outcome-based investment process. Either one believes in active management (and their ability to pick those with sustainable excess returns) or they don’t (and thus should index their portfolio and get the cost as low as possible). If one does believe in active management then whilst they should negotiate to the extent possible, they should be prepared to pay a price commensurate with the value offered, which is not equal between managers. A manager that is offering to reduce their fees (particularly proactively) has determined that that their product is not worth what is once was – and this should warrant serious contemplation of removing them from a portfolio (including if prompted by an MFN commitment as that means they are charging lower prices today to new clients than they did previously).

   Offering a lower fee scale to Australian clients than others is simply unsustainable (if the active manager is good and has finite capacity as they will simply cease to offer it in Australia) and lacks integrity (unless the cost of providing services to Australian funds is significantly cheaper).

   The flat dollar + performance fee proposed by Fiona Trafford-Walker is a neat concept prima-facie however neglects to consider that risk increases with account size in dollar terms (in the same vein as superannuation funds which charge bps to members, the larger the account, the more a minor administrative error costs), and thus a base fee in bps is required to compensate for this risk (although this base fee can and should be moderate when performance fees are in place).

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   1. 

      Fiona T-W

      11/09/2013

      Thanks for your comments Jake. I am not sure if you were at the conference but I was clear in my presentation on the day that net returns were paramount, but that fees were the piece that can be controlled by investors, unlike gross returns. The topic of the presentation was also about fees and alignment, hence the focus on that aspect.

      I agree with your differentiation between price and value. However, the superannuation world now is operating within Stronger Super and MySuper regimes, and although the legislation is silent on fees, the terms “low fees” and “simple” featured heavily in many of the earlier discussions on MySuper. In fact, I was at a conference where Jeremy Cooper was asked to provide a guide on what sort of fees a MySuper option would/should charge and he said he “would have thought sub 1%”. This has stuck in the minds of many and there is a strong view in the industry that fees need to be lower than they are now, although not all are not as clear on what the number should be.

      Superannuation funds compete with each other more than ever before and so are subject to the same pressures that permeate other industries about pricing and quality. However, many of the superannuation funds I work with are very clear in their mandate to deliver strong net returns for members or sponsors and this is evident in their track records. In the quest to continually improve net returns, a focus on paying a fair fee for the service rendered is a reasonable strategy and this is what I am strongly advocating.

      I don’t agree with your comment about the flat dollar plus performance based fee failing to account for the increased risk, as the flat dollar fee is not a fixed amount for any mandate. If it’s a large mandate, with genuinely higher risks and costs that can be transparently made clear to the investor, then the fund manager should propose a higher but still flat dollar fee. The idea behind the flat dollar fee component is to appropriately cover a fund manager’s costs of doing business, with the performance based fee the added bonus if, and only if, the fund manager delivers on its promise of added value (and that is then used to pay staff bonuses etc). Too often we see fund managers rewarded for what they promise to deliver (e.g. 2-3% above the index) rather than what they actually deliver (e.g. index or worse), with no recourse for the investor. Linking fees to funds under management encourages asset gathering and can both reward and penalise fund managers for something over which they have no influence (i.e. fees go up in bull markets and down in bear markets). I think it is hard to argue that these outcomes are in the superannuation funds’, members’ and sponsors’ interests.