The corporate watchdog has done well with its proposed changes to fee disclosure for super funds and managed funds, Chant West head of research Ian Fryer writes.
ASIC’s core objective in its review of RG 97 is to assist consumers in making confident and informed decisions through a disclosure regime that is practicable for industry.
Its proposals have largely achieved this. The changes will greatly simplify fee disclosure requirements for funds and make for fee comparisons that are much more clear – always a good thing for comparisons.
ASIC has heard the industry’s concerns and took on almost all the recommendations of the external expert it appointed to scrutinise the report.
A simple but significant change
One simple but significant change was to show just one number for investment fees and costs and another for administration fees and costs. The current distinction between investment fees and indirect costs doesn’t provide any useful information and can confuse consumers and lead to wrong decisions.
ASIC has also removed all the ‘made-up costs’ that everyone was calculating in different ways. These included property operating costs and implicit transactions costs, such as bid/ask spreads on certain types of transactions.
It was a huge job for funds to source or calculate these costs and for no benefit whatsoever. These costs were never part of the headline fees but some adviser groups, in the absence of clear guidance from ASIC, included them when comparing products, which greatly distorted fee comparisons and affected some client recommendations.
Borrowing costs have also been removed from comparisons, as they relate to interest costs rather than the cost of providing a service.
Property operating costs
The removal of property operating costs will take away one of the great inequities of the current RG 97 regime, as they applied only to unlisted property. It meant you could invest in a property through an unlisted vehicle and the same property through a listed vehicle and you would be required to show different fees and costs for each.
While there are still some differences in the treatment of listed and unlisted property, the removal of property operating costs gets rid of the main problem.
Super products and managed funds
The biggest issue with the current regime, however, is the different treatment of superannuation products and managed funds, as managed funds are currently required to show lower investment fees and costs than a super fund for the same investment because they don’t include transaction costs.
This is a real problem. Superannuation platform products (super wraps) invest in managed funds, so they disclose lower fees and costs than other super products for the same investment – this is clearly not fair.
The current regime also complicates disclosure for institutions with both super funds and managed funds, as they need to calculate different fees and costs for the same investment.
ASIC’s solution is to separately disclose investment fees and costs and transaction costs in the fee template for both super funds and managed funds. Transaction costs typically include explicit items, such as brokerage and stamp duty.
This will mean that the investment fees and costs for all investment options, whether they are in traditional super funds, super wraps or managed funds, should be pretty much the same.
ASIC does not propose to take the next step and require platforms to disclose the total cost of product for each option on a platform, although this will be the subject of further consultation with industry.
While there are practical issues related to the number of options available on a platform, I would argue it is reasonable to disclose the total cost of product for these products somewhere, even though that may not be in the Product Disclosure Statement.
Overall, ASIC should be applauded for taking on the strong criticism from industry for a seriously flawed disclosure regime and fixing it up. We look forward to ASIC continuing to demonstrate a strong commitment to solutions that achieve consumer outcomes and are practicable for industry to implement. These initiatives have the potential to lead to better consumer understanding and engagement with super, which is critical for the success of the super system.
Ian Fryer is head of research at Chant West.
