Australians have long been slugged with high superannuation fees but charges are starting to drop as asset owners bring investment teams in-house.

This is the view of industry veteran Fiona Trafford-Walker who will retire this year from Frontier Advisors after a 25-year career in investment consulting.

“The large super funds are investing a lot of money in developing their internal capabilities so while fees might not come down that much in the short term, you should see a jump down when they stabilise,” she said.

Trafford-Walker said the transfer of power, responsibility and accountability from investment managers to asset owners was well underway.

“Even the act of thought bubbling about the possibility, may well be enough to trigger discussions on fees with investment managers,” said Trafford-Walker, who was named by a US publication as one of the top five most influential investment consultants in the world and one of only six women to be nominated.

The consultant said the recent decline in fees was necessary in a low-return environment where it was tougher to achieve investment targets. “How much asset owners pay for market and excess returns will be even more critical,” she said. “With lower expected returns, anything that counts against returns such as taxes, costs and fees, needs to be carefully reviewed through the lens of expected net returns.”

For much of her career, Trafford-Walker has been on a mission to get superannuation funds to rethink how much they pay fund managers to invest in the $3 trillion retirement savings pool. The consultant, who helped develop a set of guiding fee principles in 2010, said there was now much greater awareness of the impact that fees have on long-term returns.

“We want to run the most efficient but most effective system possible and thinking about what you pay for, who you pay and how much you pay is important,” she said. “But the issue was never about paying as little as possible to get as little as possible; it was always about trying to get the best net returns.”

Aligning interests between asset owners and investment managers to support better net-of-fee outcomes has been a primary focus. She also said that assets owners should keep the bulk of the return.

“There is now a very strong awareness that asset owners provide the capital and take the risk and so should retain the bulk of the return and investment manager should not receive an excessive share,” she said. The asset owners “want to pay as a fair exchange for what they are getting from fund managers, which could vary depending on the capability of the manager and the diversification benefits or the type of sector or strategy.”

In a new research paper published jointly with Frontier,  she addressed the question of how investment managers should be rewarded for investing other people’s money. She underlined the impossibility of finding a fee model that works as well for everyone because investors will always want to pay the least possible for the outcome they think they would get.  “Passive management aside, delivery of value added is mostly an uncertain thing and as they say, hope is not a strategy,” she said. “So how can this be resolved?”

Greater awareness and transparency of fee models have made investors question the old way of charging clients. She said it was clear that the generic ad valorem model was well past its use by date. Despite this, it remained the most common model and so the typical goal of the investor has been to make fees paid as low as possible.

“We argue that a pricing philosophy that values transparency and can prove the value of the service, that shares the benefits of scale, that rewards long-term relationships, that balances structure with complexity, and that makes it clear what investors are paying for will enable more enduring fee models to emerge.

“Successful commercial relationships need the organisations on both sides to be sustainable and for both parties to think that it is fair.”

 

 

Elizabeth Fry is the editor of Investment Magazine's digital platform. Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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