As super funds come under increasing pressure to reduce member fees under strict cost disclosure rules and intense competition, industry experts warn that the sector is being “irrationally” driven to reduce and even conceal costs in the investment process, while returns have become an afterthought.
In a submission to Treasury, Allen Partners, a corporate adviser to global asset managers working with Australian investors, proposed that super funds be given a mandate of maximising net returns as their primary performance metric and move away from “inappropriately” focusing on achieving the lowest possible cost.
The current fee-based competition between funds in the member accumulation phase is missing the point, the firm said, as they should not be treated as a static, bundled-up number.
The most prominent example is the Australian Taxation Office’s YourSuper comparison tool, which – despite some industry pushbacks during the Your Future Your Super Review in 2023 – still presents annual fees as a single number to consumers.
Allen Partners acknowledged that reducing some costs, such as administration, could lead to better member outcomes, but said relentlessly cutting in other areas, such as investment costs might lead to worse returns.
“Performance fees for successful investments necessarily and mathematically put upwards pressure on total costs yet these fees are normally a reflection of substantial outperformance over a benchmark (otherwise known as alpha) and therefore higher returns,” the submission said.
“Investment opportunities should be considered and compared on a net risk-adjusted returns basis without the negative association of assessing higher investment costs in isolation.”
The submission noted private credit managers now often structure large upfront origination fees (up to 4 per cent, and not disclosed under ASIC’s RG 97 fee disclosure regime) in exchange for a lower fund management fee (disclosed under RG 97).
This is to essentially cater towards funds that seek to “artificially lower costs” by exploiting a loophole of sorts in the disclosure rules, with the result that the net cost to asset owners may end up being equivalent.
“[The practice] materially impacts alignment and risk sharing between asset manager and asset owners relative to the traditional/global approach of all such fees being paid into the fund for the benefit of fund investors, however with ‘normal’ (higher) management/performance fees,” the submission read.
Pulling both levers
Duncan Higgs, the London-based managing director and head of portfolio solutions of bfinance, agreed with the sentiment and said asset owners cannot “pull one lever and not the other” when it comes to reducing investment fees and maximising returns.
The consultancy liaises between global asset owners and managers and has a similar philosophy when they advise on fee negotiations.
“What we try and say to people is that it’s not just about reducing [costs] all the time. It’s about having an appreciation for what your manager is doing and what that mandate is doing,” he told Investment Magazine.
“Because ultimately… members are going to want to see performance as well as a cut of costs.
“With all else being equal, reducing fees is great, because that gives you a bottom-line extra return. But then you don’t want to do that at the expense of generating the most return in the first place.”
Achieving investment fee efficiency should be an “ongoing review and negotiation cycle” for asset owners, Higgs said, although the broader industry environment sometimes can collectively drive fees down for certain asset classes.
“We see that the more a mandate is out there… and as it matures in the market, what you tend to find is the range of fees quoted come down an awful lot and you naturally discover that median [cost],” he said.
For example, asset managers may not be able to charge much premium for an equity mandate with some ESG restrictions because investors are now expecting that to be offered as a part of the process, while there tends to be a wider fee range for impact investing because it is a less mature market.
But for asset owners looking to renegotiate with their managers, the most important thing is to determine what a “measure of good value” is for them, Higgs said, and to ask themselves if the new fee will be benchmarked against the old rate, or a peer average, or even the potential internalisation cost.
There does not need to be strict regulatory oversight to achieve good fee outcomes, Higgs said.
“We see that in other markets, like the Nordics, for example,” he said.
“They don’t tend to be that public in their fees and what they pay, but they’re very good negotiators.
“But then if you are solely looking at fees and costs… do you lose something elsewhere? There is always the danger of giving up on performance or other services the manager is offering.
“I think that’s a real challenge, and that conclusion can be quite difficult to come to.”
