By Craig Swanger, Chief Investment Officer, Revolver Capital
Myths abound in the finance industry, alternately bewildering and then lulling consumers into a false sense of security.
No matter what the Royal Commission concludes, the superannuation fee debate has reached the point of no return. We will not hear the end of this for a long time. Almost certainly there will be more inquiries, ASIC attention and a voracious media appetite for scandal which will ensure the public continues to learn of broader industry failings. Interestingly, and despite the focus of the more predominant media headlines, the Royal Commission findings make it clear this is not just about big bad banks and a few naughty advisers. Contrary to popular opinion and a belief that not-for-profits only act in the best interests of members, industry super funds are not always blameless.
Grandfathered trailing commissions, banks consolidating clients into their higher-fee funds, not-for-profit funds spending members' funds on self-promotion and related parties, the list of abuses goes on and on. Unsavoury in nature, they are a blight on the work and reputations of the people in the industry doing the right thing. It is therefore vital each of these issues is addressed. However, in my view, these issues only address the easy wins in the debate.
Moving beyond the easy wins: pointing a finger at obvious transgressions isn't enough when Aussies continue to be misled on performance and fees.
It's obvious we need to eradicate poor conduct of this nature, a disgrace which for the most part has been left unchecked too long. Senior bank executives throw sacrificial lambs into the Royal Commission’s fire, then claim in carefully crafted press releases that they will do better by customers in future. More must be done to fix the conduct issues plaguing parts of the system.
Less obvious, more entrenched and therefore so much harder to change, is the ease with which excessive fees can be charged within the existing rules. This is not misconduct. It is a fatal flaw in the system.
Funds charging double the fees for the same investment products offered by others are operating legally and unchecked. It may be legal, but they are not acting with full transparency, or in the best interests of customers. They hide poor performance behind a bewildering array of investment choices, yet the cause isn’t investment performance. High fees are the real culprit. These are hidden in layers of fees which make it impossible for the average consumer to compare price and value.
Let’s cut to the chase. Others won’t say it for fear of retribution, so let me spell it out in black and white. There are more than a few of these funds deliberately taking advantage of the lack of understanding and lack of engagement with super to get away with:
- Charging more;
- Hiding poor long-term performance behind irrelevant short-term performance tables; and
- Pushing up their profits whilst neglecting their customers' best interests.
So, how do they get away with this?
Most people don't think about their super much because they are more focused on solving today's problems. Also, decisions are often made on their behalf by an employer who they trust more than their own judgement. The industry is also highly effective at making super seem more complicated than it is, discouraging a deeper engagement from members (unless it is encouraging people to consolidate super into their products).
The average person in Australia generally believes that a more expensive product is better. There will always be subjective arguments of course, but for the most part, it is generally accepted that a Maserati drives better than a Mini, Bollinger tastes better than Spumante and cashmere is warmer than cotton. So, consumers will pay more if they value the difference, and they can afford the price tag. The same applies in reverse. Typically, a Holden Commodore and a Ford Falcon didn't vary far in price because consumers were aware they were essentially the same thing. This thesis applies to most consumer goods – higher quality must back higher prices. This is not the case with superannuation which joins a small list of opaque consumer products where quality and price aren't connected, just because the consumer isn't able to make an informed decision.
Education and access to unbiased advice is an important component in resolving this tension. However, it is already incredibly difficult to get Aussies to engage with their super. The likely impact of the recent revelations by the Royal Commission is less trust and a stronger reluctance to rely on industry experts to help them make good decisions for their future. Therefore, structural changes are required to increase transparency, unravel fee complexity, and ensure more funds are doing the right things by their customers.
Fake news isn't just a Trumpism. Misinformation and myths abound in financial services, drastically impacting the ability of consumers to make good decisions.
In super, there is no stronger example of this than the persistent perception that bank super products are safe (and therefore high performing) and that industry funds are cheap (and consequently high performing). The facts simply do not back this up.
The evidence on who is best between the industry funds and the retail funds is mixed, and at best inconclusive. What is not mixed is the uniform lack of transparency when it comes to fees and performance. Some major myths must be debunked if we are to become a credible industry. Alternatively, we can ignore this underlying issue and continue to suffer the loss of consumer confidence as ASIC actions hit the news year in and year out.
Debunking super myths. Getting real can benefit everyone – consumers, companies and the country at large.
Industry funds are cheaper
Since the clean up on superannuation fees with the regulatory (RG97) changes last year, some of the industry funds are far above the average fee levels. For example, the HostPlus ‘MySuper'* option is $78 per year + 145bp (145basis points, or 1.45%), equating to $1,528 per annum for an average account size of $100,000. Given this is essentially the same product as the MySuper products offered by UniSuper and Australian Super, coming to $656 and $828 respectively, it is hard to justify the perception that if a fund is an industry fund, it is cheaper.
*MySuper was designed to be a low-fee, low-complexity, diversified super solution to be offered by retail, industry and corporate super funds, and to be used as the default funds for employees that don’t choose a specific super fund themselves.
Bank funds are ‘safer.'
Contrary to the "big and safe" brand perception the banks enjoy still, their most significant products are by far the weakest on performance. Colonial's FirstChoice for example, has returned 6.0% per annum over the past ten years, compared to 7.2% - 7.4% per annum for the three funds listed above.
Past performance is not indicative of future performance
The lawyers are only 50% right in their warnings about past performance. Past performance is indicative of future performance when that past performance is poor. 66% of the time over the past 15 years, looking at rolling 5-year returns, the worst performers looking backwards were amongst the worst performers looking forwards.
Good performance yesterday, means good performance tomorrow
While bad performance in the past tells us something, good past performance is not indicative of good future performance. Overwhelmingly, the data shows that good performance is not persistent. Yet the media, the productivity commission, and far too many in our industry focus on performance tables. If you had switched to the top performing fund at the start of each year, you would have underperformed the simple strategy of choosing the average low fee product.
MySuper is the cheapest option
MySuper is the default fund for any given fund manager and has the most straightforward fee structure. Consumers are led to believe MySuper, as the default, is the cheapest. Often this is not the case. As an example, the HostPlus MySuper option is one of the most expensive in the market. Meanwhile, HostPlus currently offers the lowest fee fund in the market, the HostPlus Indexed Balanced Fund, at just $78 + 7bp a year. Similarly, Vision Super provides a Sustainable Balanced fund for only $78 + 33bp per year whereas their MySuper product is $78 + 92bp per year. This trend continues across the retail platforms where the MySuper option is typically much more expensive.
The Royal Commission has commenced an essential journey towards unravelling the complexity, misinformation, conflicts and structural issues which characterise superannuation. Rebuilding this important industry in a more sustainable and consumer-focused form will be more challenging. Debunking the commonly held misconceptions and myths which surround super is an essential first step.
But those myths were created by the industry itself so that won’t be easy to achieve. Every year the performance tables are rolled out and we celebrate last year’s winners. Inadvertently or not, once again we mislead consumers into believing that past performance is the most important guide when selecting a super fund. Industry funds collectively continue to promote themselves with the promise of lower fees, obscuring the reality that many of their MySuper funds are 20 -20% above the average cost. Both sides happily push advisers under the bus, and sadly a few bad eggs have made that job easy for them.
It’s time to get on the front foot. Let’s not wait for the next inquiry or regulatory overhaul to force us to change. The industry, consumers and the country at large all benefit from positive reformation. To achieve this, there must be a bold commitment to:
- More education so consumers can defend themselves against misleading advertising, complex fee structures and performance promotions;
- More in-depth research to uncover the realities of performance versus cost;
- Greater transparency on how products are structured, priced and managed; and
- More fee for service advice options and innovation which enable delivery of independent advice which is still profitable for advisers.
Australians work hard and deserve to enjoy the fruits of their labour. They are not, by any means, stupid. It is time for the finance industry to stop being so paternalistic. Empowering consumers with knowledge, giving them a voice in the conversation about their financial future, creating easier access to trusted advice and ensuring appropriate protection measures are in place are all imperative to creating a more certain pathway to prosperity for the nation.
Craig Swanger is a 25 year veteran in global investment markets, including 15 years at Macquarie Bank as Global Chief Investment Officer where he was responsible for a team of 120 product developers and managers across 14 countries and every major asset class. Since leaving Macquarie in 2013, Craig has invested and advised a range of technology companies with a focus on transparency, independence and educating consumers.