Threats to self-managed super ..
Many years before the superannuation scandals were revealed by the royal commission, large segments the Australian community knew that something was wrong with the way big superannuation was operating.
They didn’t have a Michael Hodge QC peeling back the details but whether it be retail or industry funds, disclosure was poor and the stories about how hard it was to transfer money or be paid were regular barbecue topics.
And so, almost a third of Australia’s superannuation money is now managed in self-managed funds and around half of those in self-funded retirement manage their savings via their own funds.
While the Australian community voted with their feet, it hasn’t been an easy journey.
The big superannuation funds got into the ear of both sides of politics and misled the politicians about self-managed funds, causing our elected representatives to dream up all sorts of nasties to curb them.
But that didn’t work because the population feared something was wrong with the big funds.
Even in the industry funds, where there have not been the same sort of problems as we have seen in the bank-owned funds, they did not have good retirement products and their level of disclosure was very poor. Accordingly a large number people who had saved for retirement through industry funds set up their own funds when they reached retirement.
The Australian community was helped by an accounting profession that showed their clients how they could operate a small fund efficiently and cheaply. What made it easy to comply with ever-increasing rules was the fact that the politicians were trying to protect self-managed fund members from themselves —the members were the trustees and so, unlike many big funds, they looked after their own interests.
Now the self-managed fund movement is beginning to move to the next stage where children are being invited into the family fund. To the great credit of revenue minister Kelly O’Dwyer, the current government has increased the amount of people that can be members of a self-managed fund from four to six, to help the family transfer process.
There are two major hazards that are set to damage the self-managed funds movement.
The first is that a large number of funds have been set up to buy residential properties with high gearing. For some high income people this can be an advantageous strategy. But high pressure sales people, incentivised by huge commissions, got into the act and sold apartments at inflated prices to self-managed funds.
In many cases they actually had people setting up new funds to borrow the money and buy the apartments. There could be some big losses in this area. But these scam funds are only a small part of the total movement.
The second threat comes from the ALP, which is trying to help its mates in the industry funds by attacking self-funded retirees using self-managed funds. The ALP plans to remove franking credits from those self-managed funds with sufficient money to self-fund their own retirement. It’s telling them if they want to keep their franking credits they must join an industry or retail fund.
The measures are carefully crafted so that the ALP is not attacking those that have substantial sums in superannuation. It is the battlers that they want to push into industry funds. It is absolutely outrageous and represents the best chance the Coalition has of being re-elected at next year’s election.
There is very little money to be raised. The ALP claims the attack of the battlers in self managed funds will yield billions but most people in the superannuation movement believe the ALP is using estimates that are simply wrong and do not take into account the Coalition superannuation tax measures that started last July and changed the game. It’s possible the ALP are using fictitious estimates to fund electoral promises.
My guess is that the Coalition has not understood the intense anger in Middle Australia who see that their friends and relatives who funded their own retirement are being discriminated against. They believe it is about the ALP helping mates and not about money raising. But the ALP’s mates in the industry funds do not need help.
There is no doubt that the problems in the retail superannuation funds will send a lot of people into industry funds but they will also cause a new generation of people to look more closely at self-managed funds as their favoured savings vehicle.
Australians are being ripped off
by super fund trustees …
Australians are being ripped off by super fund trustees “surrounded by temptation” to do the wrong thing with the $2.6 trillion retirement savings pile, while regulators are failing to search out and punish bad behaviour, the banks royal commission has heard.
In one example of fee gouging outlined at the royal commission yesterday, NAB charged a customer of its MLC division an array of fees that gobbled up $892.20 of $1101.95 earned from a year-long investment in the simplest option available, cash.
As the commission investigates the inner workings of the compulsory superannuation system over the next two weeks of hearings, it will explore how retirement savers are swindled through fees for services they never receive, cosy deals between retail super funds and the banks that control them, account-draining insurance premiums, and payment of commissions — even though new kickbacks were banned in 2013. Counsel assisting the commission Michael Hodge QC launched an attack on the sector’s twin regulators, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority, saying there was “no dedicated and active conduct regulator shining a spotlight on the trustees and searching out bad behaviour”.
An “unfortunate illustration” of the confusion between the regulators was that each gave a different answer last Friday in response to the commission’s questions about progress on a co-operation agreement between them, Mr Hodge said.
He said APRA had the power to ban people from being superannuation trustees, but had done so just once since 2008, when a change in the law required it to go to court to do so.
Mr Hodge said trustees were “surrounded by temptation”, including choosing profit over the interests of members, or they set up structures that distanced themselves from responsibility and “thereby relieve the trustee of visibility of anything that might be troubling”, he said.
“What happens when we leave these trustees alone in the dark with our money?” he said. “Can they be trusted to do the right thing?”
The comments come after The Australian has exposed a systemic pattern of fee gouging from super savings in a series of articles.
NAB has already refunded $35 million to more than 220,000 people charged a fee who got nothing for it because they did not have a financial planner. It plans to spend an additional $87m compensating 205,000 super members because it failed to tell them clearly they were able to opt out of paying the impost.
Mr Hodge said the inquiry’s behind-the-scenes work had established there was less misconduct in the not-for-profit industry sector, where super funds were controlled by unions and employer bodies, than in the retail sector, where funds were run to profit the banks and other financial institutions that controlled them.
Mr Hodge said the commission had dropped the idea of putting executives from $46bn construction industry fund Cbus in the witness stand — but said it would investigate spending by industry funds on two ventures — news website The New Daily and a TV commercial comparing banks to foxes in the superannuation henhouse — to see if this was in the interests of members.
Ian Silk, the chief executive of the nation’s biggest fund, the $130bn Australian Super, is expected to give evidence on the issue today.
NAB executive Paul Carter, a former manager of the bank’s super business, yesterday spent four hours in the witness stand as part of a detailed examination of fees and commissions charged to by the bank’s MLC division.
He was shown an account statement for an MLC super fund member who had invested $43,000 in cash, and received a return of just 1.2 per cent a year.
Among the $892.20 in fees MLC collected in 2015 was an administration fee of $554.32, an adviser contribution fee of $91.67, a plan service fee of $186.47 and “Stronger Super Implementation Fees” of $65 — the last to cover MLC’s costs in bringing in a package of government reforms designed to make the superannuation industry more efficient.
Under questioning from Mr Hodge, Mr Carter struggled to identify what benefits clients got from the plan service fee, which entitled them to ask for general advice from a financial planner.
“Fees for no service” have already emerged as a key theme of the commission.
AMP’s dishonesty with ASIC over the issue claimed the scalp of chairwoman Catherine Brenner after it was exposed at hearings earlier this year.
AMP, which saw its share price smashed by the dramatic revelations, is to return to the commission hot seat during this round, alongside other retail heavyweights including ANZ and IOOF.
Industry funds including Energy Super and Hostplus are also to be questioned. Representatives of APRA and ASIC are also expected to be grilled.
For all the political noise about rising energy bills, Malcolm Turnbull and Bill Shorten would do well to focus more on the obscene superannuation fees paid by Australian savers if they want to save households some real money.
Australians pay more than $30 billion a year in super fees, almost 2 per cent of Australia’s annual gross domestic product. That’s much more than the $23bn we spend on energy. A household nearing retirement pays average superannuation fees of $3700 a year, about the average energy bill. Turning the heater on for longer can hit the household budget for the winter months, but super fees that cut into retirement savings have a lifelong effect on retirees’ finances.
So why are we paying so much for the sector to manage our money? The recent Productivity Commission inquiry into the superannuation sector was scathing. It found there were too many unwanted accounts, too many under-performing funds and too many funds charging exorbitant fees. One-third of all super fund accounts (about 10 million) are unintended multiple accounts. Almost half of Australians aged 40 to 45 have two or more super accounts. These erode members’ balances by $2.6bn a year in unnecessary fees.
Almost five million super accounts are in high-fee funds, costing $1.3bn a year more than low-fee funds. The Productivity Commission also found that super funds with higher fees tended to deliver lower investment returns. The difference between choosing a high and low-performing fund is worth $635,000 for a typical full-time worker by retirement.
Superannuation also costs a lot in poorly targeted life and income insurance. Of the 12 million Australians with life, total and permanent disability or income protection insurance through their super, about a quarter are unaware. Almost 20 per cent of members have duplicate insurance policies across multiple super accounts. Some members may not even be eligible to claim on these “zombie” policies.
The long-term consequences of superannuation policy failures are enormous. The lowest-cost funds today charge fees of about 0.5 per cent of super fund balances annually. Were all funds this efficient, it would boost the retirement savings of a typical full-time worker in a poor-performing fund by about $100,000. Avoiding multiple insurance policies paid through super could boost retirement balances by more than $50,000. For many retirees this is the difference between staying at home for the winter and enjoying a holiday in the sun.
Past reforms, such as MySuper, have been timid. They’ve helped bring down total super fees from 1.3 per cent of total super assets in 2010 to 1.1 per cent in 2016, but total fees still are well above the OECD average.
Thankfully, the government finally may be ready to act.
The Turnbull government’s draft legislation before the Senate promises to curb egregious fees charged on inactive accounts and default insurance offered to those who don’t need it.
If passed, the bill will stop super funds from defaulting many Australians into insurance they don’t need. Life insurance no longer will be a default for super fund members aged under 25, for members with balances under $6000, and for members whose accounts have not received a contribution in 13 months and are inactive.
Life insurance is unlikely to be appropriate for most under-25s, who generally don’t have dependants. Only 6 per cent of people aged 23 or 24 and in employment have a child. If a 23-year-old dies, it is unlikely that any partner will depend on income support from them for the rest of their lives. The super industry argues the proposed changes to default insurance will lead to large increases in insurance premiums.
This strongly suggests that those who are young, have inactive accounts or small balances are cross-subsidising everyone else.
The bill also will consolidate inactive accounts automatically. But even then we’ll still have some of the highest superannuation fees of any system in the OECD. And underperforming funds still will cost retirees billions each year in forgone retirement income. More action is clearly needed.
The Productivity Commission’s recent draft report on super fees sets out a path.
Under the commission’s recommended reforms, Australians would be allocated a default super fund only once, when they first started working. Unless they actively chose another fund, new workers would be defaulted into one of a shortlist of “best-in-show” funds selected by independent experts. They would stay in this fund even if they changed jobs. Financial planners also would be encouraged to recommend funds from the top 10 list or to show reasons why they hadn’t, under a rule known as “if not, why not?”.
But such progress will require both sides of politics to eat some of their own. Many smaller industry super funds would lose the flow of default members delivered by the existing awards system. Without new members or fees on inactive accounts, many would have to merge.
Meanwhile, the commission’s best-in-show list for allocating new workers to default funds would likely be dominated by industry super funds, which have tended to outperform for-profit funds. That would be bad news for many for-profits, and for some in the Coalition government concerned about alleged links between industry funds and the ALP.
But difficult as the politics may be, solving superannuation is probably easier than solving the energy policy wars.
And it’s even more important.
Things are worse in the
financial services industry …
What I’ve learnt from the royal commission is that things are worse than I thought in the financial services industry.
I’ve known for years that the use of financial advisers as sales people — that it’s the distribution arm of the wealth management industry — was continuing despite the efforts of the ALP through the Future of Financial Advice legislation, in which commissions were banned and advisers were required to act in the best interests of clients, and which remains despite the efforts of the Coalition to gut it.
I thought at the time that more would be needed than FoFA, and that the switch to “fee for service” instead of sales commissions was a fig leaf.
What I didn’t count on was that this system had corrupted these organisations’ souls. But I should have. The system is founded on a deception: that financial advisers are like doctors, independent managers of your financial health. In fact many, perhaps most, are paid to distribute drugs. As with doctors, it can sometimes be a thin line, but financial planners — especially those employed by banks and AMP — are rewarded for selling stuff, either directly or indirectly. Imagine doctors being employed by drug companies, on salary. Advisory practices are called “dealer groups” and they are grouped under the “distribution” sections of their organisations.
It means there is a deliberate disconnect between what clients think they’re getting and what advisers know they are providing. That’s also known as deception. This doesn’t apply to all advisers — many are truly independent and acting in the best interests of clients, like doctors, but it’s very difficult to know the difference and too easy to get the wrong one.
Any business that’s based on a deception is fundamentally corrupt, and we are now seeing the consequences of that in the royal commission. The question is whether the commissioner recommends the sort of revolution required and the government of the day adopts it.
Alan Kohler is a columnist for The Australian and publisher of The Constant Investor
The first thing I have taken from the royal commission is that self-regulation does not work. The notion that the market could not just solve most problems but could also solve its own problems became embedded in legal and bureaucratic thinking over the past two decades. But self-regulation in Australia is now mortally wounded.
The second point that emerged with real clarity as the commission unearthed so much poor behaviour across financial advice, consumer banking and small business finance is that a royal commission operates in another league from “internal inquiries”, or for that matter Senate inquiries. A fully briefed QC confronting a subpoenaed witness is a remarkably effective format for the investigation of an industry.
The final recommendations report from the commission will be a landmark moment: this is history being made before our eyes. In the future we will talk about what happened before and after the commission.
Personally, I’ve come to realise that no matter how long you study a sector, you can still be surprised by what you don’t know.
I thought I had a better grasp than most of how bad things were in the financial services sector. I was wrong. I won’t be fooled again.
James Kirby is The Australian’s wealth editor
The royal commission’s biggest achievement has been the democratisation of finance.
In a sense, it’s not a royal commission at all, because most of the case studies have already been investigated, and enforcement action or remediation has taken place.
While AMP’s misleading of ASIC over its fees-for-no-service scandal has been a revelation, the reason is that the watchdog is conducting a live investigation and wants to avoid telegraphing its punches.
That said, the case studies have been carefully chosen and curated for maximum impact. Reputations have been smashed and trust in the industry is at an all-time low.
By February next year, Ken Hayne will have to come up with sensible and workable recommendations for reform.
While the royal commissioner has succeeded magnificently in bringing financial misconduct to the masses, his most important work is still to come.
Richard Gluyas is The Australian’s senior business correspondent
The four questions to ask your financial adviser
How are you paid?
There are two common ways advisers will charge, by the hour or by asset-based fees — that is, a percentage of the amount you have “under advice”. The safest option for the client is to have an hourly rate because the most you will spend on fees will be a multiple of the hours. The argument for percentage-based fees was that the adviser’s income would go up and down with yours. This argument is deeply flawed. If your wealth doubles, it does not take twice as long to advise you what to do.
Are you independent?
There are more than 20,000 financial advisers in Australia and the vast majority of them are tied or connected to a major financial institution in some fashion. At the most basic level, an adviser at the counter of a major bank is tied to that institution and endless surveys show the adviser is most likely to offer you products from their employer. You can find good planners who are independent or linked with major institutions — we have both types on our list, but it is important to know their connections.
Am I properly insured?
Under the present regulatory regime, how an adviser operates in relation to insurance can be a real litmus test. That’s because though commissions in financial product sales are now banned, they are still legally allowed when it comes to insurance. Everyone has different insurance needs, but it is not the case that everyone must have all forms of insurance. Income protection insurance is often inappropriate and poor value. Any over enthusiasm on insurance should be greeted with caution.
How am I doing financially right now?
If a planner is too keen to get your business or to make dramatic changes to your investment portfolio, you may be facing some real problems. A good adviser should be able to calmly judge if they can add value to your investment — or for that matter whether it makes sense for them to have anything to do with you. (You may be too conservative, you may be too ambitious.) If an adviser wants to make a lot of big changes — such as suggestions you borrow more than you planned, or that you concentrate your assets heavily on one investment, then alarm bells should ring. —
A new exit strategy
The damning allegations levelled at some of the biggest names in the financial services sector during the banking royal commission have complicated life for the broader financial planning industry in more ways than one.
Beyond the broader reputational hit to the sector and the increased challenge of building trust with clients, the scandals have exacerbated the longstanding conundrum facing smaller independent financial planners weighing up retirement.
Financial planners have typically had few exit options, with business owners normally looking to sell out to banks or larger corporates. But according to Gilkison Investments managing director Dean Gilkison, even before recent events at the royal commission, selling to the big boys was an exit option unpalatable for many.
Vending a business into the majors typically meant saying goodbye to a legacy built up over many years. The brands disappear, Gilkison says, as do the philosophies and values that characterise a firm.
Gilkison is now leading an effort to create an alternative exit path. He has established Broadleaf Group with the specific aim of delivering an exit to smaller independent advisory firms while also preserving the legacies of the old businesses.
The Broadleaf model focuses on acquiring financial advisory firms with aligned values, and helps facilitate the transition from the incumbent owners to younger advisers who don’t yet have the capital to buy out their bosses.
Many financial advisers have built up relationships with their clients that span decades
Broadleaf also aims to differentiate itself from the majors by allowing the existing owners to decide whether to stay involved after their exit as either directors or mentors. That option holds a lot of appeal to business owners not yet ready to completely exit the workforce, or who fear that full retirement means death.
The model also aims to deliver the firm’s employees a path towards significant ownership, an option that often disappears when firms are sold to bigger players.
Gilkison says the idea for Broadleaf was inspired by the all-too-many peers who had come to regret the way they exited their companies.
“We’ve watched great colleagues of ours in the industry go through this struggle, and we’ve seen great employees locked out of any material participation of ownership in the business they’re working in,” he says.
While the reputation of financial advisers has taken a battering, Gilkison says most in the industry are genuinely concerned about the future of their clients. Many have built up relationships with their clients that span decades. Gilkison says the Broadleaf model offers to provide peace of mind to exiting owners that they will still be able to keep an eye out for their old clients’ interests.
It’s a model he and fellow Broadleaf director Richard Hernan are starting to roll out in their home town of Perth, and that they ultimately plan to take national. The firm’s first acquisition is due to settle in July, with another three already in the pipeline.
Hernan says while the business idea was in train before the royal commission began, the negative publicity from the commission had actually proved helpful.
“In our conversations with people we used to have to explain why they wouldn’t want their business to go to the big banks or AMP,” he said. “Now we don’t. They just have to pick up a newspaper.”
Warren Buffett, the world’s
most famous investor …
Warren Buffett, the world’s most famous investor and, suitably, one of its wealthiest inhabitants, has long pointed out that the best way for the vast majority of people to invest is to avoid fund managers — those people who invest your money on your behalf by picking stocks and investments, usually making themselves rich in the process.
“When trillions of dollars are managed by ‘Wall Streeters’ charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he wrote to shareholders in 2016. “Both large and small investors should stick with low-cost index funds.”
With Australia’s $2.6 trillion superannuation industry set to become the key focus of royal commission hearings in coming months, the fund managers and other investment types who “manage” the vast majority of that cash — whether they are affiliated with the biggest unions, the major banks or some other organisation — are hoping Buffett’s word doesn’t catch on across the Pacific.
Let’s break down what Buffett is saying in its simplest terms — the key reason the nation’s super industry has become such a sloshing gravy train over the past three decades is almost entirely because of “information asymmetry”. That is: they have it, we don’t.
Buffett is saying that rather than paying someone to pick stocks on your behalf, you are better off investing in stock market movements, or a subset of its biggest stocks, as a whole.
With so much of other people’s money being “managed” by professionals, all of them trying to pick the best stocks, over time the performance of those managed investments will simply track the broader market.
Some will return more than the market, some less, but overall and on average, they will simply return the same as the market.
Buffett says for “99 per cent” of us, trying to pick which fund manager will perform better than the next is practically impossible. But if fund managers on average track the market, what’s the problem?
The reason is fees. Once you take out the (often massive) fees and charges you are hit with, directly or indirectly, with or without your knowledge, the returns you get from your fund manager, on average, will be well below how the market has performed.
Let’s put it another way. Draw a blue line going diagonally upwards across the page, left to right. That’s the stock market flattened out over the past 20 years.
Then draw a red line transposed directly on top of it. That’s the average performance of hundreds of different super funds run by thousands of funds managers, all trying to pick the best stocks on the market, but all (work with me here) working for you for free.
Now take that red line and carefully slide it down the page, making sure to keep it on the same slope as the blue line above it.
The gap between the red and blue lines is the Maserati you just saw rev past you at the shops, a few thousand Louis Vuitton handbags and designer suits, and the Sydney Harbour mansion you read about last week that sold for $34 million.
That gap is what you are being charged in fees, charges, asset management costs — whatever you want to call them — for your super fund to “manage” your cash to deliver performance that is, on average, no superior to the market.
Over time, given the wonders of compound interest, the cost to you is enormous. It’s the holiday you can’t afford for your wife’s 70th birthday, the slightly expensive toy you “really shouldn’t” buy your first grandchild for aceing his first school test, or not being treated with care in your sunset years following decades of hard work and countless super contributions.
The super sector is dominated by two main types of funds, for profit (which means profit for the operator of the fund) “retail” funds, run by private companies, such as the big four banks and AMP; and not-for-profit funds, dominated by “industry” funds that are run by employer and union representatives. The industry funds have, overall, paid substantially higher returns year in, year out. Describing these funds as “notforprofit” means there is no ultimate owner of the fund (such as a bank or other private company) making a profit from running it. The executives and fund managers running those funds still receive many hundreds of thousands of dollars a year, often with annual bonuses of similar magnitudes.
Two weeks ago the Productivity Commission released a draft report that rightly, led to headlines that were extremely damning of the super industry across the board.
A 21-year-old full time worker being paid $50,000 a year in the median MySuper fund — those funds which are far more closely monitored by the government — would retire with $375,000 less than if he had been in the median top 10 MySuper product, it found.
The Productivity Commission named two “main structural flaws” with the system: people holding “unintended multiple accounts” and “entrenched under-performance”. It expanded in great detail on the first point, including calculating that people were losing $2.6 billion a year in unnecessary fees and insurance from having more than one account.
But, oddly for a report both tasked with and titled Assessing Efficiency and Competitiveness, while identifying the entrenched under-performance of funds as one of the two main flaws, its 563pages do not extend to providing any substantive analysis as to why this is occurring, how it is occurring, or how to fix it.
It says there are “many under-performing products, particularly in retail funds” and that “as a group, not-for-profit funds delivered returns above (a Productivity Commission created) benchmark tailored to their specific asset allocation, but retail funds typically fell below theirs”.
It continues: “The difference between not-for-profit and retail funds is not fully explained by characteristics such as fund size, asset allocation (such as the proportion of growth assets) or reported administration expenses”.
In other words, the retail funds are handing back less than they should be even after accounting for all their “reported” administration expenses. Which is to say the gap between the red and blue lines is far bigger than it ought to be, even after accounting for all publicly disclosed fees and charges.
This is where an investigation by The Australian, reflected in a series of detailed exposes published over the past six weeks, comes in.
But first, let’s go back a couple of steps. Let’s look at fees and what impact they have. Here’s a key point. When your fund charges fees of, say, 1 per cent or 2 per cent a year, the ordinary person thinks, “Well, that’s not too bad”. One or 2 per cent of my returns each year is fair enough. Which, of course, it would be. Everybody deserves to be paid, and funds management is an industry that generally requires you to have at least a bachelor’s degree to get into and so should of course pay workers more than the normal wage, as the vast majority of professions rightly do.
But when they say fees of 1 per cent or 2 per cent a year, they don’t mean 1 per cent or 2 per cent of your super fund’s returns for the year, but 1 or 2 per cent of the entire balance of your super account — every cent you have put in there plus the interest it’s earned — every single year.
If you earn a return of 7 per cent on your super and pay your fund fees of 1.1 per cent, that means you get an actual return of 5.9 per cent, meaning your return would have been 18.6 per cent higher if it weren’t for the fees. Stripping out inflation, the impact of that difference, compounded over many years, is massive. Stripping out inflation, even at the historically low current point of about 2 per cent, your real return is 5 per cent and actual return after fees is 3.9 per cent. Your return would be 28 per cent higher if not for those fees.
My own super fund, a retail, or for-profit, super fund, tells me I am paying a monthly “asset fee” and a monthly “administration fee”. These fees combined come to well under $50 a month. “Not great, but not so bad, really,” I have thought for years.
But the key issue here is “reported” fees — those fees the funds report to the Australian Prudential Regulation Authority.
The monthly fees that millions of us can see on our statements go nowhere near explaining the size of the white gap full of late model Porsche Cayennes owned by 30something fund managers living in St Kilda.
Not to let off industry funds because, as the Productivity Commission points out, a number of them, generally the smaller ones, have performed very poorly for reasons they are yet to properly explain — but look at the above bar chart. See all that space to the right of the total returns on the retail funds, compared with the returns on the industry funds? That’s essentially that same gap as before — the one with all the Porsches in it — looking at just the spoils enjoyed by the retail, or forprofit, funds.
These graphs are based on detailed performance data collected by superannuation industry ratings agency SuperRatings. The SuperRatings data is paid for by the super industry. It is not made available to the public and those superannuation fund industry users are required to sign forms stating they will not share the data.
Two months ago, The Australian obtained a copy. It shines a light on how super investments are actually performing, after you take out the fees, charges, “administration” costs, whatever you want to call them. That is, what you actually end up with in the hand each year.
It’s also data much of the industry — the big four banks in particular — really, really doesn’t want you to see.
The for-profit super funds have for many years argued against the findings of report after report — even the data published by government regulator APRA — which have found they chronically underperform in comparison with the broader market and the notforprofit funds.
The key reason, they argue, is that the reports do not compare “like-for-like” or “apples-with-apples”.
The Productivity Commission says in its report into super, released two weeks ago, that the for-profit sector offers more than 39,000 super “investment options”, compared with the not-for-profit sector, which offers 688.
When you sign up to a super fund, you will usually be asked what proportion of your money you want to invest in numerous options such as the low-risk cash option, Australian commercial property, international shares and so on. Once you tick these boxes, your money is then diverted by your super fund into its “investment options” reflecting those choices.
There are vastly more “investment options” than there are super funds.
The Productivity Commission chastised the retail funds, saying 39,000plus underlying investment options is far too many. Rather than serving to provide real choice to the public, this makes things far more complicated.
This vast number of retail offerings has two significant flow-on effects. The first is, in order for the ordinary investor to navigate this byzantine system, they will likely need a financial adviser (and pay that adviser fees, indirectly or directly). The big four banks own the companies that employ about 14,000 of the nation’s 25,000odd financial planners.
The second flow-on effect is the existence of thousands of investment options makes it impossible, in any meaningful sense, for the public to make detailed “like-for-like” comparisons across those options.
Super funds are required to report to APRA only the overall performance of their funds, not on the individual performance of the tens of thousands of underlying investment options and products. This is why the SuperRatings data is so valuable. Based on data provided to it by super funds, it lists the actual performance of many of those underlying actual investment options, before “wrapfees”, “platform fees” or the like are taken out.
Put another way, it compares apples with apples — and that is why the banks hate it being disclosed publicly. Analysis of that granular level data shows many investment options operated by the big banks for the public are delivering returns that are regularly markedly lower than the market and the returns for the same type of funds offered by industry funds.
To strictly compare like-for-like, we compared cash investment options and found the big four banks are paying returns on this simple and uncomplicated investment option that are as low as onequarter — in some cases even less — of the actual market rate. These underpayments alone are earning the banks between $300m and $600m in annual profits.
Analysts interviewed by The Australian say this is just the tip of one Titanic-sized iceberg. If the funds are inexplicably paying public super members less for the simplest cash option, they are likely doing it for all the other options.
SuperRatings has already taken into account the fees and charges — they are the “returns” delivered by the underlying investment options.
As previously revealed, in addition to the up to $600m in cash returns not passed on, retail funds are gouging up to $1bn a year from retirees by failing to pass on fully a government tax exemption aimed at maximising retirement incomes.
What Buffett is saying is that if you went with “benchmarks” for each type of investment, you would be better off than paying someone to manage your cash.
Figures for benchmarks for all types of investments — shares, property, cash, you name it — are readily available from industry information providers such as Bloomberg, so there are very few unknowns.
So if it’s so easy, why aren’t more Australian super funds offering the “index funds”, which simply follow the benchmarks and charge very small fees (America’s massive $US108bn ($141bn) US Thrift Savings Plan L Fund charges fees of just 0.04 per cent — less than 1/25th of the average Australian fund, which charges just over 1 per cent)?
They answer is: why on earth would they? Why rock the boat when everyone is getting so much money “managing” all this cash?
The next question is why haven’t federal governments of either persuasion done anything about it. After all, every dollar that doesn’t end up in our retirement funds brings us closer to being reliant on the Age Pension, which then costs us all billions of dollars in extra taxes.
Here’s a hint.
The industry funds pay large amounts of money to the union movement by way of appointing senior union members as some of the “directors” of their funds, and then paying those directors’ fees straight to the unions. The unions are among the biggest donors to the ALP.
The big banks and AMP, the owners of most retail super funds, are major donors to both the Liberal Party and the ALP, though they tend to favour the Liberal Party.
As previously revealed, last financial year the big banks and AMP were at least 12 times more likely than any other of the nation’s biggest 200 listed companies to donate or make payments to the federal Liberal Party or the ALP, and, even adjusting for their size, their donations were more than double that donated by their peers at the big end of town.
Year-on-year, or decade-on-decade, depending on your age, the compounded impacts of all these hidden fees and charges are devastating your super.