The battle for member dollars

The great debate between industry and retail superannuation funds is often an ideological tussle involving heated discourse fuelled by political persuasion.

However, theAustralian Securities and Investments Commission’s (ASIC) recent release of fee disclosure guidelines, which it wants the industry to formally adopt, may help to at least end the fee part of this ‘great debate’.

If adopted, the ASIC guidelines will enable funds to be compared on an ‘apples-for-apples’ basis and prevent them from disclosing fees within a grey haze of information.

While it is already widely accepted that retail funds are more expensive than industry funds, one criticism wielded at industry funds is that there are certain fees not disclosed to members at all.

Historically, industry funds have branded themselves on a ‘$1 a week’ mantra, however, according to Warren Chant, principal of tender consulting firm Chant West Financial Services, this nominal fee isn’t sufficient for many small to medium industry funds to cover all their expenses.

Chant says in this situation funds siphon money from investment returns but have no legal obligation to disclose it.

However, he adds, the extent of such behaviour is difficult to assess.

“It’s hard to say exactly as we don’t know how much they’re taking out of earnings, but it could be a half a per cent or even up to 1 per cent — a significant figure,” Chant says.

“It’s fair to say that small to medium industry funds cannot survive on $1 a week. So it’s unlikely to be correct [the $1 a week mantra] and that’s where the real suspicion is.”

Chant quickly adds, however, that funds aren’t doing anything illegal and that trustees run them as cheaply as possible — the issue he says is that the true costs of a given fund are not being disclosed.

That funds are acting within the bounds of legislation is irrelevant to the Association of Independently Owned Financial Planners chief executive, Peter Johnston, who insists that all fees should be disclosed.

“We believe industry funds should fully disclose the fees and charges they take from members, and these should be expressed as a percentage of the account balance,” Johnston says.

According to Chant, these undisclosed fees are not an issue for large funds because they have enough members as well as economies of scale to cover the cost of running the fund without having to dip into investment earnings.

Despite the issue of undisclosed fees, most people accept that industry funds are cheaper than retail funds.

“There’s no question that industry funds are at most a third of the cost of a retail product. We believe retail products cost between 3 and 4 per cent when you take into account contribution fees,” Chant says.

According toIndustry Fund Servicesexecutive chairman Garry Weaven, retail funds are struggling to differentiate themselves in terms of performance and justify their extra costs.

“The problem that the retail funds have is that they know they are much more expensive. What they have always hung their hat on is that you get what you pay for, as in they can provide much better investment returns,” Weaven says.

“I think they have a huge problem and what they’ve been doing is disguising the problem by making their fees very hard to work out.”

However, Johnston argues that not all industry funds are in fact cheap relative to retail funds.

“What investors have to realise is that sure, they [industry funds] are cheap for some people, but if you’re a member with a low account balance then they’re not cheap at all, and in fact are more expensive than master trusts.”

Johnston says if a member has an account balance of $2,000 (he points out that the average account balance for most industry funds is between $2,000 and $5,000) and pays $52 a year in fees ($1 a week), then their MER (manager expense ratio) will be 2.5 per cent.

Johnston adds if the fees that a number of the smaller to medium-sized funds are not disclosing are added, then it is possible that some industry fund MERs may be as high as 4 per cent.

Despite this revelation, Weaven believes industry funds will always outshine retail funds over the longer term.

“Industry funds offer sustainable outperformance because of a lower cost base and some elements of scale too. So over 30 to 40 years that’s going to add up to a huge amount.”

However, the figures show that industry funds have been extremely cost competitive in depressed markets over the past few years.

Johnston says that while a master trust may have certain benefits, such as consolidated reporting, one problem over the past 12 to 18 months is that “negative returns from investment markets have highlighted just how expensive master trusts really are”.

According to Chant though, the recent ASIC guidelines on fee disclosure will help the industry provide clarity to consumers on the whole hazy topic of fees.

“The disclosure guidelines are an attempt to get some consistency in how things are described and that’s a really good thing. Most people in the industry believe it’s a good step in the right direction,” Chant says.