Industry funds marked down on fee disclosure

A new report by superannuation fund research house Chant West is likely to enflame the ongoing fees debate between industry funds and retail master trusts by accusing some industry funds of not passing on allowable administration cost tax deductions to members.

The Chant West Multi-Manager Survey claims some industry funds (and life companies) are retaining the tax deduction on administration costs, but failing to disclose this in their Product Disclosure Statements (PDS).

They “persist in showing fees that are net of tax, making their fees appear lower, accompanying this with an ambiguous comment on tax deductions, often in a totally separate section of the PDS”, director Warren Chant said.

He emphasised, however, that there are companies “in both camps [that] go out of their way to provide full disclosure that quantifies the value of the tax deduction and shows how it is applied for the benefit of members”.

“The disappointing fact, though, is that we still don’t have a situation where all funds disclose their fees on a consistent basis, so consumers still can’t be sure they’re comparing like with like”.

The Chant West report reviewed more than 70 PDS documents issued under the Australian Securities and Investments Commission’s new dollar disclosure regime, covering a representative mix of master trusts and industry funds.

The new dollar disclosure regime, which supplemented the existing enhanced free disclosure regulations, came into effect on July 1, 2005.

The report also found industry funds are more remiss than retail master trusts in the proper disclosure of investment fees, particularly in relation to some of the more complex investment structures.

It found the problem arises in mainly alternative assets such as private equity, infrastructure, opportunistic property and hedge funds, where it is common for funds to invest through one or more ‘fund of funds’.

Chant said this problem area “applies more to industry funds than to master trusts, if only because the former have been more active in these alternative assets”, he said.

“Again, there are some notable exceptions among funds, but it’s becoming clear that in these complex multi-layered situations, not all fees are being traced and disclosed.

In the worst cases, only the base fees of the promoting manager are being shown, he said, and given that the underlying managers’ fees are typically in the 1 to 2 per cent range, with performance fees on top, the result is that the real costs of these investments are being significantly understated.

The report also found that some funds — mainly industry funds — are “using their documents well to communicate and educate, while other funds are clearly only concerned with legal compliance”.

“It is up to the regulators, as much as the industry, to ensure that the fear of liability doesn’t take over completely from the desire to provide relevant, helpful and comprehensible information.”

However, the report, which was researched in September this year, concluded that “in general, it is fair to say PDSs are improving, and will continue to improve as these problem areas are addressed.”