Thanks to the federal government's acceptance of 42 of the Financial System Inquiry's 44 recommendations, Australians should see savings and better choices in a wide number of areas.
The government has also tasked the regulators with looking into the stockbroking and mortgage broking industries and their remuneration structures.
Next up should be fund managers and superannuation funds and the hefty fees almost all Australians pay.
According to recent research, the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) alone earn around $10 billion in fees for managing our super. Add in AMP Limited (ASX: AMP) and the five major super players take almost half the fees paid to manage our super.
An estimated $30 billion in fees flowed to wealth management groups, including fund managers, platform providers, advice groups, insurers, consultants and custodians.
Super assets are soaring
The gravy train is travelling full speed and gathering pace as more funds are paid into super thanks to the superannuation guarantee. Superannuation assets totalled more than $2 trillion at the end of the June 2015 quarter, according to The Association of Superannuation Funds of Australia (ASFA).
Over the past year, there was a 9.9% increase in total superannuation assets – partly from additional funds flowing into the system and partly from investment returns.
By 2025, private sector estimates suggest there could be between $4.2 trillion and $5 trillion in superannuation assets. No wonder every man and his dog is trying to board the gravy train.
If slashing the costs associated with super is one of the government's stated aims, then a review of the fees associate with managing super should be next on the cards.
Fees could soar
Almost all super funds charge a fee based on a percentage of the assets they manage. As an example, they might charge 1% of the total assets under management, which could be anything from $1 up to many billions. The clear incentive for the fund managers is to increase the funds under management (FUM), either from investment performance or by attracting more clients, be they retail, corporate or institutional.
Many funds will also charge a performance fee on top of that, so if they beat their underlying benchmark, the company, their fund managers and staff collect a bonus. This could be something like 20% of the outperformance, so if the fund beats its benchmark by 10%, it is entitled to 20% of that 10%, so they take an additional 2% of FUM as a bonus.
Now that makes sense. The incentive is clearly there for fund managers to beat their benchmark.
My issue is that most active fund managers fail to beat the market, so paying a percentage of FUM is money for jam for them. All they have to do is hug the index so their performance isn't too bad and wait for the superannuation guarantee to keep kicking in funds year in year out.
One of the conundrums facing the industry is that proponents argue that investors with more assets should pay a higher fee (hence the percentage of assets fees). But in order to attract much larger corporate and institutional clients, the managers usually give them a substantially discounted fee.
Fee for performance
Some fund managers, like Allan Gray, argue that fund managers should charge a higher performance fee and a much lower base fee as a percentage of assets.
I'd go a few steps further and suggest the following steps would fully align fund managers with their members.
- Remove the base fee as a percentage of FUM and replace it with a fixed fee, something like $500 a year for retail investors. Competition for larger clients is fierce, and they could potentially continue paying a percentage of assets fees – or they could also pay a scaled fixed fee.
- Allow fund managers to have performance-based fees, but capped at a certain level, and only after fees and other costs are accounted for first.
- Implement claw-back provisions, so that if the fund manager underperforms, their bonus fees from previous years must be repaid (either partly or fully). Some fund managers already require the underperformance to be made up before a performance fee is payable. Either that or only pay performance fees based on rolling out-performance over a number of years.
- Fund managers should be required to put their own super into the fund they manage. Nothing like having their own money on the line to incentivise performance.
Foolish takeaway
It seems clear to me that removing a number of the gravy train hangers on and cutting the fees we pay the rest would result in more Australians having larger nest eggs for their retirement. That would place less strain on the government's finances, and is a win-win in my book.
