Accusations abound that consumers aren’t getting the best advice regarding super investments because advisers aren’t recommending super products to their clients, with the industry funds’ refusal to pay commissions viewed as the cause. Professional Planner decided to dig a bit deeper into the story.
Lack of available research has been flagged as a key factor for advisers avoiding industry funds. Recent research, conducted by Wealth Insights, a financial services research firm, found that out of 660 planners surveyed about recommending industry funds, two of the major reasons for not recommending these funds was lack of research and exclusion from the licensee’s approved product list (APL).
According to Jeff Bresnahan, SuperRatings managing director, this reasoning is false. “There’s a misconception that there’s no information on industry funds,” Bresnahan said. “This perception is not valid and [those who argue this] are aware that that’s the case. These funds have been scrutinised for years along with everyone else.”
Morningstar head of research Anthony Serhan disagrees. He said many industry funds still needed work before they reached a standard that research houses can fairly examine. “Industry funds, in general, are not equipped to, or they’re not as geared up to actually supply the information to us as are a lot of the traditional funds in the retail market,” Serhan said.
“I’m just saying that’s the reality of where they are and the way that they’ve done their distribution in the past. The members have been members of the fund – effectively locked in – and they haven’t been in a position of having to go out and actively compete for members.”
The industry funds that are rated and listed on the Morningstar database are funds that showed a “clear-minded” and “proactive” approach to being rated and researched compared with their industry peers according to Serhan.
“There are particular groups that have been quite proactive and say look, we want to be able to communicate with our members through a range of different channels and means, and they’ve actively engaged with us to get the information onto our database through to us,” he said. Daily unit pricing, a useful tool to planners, is another factor that differentiated the industry funds Morningstar had rated from those it had not Serhan said.
“It comes down to an adviser being used to
the idea that they can run a statement that gives a current valuation through to the last available price. [Whereas] if you’re dealing with industry funds, they might only get a monthly declared interest rate or only striking unit prices once a week,” he said.
“A number of industry funds have made good progress in this area, but as a generalisation, they are still not at the same point as your traditional managed funds that are used by the financial adviser in terms of the flow of that information.”
levelling the field
From a competitive standpoint, Bresnahan feels that the industry fund movement has to change if it is to be embraced by the broader financial planning industry. “Industry funds haven’t been used for various reasons, but they need to think differently as well. There is an onus on them to make it easier for financial planners outside the industry fund network to use them,” Bresnahan said.
“In a commission environment, financial planners get remunerated from a super fund, or the managed fund. If industry funds are going to allow industry fund financial planners to debit from the super fund that should be extended to all financial planners. I think they should open it up, and I think they should do it tomorrow.”
the cost factor
Costs are mentioned as another explanation why industry superannuation funds are not recommended by fee-for-service financial planners, according to RMIT adjunct professor and financial planner Wes McMaster.
“We don’t advise on industry finds because we find them too expensive,” he said, referring to the financial planning firm The Money Managers – a company he is a shareholder in – as an example. McMaster said The Money Managers’ model has reduced both the administration fee and funds management cost for the client to the extent that the low-fee industry funds look dear.
“When a client invests money, there are three fees a client has to pay. One fee is the cost of advice, which typically is around one percent. The second cost is the administrative cost of their account: typically, our clients will be charged between 0.37 per cent and 0.45 percent, less for a large investment. And the third fee is the cost of funds management, or the management expense ratio. In our case, the cost of funds management is 0.36 per cent.
“Taking out the advice fee a financial planner charges, if you compare a fund’s cost for cost with the numbers I’ve just given you, you’ll find industry funds are more expensive,” he said. If they also outperform the returns of industry funds – which they often do, McMaster said – then it’s a no brainer.
Michael Harrison, the managing director of Melbourne-based, fee-advice firm Heraud Harrison, has come to the same conclusion, finding that in many cases, using wholesale managers for their clients’ portfolios results in better returns. However, clients remained in industry funds where it was in their best interests. “There are many points in time that we make a recommendation that [an industry fund] be held and maintained, and that will tend to be because there’s benefits there, like pension benefits and insurance benefits, that would be lost if they were to change funds,” he said.
Fee-for-service financial planner Venn Williams of Sydney-based financial advice business Halogen tends not to recommend industry funds because they are not on investment platforms, rendering them less “flexible”.
Williams does see a place for industry funds for many investors. “I’ve got nothing against industry funds, but as soon as you get to a certain amount, now with choice [of fund legislation] you can move out. They’re a great default fund – my two kids are in industry funds – and I think when you’re starting out they’re fabulous, but I think you can generate more performance and you’ve got more flexibility if your super starts getting around $50,000 for arguments sake.”— Catherine James