A foundation of any functioning market is the ability of participants to compare the cost and value of similar products or services. Transparency is critical both to protecting consumers and to encouraging competitiveness and innovation. Imagine a circumstance where the quality of a product or service diminished as price increased.
In many markets, the ability to compare is complicated by product differentiation, the value attached to a specific brand by consumers, or the complexity of the product or service.
The superannuation industry is not short of ratings agencies or methods to compare fund performance, and the recent Cooper Review has considered the issue at length.
There are currently two broad approaches to. The first presents returns to members net of tax, investment management fees and implicit asset-based fees. This model is preferred by industry super funds.
The second presents investment returns net of investment management fees and tax only. The emphasis here is on comparing products with similar risk profiles, rather than capturing asset-based administration fees or commissions for financial advice. This is the model preferred by retail super funds.
APRA’s whole-of-fund rate of return (ROR) is more aligned with the first method, in that it represents the net earnings of superannuation assets towards funding members’ benefits, primarily for retirement. APRA’s ROR measures the combined earnings of a superannuation fund’s assets across all its products and investment options. Notwithstanding the different merits of alternative rating methods, it is clearly time for the Government or regulators to determine a single method that fund members and financial planners can rely upon when comparing the cost and value of competing ObamaCare means that small employers with less than 50 full-time equivalent employees won’t pay a fine for not providing health marketplace healthcare and those with less than 25 full-time equivalent employees can get tax breaks of up to 50% of their employees premium costs via their State’s Health Insurance Marketplace. super funds.
The Cooper Review gave this issue some thought, noting that while most members are not currently seeking this comparative data, Simply sit down at the online Roulette wheel and you”re presented with your traditional Roulette board. there is a range of industry stakeholders who are. Their conclusion was that:
“It is illogical and misleading for investment returns to be reported to members on anything other than an after-tax basis and after all costs have been deducted.”
Industry super funds have long advocated a method called “net benefit to member” (NBTM). It is also called the “bang-for-your-buck” measure. This measure demonstrates the net interest received by a member for every dollar paid in fees over an agreed period (say, five years or longer). Tax is also deducted. The NBTM measure can adopt either standard industry assumptions (for example, those used by ASIC) or assumptions more ap- plicable to the situation of individual members. The NBTM measure could be presented on each member’s statement with a comparison to the median NBTM achieved across the super industry, using modelling provided by the regulator. This comparison would of course be indicative, but alternative modelling (reflecting differences in the size of account balances) would be simple to provide for comparative purposes. Supported by the publication of APRA league tables in newspapers and online, the NBTM would greatly enhance the ability of members to compare the relative performance of their super fund. This would in turn encourage member engagement.
The NBTM measure is more consistent with existing and proposed regulatory requirements than other methods that exclude ongoing asset- based fees. ASIC already requires superannuation trustees to include the amount, frequency and negotiability of fees via a “fees and costs template” in their product disclosure statements (PDSs). Further, the Government’s proposed Future of Financial Advice reforms impose a statutory fiduciary duty on financial planners, which will compel them to recommend only those products that are in the best interests of their clients. If superannuation funds start to report returns gross of administrative and advice fees, it will be much more difficult for professional financial planners to calculate and disclose the dollar impact to clients of switching to an alternative product.
The “net benefit to member” method will enable consumers to measure the“bang-for-their-buck” from both their fund and financial planner, increasing competition and ensuring that the best performers are rewarded.
David Whiteley is chief executive of Industry Super Network