Higher fees on superannuation funds don’t matter, so the argument goes, as long as the after-fee returns are roughly the same as investors would have got from lower-fee alternatives.
But lower fees on superannuation funds do seem to be linked to better investment performance. And in an address to the National Press Club this week the Assistant Treasurer, Kelly O’Dwyer, said the government is keen to see downwards pressure on fees as part of a range of things that will make the superannuation system more efficient and fairer for those who use it. O’Dwyer said the government will be agnostic in this respect when it comes to how it treats industry, retail and self-managed super funds.
Performance data released last month by Chant West showed that industry funds, as a rule, outperformed retail funds over the year, with an average return of 6.7 per cent versus 5.2 per cent.
Industry funds are often used as a proxy for “lower-fee” funds, and retail funds for “higher-fee” funds. There are higher-fee industry funds and lower-fee retail funds, of course – exceptions to the rule.
Chant West shows that in seven of the past 10 years, the “growth” options of industry funds produced returns equal to or better than the growth options of retail funds. On two occasions the returns from retail funds were better than industry funds. On one occasion the returns were identical.
Chant West said the top 10 growth funds in the 10 years to the end of 2015 were, in order: REST Core; BUSS (Q) Balanced Growth; Telstra Super Balanced; UniSuper Balanced; CareSuper Balanced; Catholic Super Balanced (MySuper); Commonwealth Bank Group Super Mix 70; AustralianSuper Balanced; Cbus Growth (Cbus MySuper); and QSuper Balanced.
“As has been the case for many years, the list is dominated by industry funds which account for seven of the ten places,” the firm said.
“The other three places are occupied by QSuper, which is a public sector fund and the stand-alone funds for employees of Commonwealth Bank and Telstra.”
Divides along ideological lines
Unfortunately, as soon as a discussion is couched in terms of “industry funds” and “retail funds”, the debate divides along ideological lines. We all know that industry funds are controlled by vile trade unions and corrupt officials, for obviously nefarious purposes. On the other hand, retail funds are offered by banks, which would sell their grandmothers to make a buck, and by other entities whose first priority is to enrich shareholders. (It’s interesting that the only CBA-managed fund in the Chant West top 10 is not open to the bank’s own customers or to the clients of financial planners.)
But an ideological bias doesn’t help and has no place when it comes to doing what’s right for clients and for financial planners discharging their best interests duties. The performance of not-for-profit funds versus for-profit funds cuts directly to this issue and to why individuals seek out the services of financial planners.
For the sake of discussion, we need to set aside ideology and allow funds to be divided into two basic camps: low-fee, and higher-fee. It doesn’t matter what label is on the tin; the argument applies to low-fee retail funds and to higher-fee industry funds as well.
The return generated by a fund after fees (and after tax for that matter) is unarguably what interests clients most. What they pay in fees or tax they cannot receive as income or capital growth. If Fund A has higher fees than Fund B, then all other things being equal, Fund A must generate a higher before-fee return than Fund B to produce the same after-fee return.
It’s simple
It’s simple. And while it may be true that you have to punch information into a journalist more often (and more forcibly) than you have to punch it into a computer, one other quite simple thing that’s permeated a thick skull during the past 30 years or so is that investment returns are invariably linked to investment risk. It’s in clients’ best interests that the return be as high as possible, for the given level of investment risk they are exposed to. That’s why they come to financial planners, in part – to get that trade-off right.
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The greater the investment return one seeks, the more one must be exposed to investment market volatility and to the likelihood of suffering a capital loss. No matter how often someone says, “This time it’s different”, or claims to have somehow magically uncoupled risk from return, it’s never different. It never has been and never will be.
Financial planners are not obligated to put clients into the best-performing fund. For one thing, it’s impossible to know ahead of the fact which fund that will be. But knowingly putting clients into funds with higher fees than others is a different matter. Implicit in that decision is either that after-fee returns are not what matters, or that exposure to a higher level of risk is OK even though it produces no additional benefit.
There may be other reasons to favour one style of fund over another – access to a wider range of investment options, for example, or superior administration, or even the ease of using a fund on a platform – but unless those reasons clearly serve the client’s best interests better, rather than making the adviser’s life simpler or aligning to some ideological bent, then they are equally irrelevant.
