(03) 9020 2905PORTFOLIO POINT: The super fee revolution has landed. Over the next few years, a major review of your superannuation could save you a bundle.
When you open your annual super fund letter in the next month or so, you might find yourself grizzling.
The investment return from the average “balanced” super fund is going to be a very low number. The average investment return is going to be around the 3% mark. If your “balanced” fund returned more than 4% or so, think yourself lucky.
And, to be thankful, it will be positive. There have been too many recent years where the number has been negative.
Investment markets do what investment markets do. It was a good year for fixed interest and property and an okay year for cash. But for Australian and international shares … not so much. (SMSFs, of course, do their own thing. For how to benchmark your SMSF, see my column of two weeks ago, 25/7/12).
But then come the fees. In many cases, the fees for the management of superannuation could wipe out as much as half, maybe all, of those gains. Depending on what type of super fund you have (industry, corporate, government or retail), your super fund fees will likely be between 0.7-2%.
SMSFs have more control over their fees than APRA-regulated funds. Many SMSFs completely avoid investment (as opposed to super) platforms and managed funds, but many trustees do use them for diversification and ease of management.
The good news is that, on average, your super fees fell last year. More on that later.
The better news is that there is going to be a super and investment fee revolution in the next two years. And, if you’re an APRA-regulated fund (that is, a non-SMSF), you will probably need to go searching for the bigger opportunities.
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Why? Well, it’s to do with a bunch of things. One of them is scale. Now, 20 years after the Superannuation Guarantee was introduced, many Australian super funds have enough scale to be able to cut their fees for competitive purposes, to attract new clients. But that’s been a gradual thing that would have happened anyway.
What’s really going to drive change in the next few years is the Future of Financial Advice (FoFA) reforms. FoFA technically started on July 1, but the real introduction has been delayed until July 1, 2013.
In its original form, FoFA was designed to remove many of the conflicts of interest that exist in the sometimes murky world of financial advice. Commissions, on superannuation and investment, were to be banned.
The hope of policymakers was that commissions would be replaced by pure “fee-for-service” or “adviser service fees”. Commissions have been banned and “opt-in” will help push those fees in the right direction also. That will happen over time.
But those changes aren’t so much about reducing fees. They’re about making the fees being charged more open and honest. Fees paid to advisers for their advice will, predominantly, be about levels of service and will come down to negotiation between client and adviser. And if your adviser is providing you with advice that adds value to your superannuation, then you should be happy to be paying him a reasonable fee.
What is going to change in the next few years is the cost of administration and management of your money. That comes down to two fees – the fee for the platform (administration) and the fee for the investment manager (management expense ratios, or MERs).
These fees have already starting to fall.
According to a survey by Rice Warner Actuaries for the Financial Services Council, superannuation fees have fallen 12% in the decade to 2011. In just FY2011, they fell 5% from an average of 1.27% to 1.2%.
Rice Warner said there were three main reasons for the fall last year. Firstly, there has been a wider use of index fund managers (which operate on fees 50 to 80% lower than active managers) and, secondly, lower fees being paid for financial advice.
Thirdly, fees fell because of the rise in superannuation balances. Many platforms tier or cap fees depending on the quantum of funds under management.
When it comes to scale, another survey by CoreData says the “average” super platform now controls $2.6 billion, versus just $300 million in 2004. CoreData predicts that the number of super platforms will fall by 40% over the next eight years, largely through mergers, which will help with scale.
Interestingly, fees were falling between 2002 and 2008. They rose following the GFC, partly because of the fall in the average super fund balance.
The FSC says that product rationalisation is urgently required in superannuation, particularly among older “legacy” products, which can have fees 2-3 times as high as contemporary platforms.
What’s going to change now?
The real cost-of-super revolution is just starting. FoFA is going to put serious pressure on fees, particularly what is considered to be “conflicted remuneration”.
One of the fees considered to be “conflicted” is what is variously described as “overrides” or “marketing allowances”. These are payments generally made by platforms to financial planning licensees. Technically, the fee is not coming out of the super member’s funds. It is being paid for from excess platform profits.
While many of the existing “conflicted” arrangements have been grandfathered and will continue for existing clients after the new rules come in on July 1 next year, overrides have not been grandfathered.
If (when) the fee no longer existed (and it is not a huge portion of industry that these fees apply to), then platform fees will likely fall further.
It says a lot about how much “fat” is in the fees charged by large platforms that they are often prepared to pay out as much as 0.2% to 0.25% of their platform fees of between 0.5% and 0.9% to licensees who use their platform.
The main concern with this payment being cut, which probably amounts to millions, perhaps tens of millions, of dollars a year, is that the money will now stay as super profits with the large platform providers. As of now, some is “shared” with independent licensees and, in many cases, their advisers.
One side says that has subsidised the cost of advice. The other side says it has unnecessarily inflated the price of advice.
If the end result of this is that these lower fees are passed on to consumers, then the spirit of the FoFA changes will have worked. If those platforms, however, get to keep the payments, then the only losers will be non-bank owned, relatively independent, licensees.
How can you take advantage of this?
Some platform providers have already cut existing platform fees, have opened alternative lower-cost platforms, or are preparing to pass those cuts on to superannuation customers with new offers. Expect a great deal of action in that space in the next 11 months, as FoFA’s introduction deadline approaches.
Also, as noted in the Rice Warner report, management fees (management expense ratios, or MERs) are reducing as more advisers choose to use index funds (such as Vanguard, which recently cut its own fees by around 40%). This will put pressure on active fund managers.
These fee reductions are not just for APRA-regulated super funds. Investment platforms (used by many SMSFs) will also need to reduce their fees to remain competitive and MER fee reductions should be passed on across the board.
So, what do you do?
Don’t go into a panic and switch your super provider just yet. If your current super (or SMSF investments) is already in an overly expensive platform, then perhaps jump now, or speak to an adviser.
However, plan to do a thorough review of your super probably in FY14, when FoFA-driven competition should have reached a peak.
Don’t expect your platform provider to contact you to tell you that they have launched a new, lower-cost, service. They will make far more profit leaving you where you are.
And don’t place too much emphasis on fees. The cost of managing your super (or SMSF investments) is one thing. But there are many other aspects of a platform that need to be taken into consideration, including investment choice, flexibility with estate planning and insurance.
Most people with spouses, young children or considerable debt require insurance and the cost and quality of your insurance is often going to be far more important than a relatively small fee saving on your super.
The super fee revolution is coming. Be patient.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are highly complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.