1. Preserving the status quo
The current Enhanced Fee Disclosure regime is based on a solid principle...disclose the additional cost of professional management relative to self directed investment. This principle is clearly focused on the member, and the choices at their disposal.
However, the principle is being extensively gamed and capital allocations are being distorted resulting in unnecessary costs and risks, and ultimately lower retirement benefits for members. As I have reported previously, there are at least 35 strategies that I have observed where funds knowingly or inadvertently enhance the presentation of their relative fee competitiveness.
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2. The Cooper Review Panel’s TAER
Whilst the CRP’s Total Annual Expense Ratio (TAER) is light on detail, they are essentially heading down a path of further prescription and have abandoned the principles of the current Enhanced Fee Disclosure regime. The TAER is yet another industry acronym that:
- members won’t understand
- will be manipulated for self serving purposes
- will create further market distortions
- will support the promotion of self managed super
The CRP is proposing to apply a bandaid to a problem that requires radical surgery. In doing so, they have forgotten the principles that are the basis for the current regime and will create further distortions to capital allocations and a perpetuation of the gaming that we see today.
For example, inclusion of costs such as brokerage in fee disclosure will increase the disclosed cost of managed investment schemes and superannuation funds. In reality, they will be no more expensive than they are today, yet they will appear more expensive which plays into the hands of the self managed superannuation funds industry. Equally importantly, the inclusion of brokerage will encourage further distortions to investment activities with a strong incentive to invest via principal rather than agency trades, increasing real costs for members.
3. Gross return less net return
Within the detail of the CRP report was a reference to costs being the difference between the gross and net return. The beauty of such an approach is that the net return credited to a member is largely indisputable. I do like its apparent simplicity, yet unfortunately I understand the detail.
Importantly, disclosed costs would be higher and fees would no longer be comparable with the self managed alternative. The additional cost of professional management would not be identifiable.
4. The Fiduciary Model
Throughout the CRP’s recommendations was a desire to strengthen the fiduciary obligations of trustees. Herein lays the solution to the fee and cost disclosure mess. Our interest as members should primarily be the fee we are paying to our fiduciary to act in our best interests, along with conflict of interest disclosure and related party disclosure. This is akin to listed company requirements.
Most importantly, the Fiduciary Model will eliminate capital allocation distortions and other gaming activities which plague our system. The only distortion that it possibly encourages is independent external management. Given the Cooper Review Panel’s conclusion that “it is a system that has not reached a level of maturity commensurate with its monetary scale”, this may not be a bad thing.
What is potentially lost in this approach is consumer disclosure of underlying costs. Yet, disclosure could still be prescribed via annual financial statement reporting; however it is likely to still be plagued by the various problems that exist today. However, the reality is that current comparative information is generally meaningless and requires extensive analysis to make fair comparisons. The proposed TAER or alternative methods are unlikely to result in a clearer picture for members either. So, members will be no worse off in this regard.
The advantages of the Fiduciary Model are:
- It has a clear principle…what am I paying to my fiduciary to act in my best interests, what conflicts do they have and are there any related party transactions
- It removes almost all of the capital allocation distortions and gaming that is occurring today, reducing real costs and risks for members
Maximising the superannuation pie
The retirement pie will be the biggest if all of the game playing and distortions to capital allocations are eliminated. This should be the priority, and that is why I prefer the Fiduciary Model. Yet, it is a radically different solution, yet not without precedent (ala listed companies). It will face considerable opposition as you can drive a bus through the current rules to achieve whatever outcome you desire.