The consolidation drum is pounding so loudly that barely a day goes by when I don’t hear or read some propaganda pushing the consolidation case. I could have said “argument” rather than “case”, but that would clearly be a misrepresentation of the situation.
There is no argument. There is no debate.
The rhetoric from the regulators, the reviews, the industry associations, and the funds is so omnipresent that you don’t dare question the logic of the benefits of consolidation.
It seems that every fund I speak with is on a path of acquire or be acquired. Any fund with less than a billion in assets has a target on its back, and plans are being hatched for its demise. And now the Cooper Review Panel wants funds justify their ongoing existence every year and address the question of scale.
How about large funds:
- justify the benefits they received from the last consolidation
- explain the impediments to their investment strategy from consolidation
- explain why their member administration systems are struggling to cope following multiple consolidations
So, here’s an alternative view
Consistent with presenting a contrarian viewpoint, I will do something equally contrarian and focus on member’s interests, rather than industry or government interests!!
3 golden rules: Diversification, Diversification, Diversification
It doesn’t take a masters in finance to understand the benefits of diversification. It is one of the core principles of investing. And one that survived and has been reinforced by the global financial crisis. We all know (and I think understand) the saying:
Don’t put all your eggs in one basket
So, when it comes to superannuation, the biggest or second biggest asset of most Australians, why is the government, the regulators, review panels and the funds ALL ignoring one of the most fundamental investment principles?
Why are members being actively encouraged to have only one account?
Why is the Cooper Review Panel talking about auto-consolidation of member accounts?
Self interest? Never!
The total disregard for the benefits and protection afforded by diversification is the biggest and most obvious flaw in the push for consolidation. Unfortunately, it has been totally forgotten, or worse still, ignored.
We are told that on average Australian’s have 3 superannuation accounts, and this is 2 too many. So I should put all my nest egg in the one superannuation basket? The benefit will be a saving of around $150 a year in fees, based on my industry funds. An extra cappuccino every week!
But what is the real cost...
Let’s face reality here. Despite their national importance, superannuation funds have next to no capital supporting their “promise to members”. If a $10 billion fund has a problem, well let’s hope it is a very small problem, because its limited capital won’t go very far. Even $5m of capital is only 0.05% of protection for members, which is less than the daily valuation uncertainty within unit pricing for a large fund that the Review Panel is so keen to foster. If the proverbial hits the fan, would you rather be in a $100m fund with 5% of capital support or a $10 billion fund with 0.05% of capital support?
Three is better than one
I would argue that 3 is much closer to the right number of funds for a member than 1. If your investment adviser told you that you had to spend $150 a year to achieve the extraordinary benefits diversification, to access one of the most important investment principles, then you would be pretty silly to ignore this wisdom. And if you become the victim of a failed fund, then $150 a year will seem like a pretty cheap insurance policy.
Moral hazard...have we learnt anything from the GFC?
Now, for a second reality check. Don’t expect the Government to bail you out if you become a victim, despite their active support for consolidation. To date, the Government has shown little signs of raiding the piggy bank to support members of failed funds. However, if a very large fund got into trouble, then the Government will have created a nice moral hazard...the concept of too big to fail sound familiar!? And I thought we had learnt some lessons from the global financial crisis. Unfortunately, it will be at all of our expense...remember, it is our piggy bank that will have to be raided.
Self interest and disclosure
I should obviously declare my own self interest in this debate (well, one-sided rant!)...the more funds, the more prospective clients. But equally, it is about time that others also got real in this debate and declared their conflicts. If we go back to the basics of diversification, then anyone that is actively encouraging a member to have only one superannuation account should issue a very big health warning on this piece of financial advice explaining the potential detrimental impact from a lack of diversification. Disclosure of their conflict of interest or motivation wouldn’t hurt either.
Whilst, time and probably your attention, doesn’t permit me to explore a myriad of other issues around consolidation. There are a range of issues to think about. Click here for a sample...
So that's my pebble in the consolidation pond...let's hope it causes more than a ripple, and encourages others to express a contrary viewpoint to the one-sided consolidation case.