The concept of fee budgets has been a reality across the commercial (for-profit) superannuation sector for many many years. With the increased focus on fees and charges via retail ratings, league tables, government jawboning and industry reviews, fee budgets have now permeated the profit-for-members segment as well.
Having a budget sounds like a sensible approach, however trustees need to ask the question: Is my fee budget conflicting with my fiduciary duty?
Net returns
Trustees have a fiduciary duty to act in the best interest of members, and therefore seek to maximise net returns for members. In this regard, net returns are investment returns after all fees, costs and taxes. The important point here is that it is returns after ALL fees, costs and taxes that ultimately matter.
Conflicted interests?
Pause to think for a moment and ask yourself: Why did we introduce a fee budget?
- To “manage” our profitability?
- To ensure we are competitive relative to other funds?
- To position our fund as an acquirer in the consolidation stakes (never!)?
Let’s assume that one or all of the above were significant drivers behind establishing a fee budget. Now ask yourself another question. Is my fee budget supportive of my fiduciary duty to maximise net returns for members? Or is my fee budget actually in conflict with this duty?
- Have we ever increased exposure to passive management to lower our costs even though we believe that a better net return was achievable from active management?
- Have we ever limited our investment exposure to more expensive alternative assets primarily due to disclosed costs, and not net returns?
- Have we ever pursued (knowingly or otherwise) any of the 35 strategies that Financial Viewpoint has previously written about to enhance our competitiveness or profitability, even though the net return for members may have been reduced?
I should apologise for my cynicism, but fatigue is setting in! As I said upfront, but now in less technical terms, the current system is stuffed, the proposed TAER is as bad if not worse, and Paul Costello’s report is probably our last chance as an industry to deal with this problem for another decade.
OK, back on track...the pills are now working!
Your out-clause
Here is your get out of jail free card. When you implemented a fee budget, you were seeking to curtail the natural human condition of over-confidence.
You had read my newsletter, Gamblers Anonymous: Super Industry Hotline, and felt that you should set a limit on known costs spent to achieve an uncertain return. Right?
Is your out-clause applicable?
Another question to ask yourself: Does my fee budget cover ALL fees, costs and taxes? Or is my fee budget focused on just those items that are required to be disclosed within our Indirect Cost Ratio? Remember, it is ALL fees, costs and taxes that ultimately matter.
If your focus is primarily on disclosed fees, then I suggest you consider whether your business decisions are aligned with your fiduciary duties. Whilst we can all blame the system currently, let’s hope that Paul Costello and the Peak Consultative Group have the wisdom to seize this once in a decade opportunity.
Now for those as obsessed as I am with this issue of fees and costs, here is a list of newsletter published on the topic: