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Business and operational management insights for
multi-manager investors, clients and service providers
Newsletter 9
Welcome to the October 2009 newsletter! In the last two newsletters I have focused on two industry problems associated with fees. In both instances, changes can be made to improve on the current situation, however the core problem remains. An entirely different approach is required to address the inefficiencies and anomalies within the system. Whilst I apologise for subjecting you to a third instalment on fees, it is an important issue, so I am keen to share my thoughts and encourage debate on this topic.
I hope you enjoy the newsletter, and I look forward to your feedback.
Best regards
Brett Elvish
Financial Viewpoint
04 1317 6164
brett@financialviewpoint.com.au
PS. September Newsletter challenge: In the absence of a successful reader identifying over 20 strategies that funds adopt to enhance their fee competitiveness or improve their profitability, the beneficiary of the $100 donation will be the Wayside Chapel in Sydney. Thanks to the team at Investment & Technology for their upcoming coverage of the fees topic in the November issue, Fee the difference.
Throw the baby out with the bath water
The saying “Don’t throw the baby out with the bath water” dates back many centuries to times when a single tub of hot water was used for bathing an entire family. So by the time it was the baby’s turn, there was a risk that the baby’s presence could be overlooked in the dirty water. Today, the saying is about not throwing out the good with the bad. With the Cooper Review upon us, many in the industry are posturing that the system “ain’t broke”, so be careful about what you change.
Whilst I am supportive of this viewpoint, in relation to fees, we would be better off as members and as a nation if the baby (i.e. the fee disclosure regime) was thrown out with the bath water (inefficient behaviours and practices).
“As an industry that supports the financial welfare of millions of individuals in retirement, it is incumbent on all of us to achieve lower cost outcomes. Being able to objectively compare “true” costs via sound measurement practices is essential; however current regulations and various industry practices are inadequate in this regard.
Real change is needed via the current industry reviews.”
Of course, further prescription in relation to disclosure requirements may lead to better fee comparisons and more sound measurement practices. However, a fundamentally different approach is required to address the anomalies and encourage a pure focus on long term after tax, after fees returns.
A potential solution
Our primary interest as members should be the fees we are directly paying the superannuation fund trustee acting as our fiduciary, and, of course, any related party dealings and associated conflicts of interest. Whilst other fees and charges are of interest, they should not be our primary concern. It is the role of the trustee to make financial decisions on our behalf with the aim of achieving the best after tax, after fees returns. In this regard, fees are only one of many considerations.
So there are essentially three pillars to this alternative disclosure regime:
- Disclosure of fees paid to the trustee acting as our fiduciary
- Disclosure of related party dealings of the trustee
- Disclosure of conflicts of interest
Fee budgets
The concept of fee budgets has been a reality across the commercial (for-profit) superannuation sector for many years. However with the increased focus on fees and charges via retail ratings, league tables and government jawboning, fee budgets are now permeating the profit-for-members segment. Having a budget sounds like a sensible approach, however the disclosure regime is ruining the inherent benefits of budgeting.
Consider one of the calamities of the global financial crisis, listed real estate investment trusts (REITs). The current disclosure regime encourages trustees to invest in REITs in favour of unlisted property vehicles. If you invest in REITs, the published fee is primarily the fee paid to the REIT investment manager. The costs of managing the individual REITs are not typically included in published fees. However, if you invest via an unlisted trust, the management costs of the unlisted trust are typically included in your published fee. Thus, investing in unlisted trusts could be easily 5, or even 10 times more expensive than investing via a REIT investment manager, yet only from a published fee viewpoint. You would hate to think that the Government’s Enhanced Disclosure regime underpinned the local REIT bubble!
The REITs example underscores why our primary interest should be the fee we are paying the trustee to make investment decisions which are in our long term interests. Whether trustees invest in listed REITs or unlisted trusts should be guided by investment and associated considerations, and not be distorted by disclosure requirements.
Beware, wolf in sheep’s clothing
A critical element of this alternative regime is disclosure of related party dealings. A myriad of fees and charges can be buried within related party structures hiding the true costs to members.
Consider the current debate on commissions. One of our major financial institutions has been a leading voice in the commercial sector pushing an anti-commission stance. However, this is a marketing convenience as they own the entire value chain and primarily offer multi-manager products. They can therefore financially package any desired result they wish. Of course they pay commissions to planners...they are called bonuses, so spare us the marketing spin. And this same anti-commission institution offers planners at large a commission of 0.25% pa for investing client funds in their banking products!
Thus, full disclosure of related party dealings is an essential element of an alternative disclosure regime. Importantly, the concept needs to be broader than fees and charges, and “dealings” expands the net. “Dealings” picks up principal transactions in which fees are levied via spreads on transactions thereby avoiding the current disclosure regime. This disclosure should be supplemented by conflict of interest disclosure. In particular, the various indirect fees and charges discussed in the August newsletter, Super fees debate, time to go Dutch.
The intentions behind the Enhanced Fee Disclosure regulations were to quantify for an investor the additional costs associated with investing via a collective investment vehicle. However, the regulations have not kept pace with the evolution of the industry, its participants and investment instruments, resulting in distorted behaviour and inefficiencies.
Summary Viewpoint
The evolution of the industry and fee disclosure regulations has resulted in a system that encourages inefficient behaviours and investment decisions. We need a system and disclosure regime that is supportive of trustees acting in our best interests as members, with a primary focus on long term after tax, after fees returns.
Financial Viewpoint
Financial Viewpoint provides business and operational management advice, research and tools supporting multi-manager investors, clients and service providers, including:
- Strategy and governance advice for funds and businesses, including reviews and opportunity identification
- Advice on management of custodians, transition managers, asset consultants and investment managers
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Example projects include:
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Project managed the asset transition for a $200 million defined benefit to defined contribution conversion
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Strategic and operational advice:
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Multi-manager
Project manage a $1.5 billion asset transition for a multi-manager and retail investment platform
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