By MoneyMorning.com.au

I’ve previously explained in Money Morning why you shouldn’t trust broker recommendations. Click here if you missed it.

But it‘s not just the brokers that you need to be wary of in this industry.

The interim report of the Murray inquiry into the financial system was released last month, and it made great follow up news to the recent Commonwealth Financial Planning fiasco — shedding some light on the system that allows such unethical behaviour.

Even though the inquiry was carried out by one of its own, former Commonwealth Bank CEO, David Murray, it was quite revealing of Australia’s financial system.

Of particular interest to investors was the finding that fees and operating costs paid to investment managers are much higher than international standards. The inquiry largely attributed this to limited competition, with the industry dominated by just a handful of institutions.

The findings were backed up last week by Deloitte Access Economics, who also noted the high costs paid by investors. Although they found ‘that there may be scope for lower fees in the Australian system’ through the creation of low cost products.

Fees paid to manage your superannuation are not just high; they are double the amount paid in other Western countries.

That’s right. Australians pay TWICE as much in superannuation fees as other countries. And it’s costing us $20 billion dollars each year, or an average of $1100 on each account.

In the long run, fees have a massive impact on your retirement income. Consider that reducing fees by just 0.38% will add 7%, or $40,000, to the average member’s superannuation account at retirement. This 0.38% cut would save members a total of $7 billion each year.

Of course, fees shouldn’t be considered in isolation. Investments in passively managed funds or investing in lower risk asset classes will usually provide lower returns. But for a given risk profile, comparisons should be made on after-fee returns.

Putting risk profiles aside, do higher fee products provide higher returns?

An academic study in the US, carried out by the Squam Lake Working Group, has found this not to be the case. ‘High-fee funds argue that their fees are justified by superior performance. A large body of academic research challenges that argument. On average, high fees are simply a net drain to investors.’

So what then are we getting for these fees?

Well, not much it would seem. The Australian Prudential Regulation Authority (APRA) found that higher fee funds have not performed better. In fact, the lowest fee funds provide the best after-fee returns.

The problem is that funds don’t compete on price. There’s no pressure to reduce operating costs or management fees. Instead Australian super funds, largely controlled by the big four banks, compete by creating (pricey) products with more features and options.

While the superannuation sector is now worth $1.8 trillion, lower fees haven’t been achieved through economies of scale or technology improvements either. Again, despite the size of the industry, it is dominated by a handful of players.

The lower fees found in other countries suggest that improvements can be made. But aside from legislation, it requires investors to use more discretion and take control of their investments, rather than trusting fund managers.

Take for example one particular super fund, which charges 1.08% per year to invest in ‘overseas shares’. In this case, ‘overseas shares’ means the MSCI ex-Australia Index.

But what if I told you that for just 0.42% you can buy a fund on the ASX that will match the returns of the very same index?

That’s a saving of 0.66%, or $680 on every $10,000 you invest over ten years. You wouldn’t knock that back. Other than the price, the only difference in the two is that the super fund ‘aims to beat’ the index’s return, and has a better marketing budget.

You might assume that the extra cost and aim of beating the index will bring you better returns. But that’s rarely the case. Fund managers don’t have much success in outperforming the index.

In fact, a staggering 88% of fund managers fail to beat the index they are paid to beat. Would you pay 0.66% extra for a manager who has a 12% chance of outperforming the index?

Don’t leave it to the industry to act in your best interests. Manage your own superannuation. It’s not as hard as you may imagine, using diversified listed funds and investment companies, or following the recommendations set out in the Albert Park Investors Guild.

Avoid high cost investment products, uneducated advisors, or those with compensation misaligned with your interests. You have to take action — read widely, educate yourself.

Regards,

Meagan Evans
Investment Director, Albert Park Investors Guild

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By MoneyMorning.com.au