Why you are paying your Super Fund too much
There has been a lot of interest in the Royal Commission into the financial sector in the last month, in particular, the revelations that the banks have been charging a “fee for no service”. Amazing stuff. What a business model. Why didn’t we think of that. It turns out that the banks have been charging legions of clients for financial advice they were never giving and the clients didn’t realise they weren’t getting.
The banks have all bought into wealth management over the last decade and have all struggled to earn a decent return. The consequence is that they have put their frontline salespeople under pressure to generate sales, and in so doing their advisers have detached from the brand in pursuit of the dollar. Had the banks genuinely focussed on trying to make their clients money rather than themselves, had they exploited the incredible advantages of brand and distribution, they would have built tremendous businesses, but they haven’t.
It is a parlous state of affairs and is written up as a reflection of the whole financial advice industry, but we have a different take. There have been a few issues with the big end of the wealth management industry, issues that the Royal Commission is now highlighting, issues that the industry have known for years but not discussed. They include:
- Overpricing. We have known for years that many of our competitors, and particularly the biggest wealth management institutions, have been offering a commodity product but have charged their customers a premium price. They have exploited their customer's financial ignorance and vulnerability
- Pushing product. Many financial planners that operate under the banner of “independence” are still inextricably tied to a large, major, financial planning institution that provides them with a licence combined with in-house product sales incentives. The concept of independence has been perverted by the small print which has deliberately tried to mask the true parent brand from the trusting customer.
- Underqualified staff. Many big institutions employ people whose only training has been a four-week course that qualifies them for a license to sell financial products. They have called them financial advisers and set them upon their unsuspecting dormant bank customers as “professionals” when they are clearly amateurs.
- Fees. Some large funds play on the idea that they charge lower fees, you will have seen the ads. Some even declare themselves to be not-for-profit. But the reality is that even the low fee-charging or not-for-profit fund managers are still driving around in BMWs paid for by their members. They may not make a profit, but they certainly have expenses. Big ones. All you have to do is walk around the CBD, and you will see their brand names on expensive real estate, paid for by their members.
- Average returns. Very large funds, those that run billions, be it an industry superannuation fund or a mainstream superannuation fund, in an illiquid Australian share market, have no choice but to hug their benchmark which means buying almost every stock at index weight. For instance, if their benchmark is the All Ordinaries index, they will pretty much own every stock in the All Ordinaries index. It’s called having a “neutral weighting”. Most of the funds do it, and in so doing their fund managers become administrators rather than value adders. In the Money Magazine, last month was a list of the best performing Australian balanced super funds and their returns. Over the last five years, the top twenty balanced super funds in Australia have returned between 9.1% up to 10.7%, a gap of just 1.6%. They are almost identical, a commodity, because they hold almost everything. They may differentiate themselves with their marketing, they may highlight their returns, and they may advertise their relatively smaller fees, but the truth is that they are all offering pretty much the same thing, every stock and every asset class. These days, with the average returns available from products like exchange-traded funds, you simply do not need an expensive fund manager to achieve that for you.
- No added value. Many of the large superannuation funds are also now providing their members with a website that allows them to choose what sort of investor they are. They use well-accepted terms like balanced, conservative, aggressive or cash, but, depending on where you click, all they do is re-weight your particular investments across the same four or five funds in different percentages. But here is the revelation, that, amusingly perhaps, through this mechanism the big funds are now leaving the one function that used to add value, asset allocation, in the hands of their amateur customers. Their members now have to click the right buttons at the right time to add any value above the average, because most of the very large funds have given up doing it themselves.
The writing is on the wall. The wealth management value add has been allowed to decay and, beyond administration, it’s hard to charge a lot for that, especially not when technology has allowed the individual investor, on their own, to access this sort of average performance a lot more cheaply and a lot a lot more conveniently with just a few clicks.
The good news is that, despite what you may have read in the hysterical headlines pursuant to the Royal Commission, not all advisers are underqualified lazy charlatans selling product.
On the contrary, the bulk of the financial advice industry is in the hands of individuals like us, running companies that carry their reputations, who pride themselves on their brand integrity and are relying on their own experience, intellect, personality and hard work, rather than the client’s ignorance, to deliver value and maintain their hard-won and, in our case, many long-held customer relationships.
The brand damage for the banks and AMP has opened the door to financial sector disruption, and, as it turns out, we, and other businesses like us, businesses that put their clients before the dollar, are the disruptors. Not Roboadvice, or technology, but the old-fashioned principles of integrity, engagement and value.
The Royal Commission may appear to be the death knell for the financial advice industry, but it isn’t, it is the catalyst for the re-birth of an industry that had spent too long allowing its biggest and most trusted institutions to charge too much for too little. Culture change is on the way. Add value or die.
No wonder the banks are getting out. That’s not their mantra. So best they do. All good for the rest of us.