The Biggest Rort In The Industry
Superannuation funds are up in front of the financial services Royal commission today having been asked to reveal their entire fee and cost structures for the first time. It is a two-week examination of the sector. They have been asked for five years worth of fees and expenses and the reasons for any changes in charging levels, and what services fund members received in return. Bank-controlled retail funds will this week be criticised for charging high fees and delivering low returns. Someone quoted the statistic this morning that there is $2.7 trillion in Super and since compulsory Super came in there have been $700bn in fees paid out of superannuant contributions. On top of the super fees the Royal Commission is also asking for information on the commissions between the funds and any financial planner or wealth management entity as well as details on trailing commissions.
Finally the royal commission is about to highlight what I consider to be the biggest rort in our whole industry which is:
- Charging premium fees for doing nothing but administration.
And you can add to that:
- Charging exorbitant platform fees in order to give clients access to basic information that should be available anyway.
- Paying a financial adviser to stick you in no brain no value add products like ETFs and market matching managed funds that hold almost everything in their benchmark.
THE BIGGEST RORT IN THE INDUSTRY
As you may know Marcus Today also owns a financial planning business called MTIS Private Wealth. I apologise in advance for talking my own book but you should find this interesting either way.
Our financial planning team had a typical client in recently. They had approximately $1.3m in superannuation. They came to us with a structure that had been set up by another financial planner. The $1.3m was invested in a series of managed funds through one of the big “platforms” offered by one of the big fund managers.
A survey in 2009 by the Small Self-Managed Super Fund Investor Report found that 72% of investors who were actually using a platform said that they didn’t use one (when they unknowingly did) or did not know what they were.
I’m sure that ignorance has improved in 9 years but there is doubtless still a very large percentage of people that haven’t realised that when they ticked the boxes on their employment forms, or signed on to a lazy financial planner, that they also agreed to be on a fund manager’s platform and became la creme de la creme of fee paying clients, the perfect customer for an industry that loves to collect whilst doing the minimum.
Putting employees into default funds through a fund manager's platform is what responsible employers do. It is employment 101 to find a professional well-serviced funds management platform and put all your employees onto it. In so doing the employer outsources all the Super responsibilities to professionals whilst the employees end up paying (being bled) for MER fees and platform fees and paying trails and commissions to some adviser they have never met and who never gives them personal financial planning advice but cleans up on all the commissions and trails on the products that employee base is invested in.
On top of that the employee might have also ticked a box for TPD and Life insurance in which case the premiums for those policies (and they are not cheap) come relentlessly out of their Super account come boom or crash…and the adviser gets up to 130% of the first year’s premium and 20-30% of every premium after that. This is how a predatorial insurance company bled every single dollar (around $880) out of my 20 year old daughter's superannuation fund, set up when she started working at McDonalds. It still makes me spit that I did not see it happening earlier.
Back to the $1.3m client who came to us with nothing but managed funds on a ‘Platform’, arranged by his employer, with almost all the managed funds managed coincidentally by the platform owner who earns its money through Management Expense Ratios on the managed funds (MERs) and its “Platform fees”. And the biggest rort of all….these investments are not actually being managed, for added value, they are being administered, to return the average.
Here is a breakdown of the fees this particular client was paying in MER on each of the 8 managed funds his $1.3m was invested in.
Now there’s nothing wrong with paying a fund manager a fee, it could be the best money you ever spend if it means you don’t have to do anything at all but receive a letter a year, and if they are a fund manager like Wilson, Paradice, Cooper and Padley that are actively managing the money with the goal of making you money.
But the rort comes in the often undisclosed and rather incestuous arrangement through which the employees are directed y hapless or incentivised employers into managed funds run by basically one fund manager (often an industry fund), and are captured by a predictable rather than chosen industry fund manager, and go onto the very lucrative fund manager's platform.
In this case the client had paid another 0.83% in "Admin and Plan" fees…the platform fee...no financial plan attached. That added up to $10,790. Add in the MER fees of $12,922 and the client had paid $23,712 or 1.82% in total under his current, very common, structure for nothing but incestuous managed funds and no financial advice, certainly no personal financial advice (although he probably has the phone number of an adviser he’s never met and never calls).
Despite a lot of financial planners declaring themselves as “Independent Financial Advisers” the truth is that most of the large financial planning firms are owned by a fund manager and although their business won’t carry the name of that fund manager, 72% of planners are licenced by AMP or the Banks. A large percentage of the rest will be owned by another big fund manager. You won’t be able to tell that from the business name of the planner, they rarely advertise their allegiance, but the truth is that most are ‘owned’ and are a ‘tame’ financial planner that services their parent as much as their client.
If you are someone who has ended up (knowingly or unknowingly) on a platform paying platform fees, and are invested in managed funds paying MERs, having taken the personal financial advice of a financial planner to do that then let me tell you, you are the perfect client and are paying for a lot of BMW’s. But this is what happens to the majority.
Go to a lazy financial planner with your Super and you will be stuck on a platform in a bunch of generic managed funds then you are now paying just about every fee imaginable which includes financial planning advice fees, MERs, platform fees, and SMSF administration fees (your accountant and auditor), let alone your own time spend administering the SMSF.
But again, the biggest rort is not the fees but the inaction – the fact that you are then invested brainlessly in big funds and ETFs that add no value but charge as if they do. If a financial planner can put you into “average” products then they simply don’t have to do anything after that. They are blameless for the market average performance and cannot be sued for uselessness. But if that is all they have invested you in then it is pretty useless. They are not adding value and they are not earning their BMW’s.
HOW TO SAVE SOME FEES
The key to investment is performance. Everyone will pay for performance. But the bulk of you are paying a lot of fees to the industry for very average performance, average because most of the large managed funds you are invested in are not risk takers they are market matchers, they own, on your behalf, thousands of stocks, in multiple countries, and all the asset classes. One of our new clients in last week had been put into a fund with 5600 stocks and were being told that it was an actively managed fund. Yeah right. If this is what your financial planner is doing less fees they are dooming you to average returns.
My brother-in-law showed me the list of investments last night. Almost every product was a Dimensional fund or a Vanguard ETF. I daresay that the financial pl;anner that had arranged it had the arrogance to wear an expensive suit and use a calculator whilst they sold him this “scientific” portfolio of “dumb” (no value add) average products. And laughably they had sold him on the wisdom of buying these brainless funds because he started telling me the value of paying 1% less in fees every year compounded over his lifetime. If that was the selling point then they really have nothing to offer. They should be saying "Last year our fund returned 22.34%" not "1% less in fees compounded is why you should do this".
Footnote: The approach is very low risk but these products are bull market products which means they only make you money in a bull market. Come a Bear market they will NOT cash out and you will wear whatever the market does. In other words they are much higher risk than they look because in a bear market nobody does anything to protect you.
ADDING VALUE IS A MUST
I contend that if you are paying fees you are paying for a value add. In managed funds that means you are paying for performance and in financial advice that means paying a financial adviser for value adding advice in tax, super, structure and investment advice that adds value not just invests you in the ‘average’.
To make the point here is a table of the differences in fees between using a platform to buy managed funds and the alternative which is to get advice from a financial planner like us that doesn’t use a platform and in most cases invests directly rather than in funds. WE work for our fees. We give you personal financial advice, set up your SMSF if appropriate, write you a financial plan, give you direct investment advice and do your administration for you. We do not put you in dumb products and forget you.
And I haven’t included on the left hand side the cost of using a financial planner to put you on a platform and invest you in managed funds. Add another $13,000 to the left hand side.
The net result is that if you have an SMSF and don’t want to invest in average ‘hold everything’ managed funds but want a financial plan done with ongoing investment and administration advice, you can do it for almost half as much as you are paying for no advice in average managed funds (depending on how much money you have).
This is how our financial planning business sells its services. Despite that, hopefully you will find it a bit of a heads up on what I think is one of the biggest rorts in this industry….paying fees to be stuck in average returns and then being ignored.