Chant West's latest fees survey highlights the extent to which the regulator's new disclosure regime will instantly make super look more expensive. Super funds now face a massive test to convince their members – and the wider public – that the increases in their publicly-disclosed fees are more perception than reality.
Chant West has released its September 2017 fees survey, the first since ASIC's Regulatory Guide 97 (RG 97) came into full force. The survey captures the latest fees for 92 MySuper products and the top 100 choice products, encompassing products with over $1 trillion in assets. The survey shows that with the introduction of the new disclosure rules, average investment fees and costs have jumped by about 0.20% pa.
Source: Chant West
The Chant West survey details the fee changes fund by fund, with many funds updating their Product Disclosure Statements in late September. It also analyses the fee changes for the main industry segments, namely industry funds, public sector funds, stand-alone corporate funds and retail funds.
Ian Fryer, Chant West's head of research, cautions against jumping to the obvious conclusions. "What we're seeing isn't a massive increase in fees. Rather, we're seeing an increase in the fees that the regulator, ASIC, now requires funds to disclose.
"From the members' point of view, the actual fees and costs they incur haven't changed in most cases. There have always been costs like brokerage, underlying manager fees and transaction costs that funds didn't report because they weren't required to. Now they are. That's a good thing in principle because it makes everything more transparent, but the danger is that people will take the higher published costs at face value.
"Perception is important, and the last thing the industry wants is for members to get spooked into believing they've suddenly been hit with big fee increases. They have not! Now it is up to funds to assure their members that nothing of substance has really changed and, in particular, returns for members are unaffected by the new disclosure rules.
'Russian doll' fixed, but comparisons still a work in progress
In theory, the enhanced disclosure regime should make it easier to make a fair comparison of one fund's fees with another's. "That's something Chant West has been advocating for many years," Fryer says, "and that's what ASIC set out to achieve. Unfortunately, the way the guidelines have been framed they have solved some problems but created others.
"There are certainly some positives. One we would single out is the requirement to disclose the costs of interposed vehicles, such as the layers of fees you find in some fund-of-fund investments. We've referred to this issue over the years as the 'Russian doll syndrome', where funds only disclosed the top layer of fees charged by the lead manager, but ignored the fees of the sub-funds they invested in.
"That's one of the good things to come out of RG 97 but there are a few not-so-good things as well. One is the way it has created a distortion in the treatment of fees and costs for property investments. Put simply, you have to disclose more fees and costs if you invest in unlisted property rather than listed REITs. That puts industry funds at a disadvantage because their property exposure is mainly through unlisted vehicles, so they will tend to look more expensive.
"There's also a structural issue that means super wrap products can disclose lower fees and costs than other superannuation products for the same investments. That's because wraps, which are widely used by financial planners, invest through managed funds (ie Managed Investment Schemes) that don't need to disclose fees and costs in the same way as other superannuation products. This is currently being addressed by the industry and in late 2018 there should be a solution that will involve 10,000+ managed funds disclosing costs on both the managed fund basis and the superannuation basis. In the meantime, super wrap products will look cheaper than they really are compared with other super products.
"Finally, RG 97 has introduced a lot more complexity and requires funds to gather and report a number of costs they've never had to before. There's a lot of extra work involved and inevitably that will add to costs, so transparency does come at a price."
The guidelines are complicated and in some areas are open to interpretation. In response, the industry formed an RG 97 Industry Working Group, chaired by Fryer, that will soon release a comprehensive guidance document on how to comply with RG 97.
For now, Fryer says, the outcome from RG 97 is actually less comparability, not more. "It will take the next year or so for the industry to arrive at a consistent way to disclose fees and costs in line with RG 97. Until then, as researchers, we will continue to make adjustments to the published figures to allow fair comparisons."
The survey warns against the danger of becoming obsessed with fees and losing sight of what is most important to members, which is the return they receive after fees and costs have been deducted. As Fryer says: "At the end of the day, the net return is what really matters. The industry needs to draw the focus back to member outcomes and cannot sacrifice performance just to bring the fees down – that would not be in the best interests of members."