by Wes Hall and Tristan Laszok*
Australia’s super system is heralded as one of the world’s most successful retirement income systems, but scratch the surface and things look different. The industry is suffering from underinvestment in administration and communications infrastructure, risk and compliance. If the large incumbents hope to continue managing Australia’s retirement savings, they need to make some radical changes.
The Royal Commission Financial Report rightfully focused on the fundamental principles of conduct but addressing conduct and culture alone won’t fix the industry’s woes. The solution must involve digital-enabled, consumer-led propositions to help close the widening trust deficit and lack of confidence in institutions, regulators and government.
However, innovation rarely comes from large incumbent players. Furthermore, they’re neck-deep in outdated processes and legacy systems; trying to clean up past mistakes. Simply adhering to Hayne’s six rules of conduct; obey the law, do not mislead or deceive, and be fair Et Al, is just about all they can muster.
Yet these rules are not new. They’re not even onerous or unreasonable, although admittedly they’re covered by complex combinations of existing legislation. Perhaps a lack of clarity is part of the problem.
In amongst the ‘black and white’ rules, there are carve outs and grey areas that are open to interpretation. This has enabled institutions to create and implement their own artificial, arbitrary rules to manipulate favourable outcomes.
For example, consider asset management rebates. Often a portion of the published fee paid by super funds for asset management is syphoned off to the product manufacturer.
In retail land, the institutions developed administration platforms, and subsequently platform rebates, as a means of enticing cash-strapped AFSLs to channel clients into their products.
These rebates, which were grandfathered under the FOFA reforms, are part of the fees for no service epidemic.
As stated in Royal Commission Financial Report (page 136, Volume 1): “The fees were charged ‘invisibly’, in that they were deducted from consumers’ investment accounts.”
“The total amounts taken were very large. By August 2018… the total amount paid and to be paid as compensation was estimated to be about $850 million – but the then Deputy Chair of ASIC said that he ‘wouldn’t at all be surprised if it ends up being in excess of a billion dollars.”
It’s telling that over a billion dollars in unnecessary fees went unnoticed by members and the media until the Royal Commission, such is the opaque and confusing nature of superannuation, and the disengagement of members.
This problem is confounding, considering most consumers notice a minor spike in their telephone or electricity bill.
Ironically, the development of ‘net’ unit pricing and ‘implicit’ fees in the 1980s were intended to simplify investments and minimise confusion for punters.
In the end, it has conveniently made it hard for workers to understand how much they are actually paying for services. It used to be that things were this way because of limitations in technology. But in today’s digital age, system limitations can’t be an excuse, especially when the comfortable, dignified retirement of Australians is at stake.
Given superannuation is compulsory, there is no excuse for retail super funds charging over 1.5% in fees for 4 million accounts representing $275bn. Consider also that the majority of these providers also offer better, cheaper products.
What’s needed is a fresh approach to the requirement that “services are fit for purpose”. That should mean calculating gross investment returns, the impacts of tax and other costs.
It’s clear that Australians wants greater transparency and scrutiny of fees, evidenced by the wave of members who have fled the retail sector in favour of industry funds in the wake of the Royal Commission.
Let’s hope these entities can live up to their promises of higher investment returns and all profits to members. Sadly, if they don’t, the average person probably won’t know. Even the Productivity Commission struggled, with its latest report concluding it could not easily account for the differences in returns between retail and industry funds.
Ultimately, this all points to opportunities for nimble newcomers who aren’t shackled by old-thinking, legacy systems and conflicts of interest.
It’s only a matter of time before the same benefits and efficiencies enjoyed by consumers in other industries, such as education, travel, communication and media, are made available to financial services customers. It’s clear that the days of institutions charging a lot for so little are over.
*Wes Hall is the CEO and co-founder of TOMORROW Super. Tristan Laszok is Chief Product Officer. TOMORROW Super a disruptive superannuation fund, which at launch will offer superior choice, transparency and control, the founders say.