Fund managers overpaid

With an estimated $1.5 trillion in our government mandated superannuation system and growing, it’s perhaps no wonder that the industry has attracted its fair share of ‘hangers-on’, and accusations of ticket-clipping.

AustralianSuper, the country’s largest industry super fund has accused fund managers of pocketing ‘manifestly excessive’ pay and leaching off the public at the expense of ordinary Australians. Chief executive, Ian Silk, speaking at the Australian Securities and commission (ASIC) forum, delivered a stinging rebuke to financial services professionals, saying ‘we’re all sucking on the teat of the public purse”.

Mark Lazberger, chief executive of Colonial First State Asset Management, which is owned by the Commonwealth Bank (ASX: CBA), agreed, saying that there were a lot of intermediaries extracting fees in the superannuation sector.

Caltex Limited (ASX: CTX) and Westpac Banking Corporation (ASX: WBC) director Elizabeth Ryan also said that funds management fees did look excessive from the perspective of pensioners.

Perhaps the most contentious issue is that fund managers charge a percentage fee of assets managed, when the marginal cost of managing an extra $500 million was negligible, said Mr Silk. As a result, AustralianSuper has reduced the proportion of assets it outsourced to active fund managers to around 50%, which is estimated to save its members $200 million.

No wonder then that self-managed super funds are rising in popularity and already represent over a third of the super system. Investors are sick and tired of seeing their hard earned funds clipped by financial advisers, asset managers, platform providers, asset consultants and other financial services professionals, and are taking matters into their own hands.

While some listed fund managers provide details of some of the salaries paid to its managers, such as Platinum Asset Management (ASX: PTM), many do not provide details, including some of our largest super funds owned by the major banks.

The fact that most active managers fail to better market returns means many investors are better off in a passive index fund, which generally charge less than 1% fees. Of course that fee is still based on assets managed, rather than a set fee for service. An even better option is likely to be direct investment in shares.

Foolish takeaway

Here at the Motley Fool, we’ve long complained about the excessive fees paid to financial services professionals and companies in the superannuation sector. We wouldn’t mind so much if those fees led to fund managers consistently outperforming the market, but there doesn’t appear to be much evidence that high fees leads to high out-performance. Why should investors and retirees pay excessive fees for mediocre performance?

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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