In a recent report on more than 3,300 managed and superannuation funds, Australia's big four banks and AMP Limited (ASX: AMP) continue to rip Australians off with high fees. If it was anything else, we'd be up in arms and protesting about it, but the fact remains that very little is likely to change.
Ultra-low cost fund manager-competitor Stockspot conducts an annual review of managed funds and this year included superannuation funds. 3,390 funds were analysed for 12 criteria including historical returns and fees with some un-surprising results.
The funds were then ranked into five sets of cats, Fat Cats, Flabby Cats, Fair Cats, Fine Cats and Fit Cats. Fat Cats are the worst offenders when it comes to fees and performance, with Fit Cats at the other end with lower fees and better performance.
- Those 3,390 funds represent $570 billion of funds under management, with $6.7 billion paid in total fees – equating to an average fee of 1.17%.
- Australians pay $23.5 billion in investment fees to superannuation funds each year – and that amount is growing.
- The big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and AMP dominate the Fat Cats category, along with collecting the highest fees.
ANZ had the greatest number of shocker funds with 277 out of 701, followed by CBA/Colonnial with 67, AMP/AXA with 64, Westpac/BT 60 and NAB/MLC with 39. - Total fees paid by consumers to those funds was $790 million last year.
- The results also showed that high fees generally equates to poor performance. The average Fat Cat return after fees of around 2% was 6.4%, while the average return from a Fit Cat fund, after fees of 1.2% was 11.9% – almost double that of the Fat Cats.
- The best Fit Cats were Investors Mutual, Lazard Asset Management, REST Super, Legg Mason Global Asset Management, SG Hiscock and Co and Vanguard Investments Australia.
- The fund manager or owner of the fund is no indicator of your potential performance. Suncorp Group Ltd (ASX: SUN) and Perpetual Limited (ASX: PPT) both had representatives in the best of the Fit Cats and the worst of the Fat Cat funds for Australian shares-focused super funds.
That suggests that investors need to pay much greater attention to the actual fund details. - The introduction of MySuper has failed to reduce superannuation fees. Australia's scale as the third largest pool of private savings globally means our fees should be 60% to 80% lower than the current average of 1.17%.
Without a public tender for the right to manage default fund super like Chile and New Zealand, fees are likely to stay high. The average fees in those countries are between 0.3% and 0.55%.
The report also suggests that the ability for consumers to choose their super fund is extremely difficult with no centralised website allowing Australians to compare fees and performance data in a standard format.
While many funds charge fees as a percentage of assets under management, consumers could also be liable for platform fees, administration fees, entry & exit fees, advice fees and performance fees. That could see them paying more than 3% per year of their total assets in fees.
We've mentioned the high fees and underperformance of retail funds (here, here and here) and have argued that a fee based on a percentage of assets should be banned and a fixed fee or performance fee charged instead as Australia's super system rises beyond $2 trillion. A percentage-based fee encourages fund managers to increase their assets under management, with little consideration for performance.
If the government outlawed percentage-based fees and only allowed fund managers to charge a small fixed fee and performance fees when they beat their underlying index, we'd have far fewer super funds and plenty more that beat the market and likely end up paying much lower fees, meaning more cash in our super fund at retirement.
Foolish takeaway
Year in year out, survey after survey shows that on average retail super funds rip off their members through poor performance and high fees. The problem is that many Australians simply are too lazy to take control of their super – much like mortgage borrowers stick with the big four banks, despite much lower rates available elsewhere. I guess we end up with the super system we deserve.
