Gareth Daniels is an Authorised Representative, GWM Adviser Services Limited, Australian Financial Services Licensee
Driving home from work last night there was a conversation the radio relating to super funds and how they perform relative to each other.
Many people would reach for the dial or press the button to change channels but the nerd in me resisted.
The item was a simple one; a firm has compiled independent research into the performance of super funds every year for the last five years and rates them accordingly on an annual basis.
The cynic in me listened intently for the criteria by which they had categorised the funds, but I had a bit of a ‘Wow!’ moment when they stated that they had looked at performance net of all fees and charges and had reached the overall conclusion that funds that charge lower fees typically outperformed funds that charged higher fees!
Further, in most cases, Australians would see a better performance from their super fund if they selected a low-cost index option that tracked the broader market rather than paying performance fees to active fund managers who fell short of the bench mark over the long-term.
Now I know I can be a bit sarcastic, but that ‘Wow!’ moment was genuine.
Simple, common sense advice can sadly be lacking in the superannuation space, frankly in financial planning in general. So when I hear it from an external source it jumps out at me and I realise that maybe we are not alone in our philosophies.
I downloaded the report that the firm produced, and a couple of key comments shouted at me from the pages;
Our research shows there is a clear correlation between high fees and long-term underperformance in super (The Fat Cat Funds Report Super Fund Guide 2018 page 3)
Poor fund performance comes predominantly from active management fees as well as higher administration and operating expenses than necessary (The Fat Cat Funds Report Super Fund Guide 2018 page 3)1
The funny thing is this information probably doesn’t surprise you. It is logical; it is common sense. So why don’t more of us follow it?
Like superannuation itself, the concept at the heart of following an index approach is BORING! We don’t want to talk about so its sits at the back of our minds. Over time we might not fully remember
why we are following that strategy anyway, particularly with the drip drip effect of other people’s opinions impacting on us. The reality is, what is there to talk about anyway?
Imagine the barbeque conversation;
“Yeah so I er um yeah paid no attention to my superfund again this year but as I track the broader Aussie market I got a nice steady long-term average return and I er um received a good level of fully franked dividends and I didn’t have to manage or worry about anything to get that…”
Well, that’s not very interesting is it? Not compared to the person who runs their self-managed super fund and trades shares daily and has a no recourse loan for the residential unit development that they are building up there in wherever and they had to meet with their accountant for three hours last week because there was some problem with the audit and now it seems like they might have to take that piece of art off the wall an put it storage because it “doesn’t really meet the sole purpose test after all”…. What?
Superannuation is an investment vehicle for you to set yourself up for the retirement lifestyle that you want. Research shows that a lower cost fund with an indexing approach will typically provide better long-term result than any other investment option. The point is that the more you pay in fees through more complex investment options the more likely that the long-term returns will be lower.
Our research shows that 96% of balanced super funds underperformed a simple low-cost index strategy after fees and taxes. This is consistent with research from Finalytiq4 which found similar results in the UK, and S&P Dow Jones whose SPIVA research shows that 80% of active Australian share fund managers have underperformed the index over 15 years. (The Fat Cat Funds Report Super Fund Guide 2018 page 35)
Why does superannuation need to be an interesting conversation anyway? Why does managing money have to be at all? Far more interesting is what you do with the time you have to enjoy life rather than worrying about money and what you spend your passive income on!
So how does any of this impact you? If you have made it this far through the article, then you have already met more than half of your required quota for paying attention to superannuation this year. Well done!
From here, check in with your adviser and (subject to your risk profile) determine your level of exposure to growth assets which should come via an index approach, balance that with your need for defensive assets and then ensure that you are on a fee favourable platform.
Simple but not easy I know; but it is common sense!
1 The Fat Cat Funds Report Super Fund Guide 2018 is produced by by Stockspot Stockspot Pty Ltd ABN 163 214 319 is a Corporate Authorised Representative (No. 453421) of Sanlam Private Wealth (AFS License No. 337927). They are a Robbo Advice firm and have no affiliation or connection to Income Solutions. We still believe that personal relationships are at the heart of quality financial advice, and have referenced the The Fat Cat Funds Report Super Fund Guide 2018 as an opinion piece.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.