Cooper challenges multiply for wealth managers

When Jeremy Cooper and his colleagues on the panel of the Review of the Governance, Efficiency, Structure and Operation of Australia's Superannuation System started taking submissions in August last year they came across a couple that, compared to most of the others, were out of left field.

The Australia Institute argued that the superannuation industry looks competitive, because there are so many funds and investment options, but isn't because an uninformed and apathetic consumer market does not impose any pricing discipline on providers.

Making a similar point, Ron Bird and Jack Gray from the Paul Woolley Centre for Capital Market Dysfunctionality at the University of Technology, Sydney, argued that consumers of superannuation products are unable to determine the quality of the seller's goods and costs are unnecessarily high as a result of "inappropriate, ineffective competition".

The Australia Institute argued for a low-cost universal default fund, based on the fact that 80 per cent of super fund members never exercise their right to choose a fund or an investment strategy. They are put in a default fund and stay there.

The Institute argued that the current system, with its multitude of investment options, is too complex and costly for most members. The cost of running such a system knocks about $35,000 off the average retirement balance.

This left field proposal is at the core of the Cooper Review's plan to overhaul the superannuation system.

The panel, whose final report was released yesterday, says it wants to "re-cast the architecture of the superannuation industry to a member-oriented, rather than an industry-oriented, perspective. The degree of engagement a member wants to exercise in relation to their superannuation should dictate the regulatory settings and nature of the products available."

Cooper says there are three constituent groups of fund members. Some members want to have someone else take care of it all for them. The proposed MySuper default product would cater to these members.

Some members want to exercise choice over the investment strategies applied to their superannuation balances but want their accounts administered for them. They would use the choice options available to them in mastertrusts, industry and retail funds.

Those who choose to be fully responsible for the investment and administration of their superannuation arrangements would operate a self managed fund.

MySuper features would include specific trustee duties designed to deliver lower costs, increased transparency leading to better comparability, provision for intra-fund advice and an embedded retirement product. Any industry sector would be allowed to offer a MySuper fund and current default funds could be converted into MySuper funds.

MySuper would cut costs from the current level of 97 basis points for default fund members to as little as 32 basis points. Long term the saving would be $1.7 billion a year. There would be no cross-subsidisation allowed between MySuper and other products. Buy and sell spreads would have to be based on demonstrable costs. There would be no entry fee.

A Macquarie Research analysis of the impact of the MySuper proposal on AMP suggests that as much as 50 per cent of the $15 billion in the group's small corporate super business could migrate into a MySuper product, cutting the margin by half or more.

Other wealth management groups would face similar challenges, varying with the makeup of their businesses.

However, Macquarie says that if MySuper was adopted on the basis of improving competition the government may also remove the bias towards industry funds in industrial awards, and this would open up a bigger market for wealth management companies. There could be gains as well as losses.

MySuper is not the Cooper Review's only radical proposal with negative consequences for the wealth management industry. Its elevation of self managed super to a core role in the system is another.

Cooper said in a recent speech that when he started working on the project in the middle of last year one of the things he heard a lot was how bad the do-it-yourself sector was.

Cooper said: "Stories about investor losses, dangerous investment products, non-compliance, bad advice and general mayhem were often bandied about as truths about self managed super funds. Yet there was very little hard evidence to go on."

What Cooper did find was that the SMSFs were achieving investment returns that "appear to be as good as, if not better than, the returns in other sectors" and that the cost of running SMSFs was going down as a percentage of assets (a result of steady growth in average fund size).

Cooper says: "On the whole, SMSF members appear to be doing well in taking on a higher level of responsibility for their retirement savings and achieving satisfactory net investment returns."

The Cooper Review may not silence all the critics but it has legitimised self managed super and that may encourage even more people to get into it, to the detriment of some sectors of the wealth management industry.

A third issue that will challenge the wealth management industry is the recommendation, with regard to choice of funds, that trustees be assigned a duty to carry out appropriate due diligence and monitoring of investment options they offer.

When it comes to investments the superannuation system, like the non-super investment management system, has operated on the premise that with proper disclosure investors can make informed decisions.

Cooper says this is not enough and he wants trustees to vet the investment options that go onto mastertrust and wrap platform menus. What may result from this is that wealth managers will have fewer opportunities to offer high risk alternatives, hedge funds and exotics. These types of funds generate high fees.