Wednesday, 20 May 2015

Super fees have been a hot topic recently given MySuper reforms and the Financial Services Inquiry. You have probably seen or heard the claims that superannuation fees in Australia are much too high. And I would wholeheartedly agree that fees should not be higher than necessary given the effect they can have on your superannuation savings. The higher the fees - the less you have to live on in retirement, right?

But while I agree fees should be low they should not be lower than optimal. Recent research suggests that funds with high investment fees, where the fee budget has been used wisely, were rewarded with higher investment returns after fees have been paid1.

There is the old saying that you get what you pay for. If low fees are pursued to the exclusion of all else the likelihood is you’ll end up with a very low-cost portfolio, but one which may be constrained to a narrow range of assets. This could have the effect of reducing investment returns over the long term by restricting the types of investments you can hold to those which are relatively cheap, such as market index funds.

In my view a well-constructed investment fee should do several things. Broadly it should offer both parties (i.e. the investor and the investment manager) a good deal. The investor wants to see certain investment return targets met at a cost that represents good value for money and the manager wants to be appropriately rewarded for good investment performance.

A good fee structure will look to incentivise investment managers to perform well. However it should also discourage excessive risk taking in order to generate strong short-term returns - and earn high one-off performance fees  - at the expense of longer term performance.

To do this a fee structure will take into account performance over rolling periods. This ensures investment performance is measured over several years, and encourages consistently good performance over longer timeframes.

Getting this balance right and negotiating a fee that is optimal is a ‘good’ investment fee in my opinion.

The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
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1. Research Paper, Chant West, Active and Passive Management, Australian Super Industry Experience, August 2014.