The advertising blitz is upon us. Employees are - at long last - getting the right to choose how their own hard-earned superannuation is invested. But let me hazard a guess. You’ve got no idea what you’ll do with super-choice. Here’s another guess. Even if you start studying now you still won’t know what to do come July 1.
In life as in economics, choices are only as good as the information they’re based on. And there’s always been a terrible problem in getting people good information about where to invest. It’s an intrinsically difficult problem. Markets often fail doing it and governments can be even worse.
Right now, “investment advice” exists in a netherworld. Having grown organically from the sale of life insurance, the industry is still regarded by investment funds as a “sales channel” and its commercial structure is identical to the sale of fridges in a department store - with each stage of the distribution chain adding its margin and using it to fund sales incentives.
At one level there’s nothing wrong with that. It’s a free country and it works for fridges. Why not for investments? The problem is that there are big rewards for sales people who can get their customers to think of them as fiduciary advisers - that is, professionals who act in their clients' best interests, usually in return for a fee, as a good doctor or accountant would.
The ambiguities of this situation, together with the usual gallery of rogues on the fringes of any industry, make regulation inevitable. That’s no bad thing where it provides basic safeguards - like some protection against fraud, fee disclosure and streamlined dispute resolution.
Beyond this, the regulation we’re pursuing will do more harm than good. Why? Firstly, beyond very simple regimes - like the panel on a packet of biscuits telling you its fat and sugar content - elaborate disclosure confuses and paralyses more than it empowers.
And even more important, trying to regulate to improve the advice of a sales-oriented industry is not just wishful thinking. It legitimates the subliminal association of salespeople with fiduciary advisers. Regulation not only allows them to parade their “government-licenced” status but actually requires practitioners to play the role of adviser - by mandating the provision of continuing risk analyses and written investment plans.
These plans generally comprise slabs of standardised text drafted before the event by investment sales executives, vetted by lawyers and disgorged from software packages upon entering of client data. The software gives the impression of independence and expertise, but is promoted as “sales technology” within the industry.
So here’s how I think regulation should work. Beyond basic fee disclosure and effective dispute resolution, we should require any adviser recommending a product charging fees above some minimal level to provide some simple measure of the likelihood that this will pay off with higher net returns.
In the US where we have the best evidence, around 90 per cent of investment managers underperform the market. And in Australia the “industry funds” to which award super has usually been paid have generally outperformed commercial funds. Not having to remunerate investment advisers, they charge lower fees which - as we’ll see - add up over time.
We also need a system where advisers keep independently auditable “sample portfolios” operated in “real time” - to avoid “advisers” selecting their best picks (and forgetting their duds) after the event. Then we could measure their performance. The investments in these portfolios would be confidential - to protect advisers’ investment management secrets. But their performance - in terms of absolute returns, after-tax returns and volatility - would be published.
The Government - or even an enterprising Opposition - might kick this off with public encouragement rather than compulsion. If leading figures called for action and initiated co-operative work on reporting standards to ensure comparability of performance measures, some industry leaders might start self-reporting - to highlight their own good performance. But over time I expect it would make sense to regulate to bring everyone into the fold and scale back other regulatory excesses.
And you’ve heard of the miracle of compound interest. You’ve got to decide whether you want it working for you or your “adviser”. If you were earning $50,000 a year, your fund was earning a 5 per cent real rate of return and my regulation helped you avoid the 0.25 per cent per annum trailing commission plus GST that most funds pay to advisers, your pay out after 35 years of compulsory super would be more than $28,000 or 5 per cent higher. If my system helped you pick a fund with an annual return just 0.5 per cent higher again - hardly a stellar result - it would increase your ultimate retirement nest egg by $85,000 or over 14 per cent on the base scenario. You’d be richer and our economy would function more efficiently and fairly.
Choice of fund is a great idea. Now let’s make it an informed choice.
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