Hot topic of the week…

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A 57-page report that analysed problems with soaring fees within Australia’s current superannuation model and suggested an alternative drew heated debate among Wealth Professional readers.

Many of you weren’t happy about statistics that appeared in the report that highlighted that industry funds generally have cheaper fees than retail funds.

Industry Super Australia (ISA) trumpeted the information to push its cause against the bank-owned retail funds and promote its favour of the much debated default-fund selection process currently in place.

James Smith wanted to know if the report analysed how superannuation fees are calculated: “We have a floored [sic] system where many industry funds are non-unitised with fees deducted for admin etc.

separately. The challenge with models that compare fees is the assumptions made which are often flawed. Disclosure of super fees should be uniform (e.g. unitised pricing) and regulated to prevent vested interests distorting the numbers and/or using flawed comparisons to push their product.”

The oversimplification of the report does not take into account the value of advice or the fact that not all superannuation funds are the same, said alleycat: “For instance, the default fund for one ISA is "Core" which is set up for a "Balanced" investor. What happens if the person who was disengaged in choosing this fund in the first place is actually a "Conservative" investor? The fees may be less in the Industry Fund than say a Wholesale Fund but the issue here is not necessarily about the fees but more about how the client receives reasonable outcomes for their retirement.”

Let’s Get Real wanted to know if the report assessed the cost impacts on final retirement balances, which would include the CGT impact of constantly switching super funds (as suggested in the report) to save on fees.

Mossman used their uncle as an argument to support the debate that you can’t judge sectors of the industry just based on fees: “My uncle was obsessed with fees. He would quite happily sacrifice $5,000 in additional earnings from a better performing fund, if that fund charged an extra $100 in fees compared to a cheaper, worse performing fund. He was far too concerned with 'being ripped off' that performance was irrelevant to him. So he never sought financial advice, and has sat in a cheap industry fund all his working life, and has paid bucket loads more tax due to never undertaking TTR strategies, never moving additional capital into his super or pension for the friendly tax environment, gets less Centrelink, Age Pension etc.”

And Innocent Observer said having read the report there are certainly some principles that are “spot on”, however there several simple practical considerations have not been addressed adequately: “Instead, by over-simplifying or avoiding the real issues, the credibility of this report is significantly watered down…Most importantly, though, the report suffers a severe case of hindsight bias and short termism. Looking at the period covered, the quantitative inputs are close to meaningless. As a result asset characteristics are under or over emphasised, and (as is often the case) volatility and risk are confused as being the same thing.”

See more comments and read the story here.