David Murray has launched a stinging attack on the country’s massive wealth management industry, criticising the high level of fees and the poor quality of financial advice.
The report found “little evidence of strong fee-based competition” in the country’s $1.8 trillion superannuation system, adding that “operating costs and fees appear high by international standards”.
Hefty fees and charges, it noted, would not only erode people’s retirement incomes, but would also reduce the amount of funds available for long-term capital formation in Australia.
“As a guide, a 38 basis point reduction in average fees for the entire superannuation sector would deliver a total saving to members, and additional funds to invest, of about $7 billion per annum”.
The report takes aim at the banks and big super funds for tolerating conflicts of interest, and paying financial advisers for selling financial products.
“The inquiry considers the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice”, the report says.
Although financial advice is becoming more important as an increasing number of people retire with large superannuation investments, the report notes that “the competence of advisers various widely”.
“Some advisers are highly qualified and competent, others less so. Consumers find it difficult to know the difference.”
The report points out that fees charged by superannuation funds have not fallen more because competition between super funds to attract and retain members “has largely been conducted on a non-fee basis, which has led to feature-rich and more costly superannuation products”.
It argued that because consumers are not engaged with the superannuation system they tend not to be sensitive to the fees charged by their funds, and it can be difficult for people to understand and compare fee structures.
The Murray inquiry argues that as the wealth management industry becomes more vertically integrated, the degree of cross-selling of services may reduce competitive pressures and contribute to higher costs in the sector.
The Murray inquiry says it is “too early” to tell whether the MySuper reforms will stimulate competition and improve after-fee returns for default fund members. In the meantime, it suggests we follow the Chilean approach of putting the super contributions of all new members into the same default fund, and allowing different super funds to compete to manage the default fund.
Since this system was introduced in Chile in 2008, the fees charged to manage the default fund have fallen by 65 per cent, although fees on other funds have not fallen as far.
Another reason cited for high fees is that many superannuation funds allow members to switch their investment choices frequently, often at short notice and with little or no cost.
This not only means that a majority of fund members end up subsidising the investment switches by a minority, it can also affect overall returns, because it puts pressure on funds to hold a high level of liquid assets.
Since older members (with higher balances) are more likely to change their asset allocations than younger members “the need for liquidity to manage this risk may increase over time as the population ages”.
It would be more efficient for super funds – and more equitable for their members – if investment switching were properly priced, the inquiry noted. The Murray inquiry advocates a -different approach to regulating consumer financial products than was proposed by the previous 1996 Wallis financial system inquiry, which put a heavy emphasis on disclosure.
“The current disclosure regime produces complex and lengthy documents that often do not enhance consumer understanding of financial products and services, and impose significant costs on industry participants.”