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I’m often asked by friends, colleagues and clients about industry super funds. Which one should I go with? Who do you think performs the best?
This week, Australia has seen a surge in media coverage on big industry funds and their questionable behaviour. This isn’t a first for the superannuation industry and, rightfully, have investors concerned.
Looking at how the industry has evolved over the last few years; it wasn’t long ago that we saw banks be reprimanded for taking advantage of people and being “greedy”. Since then, the introduction of the Banking Royal Commission in 2017 has aimed to ensure that superannuation funds act in the best interests of their consumers. The banks now play only a small part in the superannuation sector, having had to offload entire divisions and billions in revenue. Will industry super funds end up in the same pile of shame?
With increasing concern regarding the behaviour of large industry funds, it begs the question; is bigger better? As the entity that acts as the guardian and fiduciary of our compulsory savings, understanding this is more important than people anticipate.
When I’m asked about industry funds, before offering my opinion, I like to first ask what they know already. What do you really understand about these funds? What do you think they’re for? Do you know how they operate? Are you aware of some of the challenges, such as overspending? Do they know about the ties between industry fund executives, unions, and political parties? Most importantly, are members fully informed about how their money is being managed and spent?
The most common response I get is this;
“They perform really well!”
Who is they? Which fund are you referring to? Did they tell you this via the advertisement funded by client contributions?
There are lots of different industry funds and numerous investment options within each fund. Each industry fund has many different options to choose from. There are around 20 industry funds, which all have between 10 and 100 investment options. “They” is a lot! And not all these 2000 or so investments can “outperform” whatever the interviewee actually understand this to mean.
My next questions come after the (very common) answer, that said super fund ‘performs well’. Which one are you referring to? And compared to what – other super funds?
You see, the main misconception with investing (and this is not specific to industry funds, but they do a really good job of marketing to this point) is that it’s not the “industry fund” that is performing well (or bad). It’s the underlying investments. The most significant attribute of your super fund’s performance is what you are in invested in. What do I mean by this?
(And we won’t get started on how valuations and performance are measured…. That is for another week!)
Let’s say you are in a fund with 40% allocated to Australian shares, 30% to global shares and the balance in cash and bonds. Over 90% of your return comes from this decision alone, this being the underlying market you have exposure to or are invested in. So, if your fund says they performed well they are just taking credit for the return of the market. The market itself does all the work. And yes, they are all investing in pretty much the same shares as the other fund.
So, if the industry fund is not really responsible for investment returns, what does your fund do?
The requirements for the super fund trustee is:
- Provide the legal structure and comply with all the laws (in this case superannuation legislation).
- Act as a trustee.
- Provide suitable investment choices and select the investment managers based on your choice (yes you get to choose).
- Manage applications and withdrawals.
- Manage payments such as pensions and death benefits.
- Report to the tax office on your behalf.
- Manage insurance and payments.
- Act honestly in all matters concerning the fund.
- Act in the best interests of all fund members.
There are a few more intricacies, but these are the core function of your super.
What they don’t do is miraculously “outperform” all other investments on any given day. That is not their objective. And we can get to another article on how they don’t necessarily “outperform” like the say they do. Marketing is a wonderful thing… especially when they are using your money to pay for the ads!
In our next weekly we will start to explain how funds select the investments. Are there any conflicts involved? Is there a better way to invest? We’ll also dig a little into the “outperforming funds” and examine if this is in fact true.
My last comment today is this; I took little interest in my super when I started working. Then one day I looked one of my statements and thought; if I had $20,000 invested in my own name (not super), would I take more interest? Long story short, the answer was yes!
So, I highly suggest you think about your super fund and learn more about it. Gathering and understanding all the relevant information will help you decided whether an industry fund is the best place for your money. It may or may not be, but get the right information so you can say more than “Well…they perform well!”
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Nigel Baker
nigel@scientiam.com.au
Nigel Baker is a Chartered Accountant and Certified Financial Planner and has been an adviser for over 20 years. He founded Arch Capital Advisers providing comprehensive financial advice based in Sydney Australia and Scientiam.com.au a digital financial education and coaching site.
