There has been a lot of debate recently about commissions relating to retail superannuation funds. This debate has been largely lead by the industry superannuation funds, who do not pay commissions to financial advisors.

As a company that exists only because of the commission structure that has developed for the distribution of retail financial products, Rebate Financial Services obviously only deals with retail funds, and the author of this article is strongly biased towards retail funds. Nevertheless, this article utilises numerous hard facts and third party opinions that add some balance to the advertising campaigns and lobbying by the industry funds, with regard to their competitive position compared to commission paying retail funds.

Are Industry Funds really cheaper?

This point is arguable. There is no doubt that Industry funds do not pay commissions to financial advisors, however commissions paid through an individual fund differ depending on the fund manager used and the advisor used to access the fund. Clients of Rebate Financial Services, for example, pay far lower fees than most people who use a retail superannuation fund, because we remove contribution fees and rebate half the trailing commissions received.

A fact that is forgotten in the advertising of Industry Super funds, is that they have far higher costs associated with managing their investments. It should also be noted that industry funds do not deduct administration fees from performance.

Australian Bureau of Statistics figures show that the relative cost of investment management, compared to assets under management at the end of 2008 were 0.35% for Industry funds and 0.12% for retail funds. A look at investment costs to various individual funds is also interesting:

Sample Industry Funds

Australian Super 0.45%
Health Super 0.38%
HESTA 0.27%
MTAA 0.55%
Sunsuper 0.38%
REST 0.29%

Sample Retail Funds

AMP Personal Super 0%
BT Lifetime Super 0%
CFS FirstChoice Super Trust 0%
Masterkey Custom Super 0%
Suncorp Easy Super 0.59%
Suncorp Mastertrust 0%

There are significant differences in the way industry and retail funds invest!

Investment fees are generally higher for Industry funds because they maintain higher asset allocations towards unlisted assets. This difference, it can be argued, was the major reason for the outperformance of many industry funds prior to the onset of the financial crisis. However, since this time the lack of liquidity of these investments i.e. the funds cannot easily alter their exposure to these unlisted assets has caused significant problems for many industry funds, driving down their relative performance, making it difficult to maintain targeted asset allocations and, creating a risk that some of these funds may be unable to pay benefits on time or facilitate timely portability under Choice of Fund.

Personal insurance offerings are an important facet of superannuation funds

Industry super funds have largely ignored a change to tax laws that allows them to offer comprehensive income protection insurance to their members. A survey of 17 industry funds by The West Australian Newspaper during 2009 indicated that just two were offering whole-of-working life insurance, despite the rules being changed more than two years ago to encourage funds to offer the cover. The inaction affects more than four million industry fund members.

Income protection insurance is designed to pay an income stream to a worker who is unable to work because of injury or illness. It is considered most critical for workers with mortgages, children or high investment or personal debt levels.

Almost all retail super funds, including AXA, AMP, Colonial, MLC, BT and ING, provide the extended option through at least one of their products. However, most industry funds only offer income insurance that covers members for two years, the former standard for funds before July 2007. Of the 17 industry funds surveyed, only Hesta and Legalsuper were, at the time, offering their members cover to age 65. Those that were not providing this option included AustralianSuper (with 1.3 million members), Cbus (500,000 members), HostPlus (900,000 members), MTAA (280,000 members) and CareSuper (220,000 members).

The cost of note receiving advice

There are a plethora of arguments that can be made regarding the most suitable asset  allocations for different people, and the effect this will have on their retirement funds. Australian Bureau of Statistics figures indicate that 72.5% of investors in industry funds utilize their funds default strategy, compared to only 23% of investors in retail funds. The question must be asked whether the default options of Industry funds are best suited to suited to such a large percentage of people.

It is also plainly obvious that vastly fewer members of industry funds are utilizing the taxation efficiency of the superannuation environment to maximize their wealth. Personal contributions to super accounted for only 15.7% of inflows into industry super funds during 2008, compared to 49.4% of inflows into retail super funds. The use of strategies that use superannuation to reduce taxation liability, such as the use of “transition to retirement” income streams must not be utilized by industry funds investors, to the same extent as those investing retail funds, probably because they have not been made aware of such strategies by a financial advisor.

It is difficult to quantify the wealth that is lost every year by people who do not effectively utilize the superannuation environment to minimize tax. However, it seems obvious that a large portion of those who do not receive financial advice forgo significant potential savings. Such costs are certainly not included in any comparison between industry and retail superannuation products. This must lead one to ask how much the negative publicity and advertising relating to financial advisors and commissions is really costing Australian superannuation balances, given that it is a fairly safe presumption that a larger portion of investors in retail superannuation funds receive financial advice.