Would this be considered a bailout? Or the government underwriting industry funds?
Our business has seen a lot of potential and existing clients switch to industry funds in the past few years and so I’d go so far as saying they have been our biggest competitor. Yet, how do you compete on a playing field that isn’t level?
The first question we are asked by a potential client is “what does your ‘model portfolio’ look like”, and we have to provide granular detail of every investment. However, when they decide to switch from their existing super fund they receive no clear picture of what they actually own.
The industry super fund sector has generally delivered strong investment returns; however, what level of risk has been taken to achieve these? The answer is being felt by members now.
The current period of volatility has the potential to unwind many of the benefits the sector has leveraged in recent years and level the playing field for advisers.
There are many reasons for this:
- Fees for service – Industry funds cannot deliver tailored advice in a cost-effective manner, nor guide nervous investors through periods of volatility. A phone call to one fund directed me towards an iPhone app to make investment changes without speaking to a human. The decision to switch investment options is one of the most important and potentially costly decisions someone can ever make, but is being made without any advice.
- Liquidity – The sector has some structural issues, in that it offers daily liquidity to investors but holds unlisted asset exposures of up to 30 per cent in some cases. Many balanced funds hold as little as 3 to 5 per cent in cash – in fact a CIO was quoted as saying 10 per cent in cash was “a hell of a lot”. Yet this is around the average cash allocation of an SMSF. There will be a greater focus on balancing both liquidity and returns or alternatively they may choose to freeze redemptions from certain options as flagged in 2018.
- Transparency – Without quoting Warren Buffet, in my experience the one thing clients are looking for in times of volatility is the one thing that industry funds do not provide: transparency. Most investors are comfortable with volatility if they know what they are exposed to personally; industry funds need to match to deliver this.
- Age mismatching – Growth in members has been incredible, yet we can’t help but question if becoming bigger is in the best interest of all members. As you grow in size, your investment universe shrinks and the demographics of your membership changes. You either need to offer a broader set of options, or greater support, otherwise you must prioritise either liquidity or returns; not both.
- Valuations – Structural issues mean that members are not always treated evenly. The overnight revaluation of Australian Super’s unlisted assets by 7.5 per cent applied only to those who remain in their funds; anyone who redeemed before this valuation was better off. Some have suggested the threat of legal action on the basis of the mistreatment of existing members.
- Targeted changes – The sector continues on the ‘one-size fits all’ approach, which does not allow for any nuance in risk profiles. A ‘balanced’ 22-year-old is different to a ’balanced’ 72-year-old. Yet, the options to change investments are limited to substantial asset allocation shifts. You can’t decide to hedge currency, or reduce your unlisted asset exposure, or increase overseas investments; your main option in volatility is going to cash, as many have.
By no means am I suggesting the sector is broken, I simply believe that change needs to occur and this change will level the playing field for advisers and SMSFs.
Drew Meredith, director and adviser, Wattle Partners
These super funds only cost $1.50 a week to run, .. like surely they wouldn’t be telling me porkies.
I personally think anyone who is prepared to have such a big say on this topic should not be making all of these, clearly informed comments, under the name “Anonymous”. Clearly, you are an insider in the Industry fund space.
The comments here are very disappointing, and merely illustrate a lack of understanding of the investment issues involved in choosing between any large multi-asset superannuation fund and a bespoke individual model such as an SMSF. There are many ways of handling liquidity, and yes, liquidity risk, like any other, has to be managed on an ex ante probability basis. A sudden decision by government to allow blanket $10,000 drawdowns, regardless of the nature of the fund or the member, of their age or account balance, is an extremely unlikely event, even given the underlying unlikely event of a worldwide pandemic. A direct consequence of that government decision is that members with less than $10,000 cash in their account would have to liquidate other assets to withdraw that amount. If they do have an allocation of $10,000 or more in cash, there are ways they can ensure that the withdrawal does not result in sale of other assets by transferring amounts between products.
If you’re going to tie your members investment funds up in assets that are illiquid so you can invent your returns, then dont cry poor when an event happens that blows up your investment strategy and forces you to bring some of your assets to market. And certainly dont expect taxpayers to bail you out unless that is a blanket liquidity handout to all super funds including retail and SMSFs. Might want to declare your vested interest next time too.
Chris, suggest you do some research and find out how much (or actually how little) of the funds are tied up in illiquid assets.
Up to 40% Anon. If that’s not the case then shut up and stop putting your hand out for my money.
No problem. Then we can assume that the Industry Funds are joking when they say they need a loan, to tide themselves over an illiquidity issue that you’re saying doesn’t exist.
Liquidity is required to fund member transfers to cash ( which has occurred in droves in the unadvised industry fund space ) to organise fund transfers to other funds and to convert funds into allocated pensions. Not too mention the liquidity premium expected to compensate for illiquidity that is not disclosed. The professional standards advisers are required to abide by should apply to super trustees. The defence of these trustees highlights the extent of the problem and double standards that exist.
Wondering if Drew is an adviser or a trustee? why would he see the industry funds as a competitor. Surely he has moved on from the product based advice and focuses on strategy…industry funds are simply a product in the marketplace. But until so many in the industry seemingly still cant get past this notion its a concern for the advice profession.
Agree. I find it sad you have people like Drew taking opportunities to try and put industry funds down. He should look at why his funds have underperformed instead of trying to drag the others down.
Saying things like “the sector continues on the ‘one-size fits all’ approach” is nonsense. Has he seen the different investment options they have?
There is a lot written about the illiquid investments held by industry funds. While I am not a big fan of the way industry funds classify them (and the fact they don’t hold cash), to use this as a reason why industry funds are in trouble is absurd. In reality it is a pretty small portion of their overall holdings.
The main reason for a potential problem at a fund like Hostplus is not any of the ones listed above by Drew, but instead it is a large concentration of people impacted by the Covid-19 crisis. Why did he not mention this? Maybe didn’t suit his narrative that all industry funds are bad…..
It has been the abject failure and obsessive focus by regulators and commentators over the last decade that paying less on everything makes you a winner.
Well, if you pay a little more and receive the right strategy, right advice, personal and caring service and someone who looks after your best interests AND gets paid reasonably for what they do, is that value or is that being ripped off by an adviser ??
The ideologists of which one Kenneth Hayne is a leader, are misguided and do not understand the value of personal relationships and trust.
The industry funds have been ignored for too long and let to run on their own with no consequences.
The people and organisations behind the Industry Funds , IFM (Industry Funds Management ), Industry Super Holdings (ISH), Industry Fund Services (IFS), The New Daily Pty Ltd, Garry Weaven and all the hangers on, have made a fortune off the back of charging members of industry funds a fee for no service and nothing has been done about it.
On top of that, the volume of monies that flows to the Trade Union movement and advertising and marketing is sickening.
How the Sole Purpose Test has not been breached on 100’s of occasions is beyond understanding….but the Govt just let it all go…..because it’s too hard.
Fees for no service? Seriously, get a new drum to beat.
They fund their intra fund advice out of their administration costs. Please tell me what the retail funds do with their admin fees.
And the “volume of monies” that flow to Trade Unions. Have you seen how little it is that actually goes to the Trade Unions.
Seriously, whilst ever the broader advice industry has this gripe against industry funds, the longer people will see advisers as greedy swine that are only looking out for themselves.
Anon the leader of the industry fund cult that is blind to a reality check.
The industry funds do have a conflict because their associated company, Industry Funds Management (IFM) invests some of the cash in unlisted investments and the more money IFM invests in these assets the more their executives get paid! Brett Himbury just retired as CEO of IFM and he was paid $1.73 million over the last 12 months. IFM wouldn’t want money sitting in cash because they would look after less assets and their executives would be paid less! How’s that for a rort.
You forgot to mention how much Alex Wade from AMP was paid……
Speaking of conflicts of interest, what about the AMP advisers that move people from low fee paying investments into high fee AMP products.
slightly less pay than Hamish Douglass
#5 valuations – I remember seeing the pricing discrepancy back in 2009 during the GFC fallout where an industry fund still hadn’t ‘revalued’ its unlisted assets, and a client with $900k in their fund sought our advice. Luckily he followed it and basically got full pre-GFC value into a low market environment retail super fund and has never looked back!
Doing business by transactions only online is dangerous, and maybe the FUTURE paradigm will be to use TRUSTED advice
By the way – this is an ABSOLUTE REASON to recommend moving a client from an Industry Fund to a SMSF.
There are other options. There’s plenty of retail funds now that provide low cost index linked returns that are both price and performance competitive with “Industry” funds.
There’s also super wraps which can provide much of the investor choice and control of SMSFs. Super wraps don’t involve the same admin overhead, are usually much cheaper, and don’t require the member to assume the risks and responsibilities associated with being a trustee.
Only a tiny proportion of investors really need the extra complexity of an SMSF.
This is a sick joke. Advisers have been screaming about the asset allocation of Industry Funds for years. Deaf ears on the regulators part. Has anyone noticed that you don’t see the adverts on tv anymore ?
Bye Felicia
These funds have just had tremendous inflows off the back of the Royal Commission. If they can’t manage liquidity then perhaps they shouldn’t hold so many iliquid assets? COVID19 has just brought forward a problem that these funds would have faced as more and more baby boomers retire. Is it no wonder that the news and government were looking at mandating annuity options for smaller balances? They know full well that everyone with a balance under $100k will just rip it out when they retire.
Were mortgage funds offered liquidity when the GFC resulted in Rudd’s $250k cash government guarantee? No they were left as frozen funds for the better part of a decade..
The industry funds will still compare the pair. The devalued their illiquid infrastructure by 10% despite the fact listed infrastructure fell by 40% on the basis that quote ‘infrastructure is a 40 year investment ‘ So not only is it a defensive asset it does not fall at market prices because they say so. What an absolute farce.
looks like some honest information is coming home to roost….at last.
It has become so out of control that an adviser who wants to assist clients protect their funds by investing some money in cash to fund pension payments is likely to be sued and shutdown by government for not achieving a high enough return like the top ten industry funds!!!
Its an absolute disgrace if they get bailed out for refusing to manage their liquidity risk. If they get cash, then why dont my SMSFs get a loan from the RBA so they dont have to sell down assets to meet pension payments as dividends get slaughtered. Dont even start me on the embarassingly small writedowns on their unlisted assets. The gig is up for these charlatans.
It is time for the Industry Super Funds to pay the piper after bragging about their huge returns compared to SMSFs. And out of this we will see a new generation who will move from them to SMSFs and Australian Super sucking up the mid-size funds. On the cash side, I pulled down HostPlus balanced fund allocation and cash was 0% – hubris.
All coming home to roost for them- compare the pair now!!!!
No doubt FP’s will now somehow take the rap for this too if they recommended NOT to rollover their client’s industry super fund despite being pressured by regulators and licensees that switching from these funds more or less couldn’t be in a client’s best interests.
Exactly Drew , we all knew this but arguing our points was seen to be considered conflicted to our income needs and not the underlying structural issues that are just beginning to surface