Hidden costs in superannuation and investments


Lots of little things can add up to a completely different picture

Just a quick note today… With the broohah surrounding the government announcements on legislating to remove commissions from superannuation and investment accounts there are all sorts of comments being made on the likely impacts – some more informed than others.

Feedback in a number of online forums suggests that many people are happy with the broad thrust but perhaps not quite understanding of the potential impacts. Here’s an example that will resonate quite strongly for a few people…

Let’s say you are a share investor. You buy and sell shares reasonably regularly – say a couple of trades per month. You do this because you are keen to keep only the most appropriate, best run companies in your portfolio and using the best research you can find suggests that the companies that are ‘best’ change all of the time as internal and external parameters change. You also don’t like managed funds because they charge ongoing fees and that annoys you immensely.

At the end of the year you pop along to your Accountant and submit all of your contracts and trading history so that your return can be done. Sooner or later you will notice that your bill for return preparation will move in correlation to the number of trades you are performing but you are highly unlikely to know exactly where the correlation is. We have just found a hidden fee. It is not really hidden, of course – it is just a part of the cost of getting your tax paperwork obligations into order… but it is a cost, and one that you most likely to not associate with your share trading activities – you associate it with your taxation obligations. And so your tax work seems more expensive than you’d like it to be but your share trading is pretty cheap.

Some people think that when commissions are removed from superannuation and investment accounts that the result will be a move to ‘cheaper accounts’ and ‘better’ recommendations by advisors. I’d suggest a little caution on that thinking (certainly don’t make a wager on it) as advisors generally are not fools, and they are mindful of their client needs and preferences. One of those will be for lower costs, which will mean advisors will look for accounts that allow them to transact and make recommendations the most efficiently. In many cases, that will NOT mean dealing with institutions and providers any different than they already use. Why? Because the institutions that advisors deal with are already aware of this requirement and have invested very heavily into technology and infrastructure that allows them to provide VERY cost effective delivery of products and information. Again, you may ask why this is even important?

When you sit down to discuss matters with an advisor, they will need to have a very good picture of your current financial position in front of them – otherwise they will struggle to fulfil the “know your client” rule and therefore will be potentially liable to litigation for making inappropriate recommendations. You may think that gathering your current position is a very easy thing. If you do then here is a little challenge for you. Time yourself for how long it takes to find supporting documentation, extract account numbers and specific details for every asset/ loan/ liability/ income and expenditure that is part of your world. For superannuation, determine the specific areas in which your money is invested, the number of “units” (if that is what is applicable) held, their current price (including the date last updated for reference purposes), the mandates under which the individual components are operated, the fees levied and the basis for those fees, details of beneficiaries and insurance particulars. You may have a recent statement but best practise methodology suggests that you should work on current data so you will need to contact the customer service centre to update to the present figures. Now do the same thing for your loans. And your income source (don’t forget to include an idea of taxation and its impact). Expenses can be tricky but you’ll need at least a basic overview to work from. Now tabulate all of that into something that is at least partially readable. Now we are getting somewhere… i won’t bore you with the rest but obviously this will involve looking at your overall asset exposure across accounts (ie, in your super/investments), and your free income and available assets. Now list your objectives for financial futures.

From this you can begin to appreciate (i would hope) that a very basic function that has very little obvious value (all we are doing is showing what you currently have, and you pretty much know that don’t you?) has taken an awful lot of time to prepare. And you haven’t even begun to start to consider options or make recommendations.

If you deal with a provider of superannuation or investment accounts that can have all of that information (your account info, obviously not your personal information) available for download through secure online web servers, and are prepared to pay the many thousands of dollars in annual licencing fees for appropriate software then you are able to produce that update very, very effectively. It will still have a cost – but the time cost will be substantially lower.

And so my prediction is that the current bias sitting in the financial planning system will become all the greater. The drive for cost minimalisation and profit maintenance will cause a change in delivery systems, leading to greater costs for providers who currently do not do this or a restriction of approved product lists (the legislative gateways that keep bias entrenched), with the result that overall fees will be highly unlikely to reduce.

If you have read this far then i’m going to assume you are a thinking person, which means you most likely have already come to some of these conclusions anyway. From the point of view of Wealth & Security Planners, the changes being suggested are a good thing. However, we know from bitter experience that retaining your ability to deal with anyone and to be free of institutional influence and bias is an extremely difficult thing. One that has been made even more difficult in the recent years. Legislation and media pressure are trying to achieve greater clarity of bias and “better advice” but the processes being put in place in the current marketplace are highly unlikely to achieve those ends. Feel free to disagree or point to flaws in my arguments. Keep in mind that i think these changes are extremely good – it’s just that they are not enough to bring about the results that people are apparently looking for.

For what it is worth, that is my opinion.


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