Industry Funds – “Compare the Pair”

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comparing the pair is difficult to do in advertising

Which pair to compare? Comparing super funds is anything but straightforward, and is definitely NOT a place for sound-bite advertising campaigns. (Image: anankkml/ FreeDigitalPhotos.net)

“Compare the Pair” is the catch-phrase for a marketing campaign being run by the a group of superannuation funds, who promote themselves under the name “Industry Funds”. This campaign has been running for years, and from the point of view of a person who spends a great deal of their day comparing or analysing investments and financial strategies, it is one of the most misleading campaigns possible. When these advertisements started, i wrote a lengthy note to the primary Australian financial services regulator, the Australian Securities and Investments Commission (“ASIC”), pointing out the many ways in which the advertising was misleading. The response was that the disclaimers at the end of the adverts were sufficient to deal with these issues. Let me explain why they are not sufficient, and why after all these years, such advertisements continue to grate on the average financial planner.**

We’ll start by looking at the broader picture then a little bit of history, and then some of these reasons for my taking fingers to keyboard…

Industry Funds – the basics

Firstly, let’s get a few things very, very clear :

  • Industry Funds have been good for Australia, and good for the average member of those funds. “Industry Funds” are predominantly the children of the 1980’s push for “award” super. This process aimed to boost the long term savings of the average Australian worker by forcing them to forgo components of wage rises in lieu of obtaining an employer contribution to a superannuation fund. As predicted at the time, and highlighted by Paul Keating, the pool of funds from this source has grown to be a substantial power house in Australia’s economic system. Each industry saw their specific member needs, and super funds were set up to theoretically meet those needs. For example, there was a fund for retail people, for electrical trades, for agricultural workers, building workers etc, etc, etc. Over time, these funds have grown and amalgamated, and opened themselves up to the general investing public.
  • Industry Funds are generally cheaper than the “average” retail superannuation fund. This is obviously the focus of the advertisements, and being a truism, is the fulcrum on which the advertising is justified. The “average” retail superannuation fund has a different service and cost structure to the “average” industry fund, and this inherent difference is the primary reason for the differences in cost.

Industry Funds vs ISN

Now we have that out of the way, let’s clarify yet another point that muddies the water. It is the difference between an “industry fund” and the “Industry Super Network”.

Many financial planners quite like the ideas around industry funds, mainly for the reasons above. These funds help the average worker to accumulate money in a cost-effective, “hands-off” way. There is the added advantage those most funds provide at least some level of insurance cover, and that is nearly always a good thing. Financial Planners also like the way that award super (now called the superannuation guarantee charge or “SGC”) kicks in automatically. This means that someone starting their first job is forced to accumulate money for the long term. Money that they cannot spend, and which will benefit them greatly through the simple work of compound interest over the 30-45 years of their working life.

However, the advertisements consistently highlight the lack of commissions being paid to planners, as if this is the ONLY reason for the lower costs. Naturally, Financial Planners took offence at the idea that they were the only thing standing between the average worker and a satisfactory retirement income. If the idea were simply to compare fees and leave it at that then the average Financial Planner would be able to say “fair enough”, and then go on to explain what they do and what services they provide. It would then be up to the customer to decide if those services justified dealing with the planner. The advertisements take the idea further though. They categorically imply that the difference between funds can be broken down to a simple difference of a financial planner’s commission.

This is not actually a statement of an industry superannuation fund. This is a political or ideological statement of those involved in the management of those funds. In effect, these people are using the clear and positive benefits of the industry super funds to make an added political statement. How can i make such a strong statement?

For the moment, let’s just continue to highlight the fact that most planners are not against industry superannuation funds. They are angered by the way some representatives of the industry funds use industry fund member fee money to promote and fund an ongoing campaign against financial planners.

This is the nub of the matter, and this is the reason you will find most financial planners are less than happy about industry funds generally. As for the reasons i can make such a comment about political or ideological positions – you have only to look at the actions and statements of the Industry Super Network.

Industry super funds were set up to provide a low cost, long term environment for the investment of worker’s wages that were taken as super contributions. They were also a way of ensuring that the benefits negotiated from the foregone salary were not eaten up by hidden costs or excessive fees or fraud or mismanagement.

Therefore, you would expect that the primary focus of these funds would be to improve the lot of the average member, and to continue doing so until industry fund members had the most outstanding accounts available. Yet that is not what happened.

Once upon a time, there was a concept called “not-for-profit”. An organisation using that branding was telling you that all benefits of membership were returned to members, and all actions of that organisation were for the benefits of members.

Originally, industry funds were set up as “not-for-profit”, and given that they had no shareholders, there was not institution taking money out of the funds other than those contracted to do specific jobs. So far, so good. What went wrong? (and please remember that this is only my opinion, so you may actually believe that nothing went wrong at all… i am simply pointing to events and ideas to show why  i definitely do think that something went wrong).

The ambitions of the representatives of the industry funds grew with in line with the growth of the funds under management in their member’s accounts. It was no longer enough to simply offer a low cost, prudently managed and appropriately optioned superannuation account. It became important to start highlighting the areas in which non-industry funds were deemed to be deficient. Now that is not a primary function of a not-for-profit organisation. Similarly, it became fashionable to offer other financial services to members of the super funds, such as banking. This may be a good idea but it is not the primary function of a not-for-profit organisation looking after worker super funds. The “compare the pair” marketing campaign was started. This had a cost, and the point of the campaign was clearly not directed at existing super fund members. If it were then a campaign direct to members would have been substantially cheaper, and would arguably achieve a better outcome. The not-for-profit label becomes more difficult to justify when the full scope of activity that member fees are used to promote is taken into account.

“Not-for-profit” becomes “Profit-for-Members”…

One of my favourite novels of all time would have to be Animal Farm. Even though it takes a very despondent view of human nature, it does highlight the way in which those who are given power begin to widen their mandate and alter definitions to suit their own agendas. My soapbox rant is that this is what has happened with industry funds and their management. As an old-timer in the financial services world, i see this as just another repeat of the earlier “mutual funds” debate. AMP and National Mutual were “mutual” organisations, supposedly run for the sole benefit of the policy holders. Yet management of these institutions became carried away with their own importance, resulting in greater risks than was prudent and greater costs than would be justified were the “not-for-profit” concept to be properly fulfilled. They squandered the reserves accumulated over almost 100 years in pursuit of the title of “Biggest Company”. The rest, as they say, is history. AMP listed itself on the Australian Stock Exchange and National Mutual was sold to the French company AXA (i am aware the story is bigger than that but the basic statement holds true). In effect, management had shifted focus from maximising member benefits to maximising the size of the business.

This is what i see happening in the industry funds area. Member’s money is used to set up businesses to provide asset strategy advice, to direct greater funds towards specific mandates (such as the ideas of “clean” energy and fledgeling industries), and to operate financial advice businesses. They may be ethically pleasing or moral imperatives in their own right but these are not focussed on maximising member services and reducing member super fund costs. You can argue all you like that they are – but they are not.

Hence the need of the industry funds to change to a “profit for members” label. This allows broader scope for the use of member money to run businesses. To my way of thinking, this is dangerous territory. This is not the mandate of a super fund trustee and is not aligned with the super fund “sole purpose test”. In other words, the super fund is being used for a purpose that is not directly related to the provision of a retirement benefit or a payment to a beneficiary of a member who does not make it to retirement. The focus has moved away from maximising super fund member benefits into a grander plan of maximising the reach of industry funds. Again, this is my opinion. i am as aware as anyone else of the ways in which you can argue to justify such actions but in my eyes that does not make it “right”.

Compare the Pair – Which Pair?

Now this is where i’ll get to the point of my little Soapbox Rant.

i apologise for taking so long to get to this point but my previous exposure to any criticism of the actions of the ISN has left me wary of assuming honest debate exists in Australian media anymore.

i once posted a comment to the website “Crikey” to try to put forward a planner’s view of the world, and found that my comment was edited to make me look like a fool, and a selfish and stupid one at that. This was from a website i had high regard for, and from people who aren’t even (apparently) linked to the ISN, so it certainly shocked me. It also made me understand why so many planners are hesitant to stand up and try to clarify the inaccuracies or the misrepresentation that underscores so much of the “Compare the Pair” media campaign. Let’s get into a few of these.

Industry vs Retail

The first question we need to ask ourselves is “which pair are we comparing?

Most literate people are aware of the way that statistics can be distorted to support just about any argument. In this case, we are looking at an advertisement that draws the conclusion the average person is better off in an average industry super fund than they would be if they were a member of an average retail superannuation fund. Remember, this is a foregone conclusion, so the comparison is valid if taken EXACTLY as it is stated. That is, if we measure the AVERAGE versus the AVERAGE. It is not so valid outside of that narrowly delineated pathway.

It certainly does not mean that every industry fund is cheaper than every retail fund. It does not mean that every super member would be better in and industry super fund, even if the first part were completely true. It also completely ignores the large number of people who are in “employer funds”, which look like retail funds but often have individually negotiated fee levels that lower fees through rebates and concessions such as lower insurance costs or greater scope of cover.

One of the problems i see with the “Compare the Pair” advertising is that it makes no concession towards any of the huge range of issues that would impact on the relative returns and retirement benefits of two sample super fund members. As a financial planner, simply choosing the lowest fees is not a sufficient answer. If it were then there is a “next step” that needs to be taken.

Industry Fund vs Industry Fund?

Let’s make it clear that there is not such thing as an “average” industry super fund, anymore than there is an “average” retail fund. These are terms used to simplify discussion. They are not actual areas of investment. In other words, you cannot currently hold a super fund account that is the “average” of industry super funds. Similarly, you cannot hold an account that is the “average” of retail funds. You have to eventually put your money into one specific fund. From that moment on, you cease to be an “average” fund member of the type described by the “Compare the Pair” advertising.

To explain…

There are a number of industry funds – once upon a time all of the award based super funds were pretty much “industry funds”. The amalgamation of marketing resources of a group of particular industry funds resulted in a new use of the term “industry funds”. The group size has altered and changed, and will change on an ongoing basis as funds amalgamate and move focus. This can create confusion for the average member of the public, as there are many “industry funds” that are not part of the “industry funds” media campaign. At least, not in a visible way. The industry funds website lists 14 funds as of today. That is not the full list of “industry funds”. It is simply the list of those who have grouped under a particular marketing banner, and those who are advertising under the “Compare the Pair” banner. At least, that is what my research leads me to believe.

Confusing, is it not?

The point of my highlighting this issue is that you or i looking to start a super fund are being told by the marketing campaign that we will be better off in an “industry fund”. Yet this won’t really clarify much unless you are very efficient at research or you use the services of a financial planner.

If i am a builder then i will look to “my” industry fund. This is most likely going to be the CBus fund. If i am in Queensland, it may be Aust(Q) Superannuation. They are different funds, offering different services and operating on different fee levels. In fact, even on the most basic of measures used as a proxy for fees under current legislation ($50,000 account balance, with a $5,000 contribution into the “default” investment option) these two funds costs vary by something between 6.8% and 21.4% depending on which piece of information you download from their respective websites as of last Friday. Keep in mind that i am a financial planner. Even if i were a bad financial planner (and we’ll leave that open to debate) then you would expect that i should be able to find a specific answer to that specific question by simply reading the publicly available material. Yet i cannot. What chance then a fresh-out-of-school recruit to the building industry?

Compare which Pair again..?

Here is a quick listing of the “default” fees applicable to the industry standard illustration (which is a $50,000 account balance with a $5,000 contribution into the “default” fund). i have taken this from the respective websites of the industry funds, to best represent the detail available to the average consumer.

  • $403.00
  • $593.00
  • $530.00
  • $398.00
  • $451.40
  • $623.00
  • $470.00
  • $395.00
  • $500.00
  • $601.30
  • $568.00
  • $392.00
  • $412.20
  • $542.60
  • $418.00
  • $496.00 or maybe $436

And so i had a quick look at the current raft of “low fee” super products put forward by the various institutional managers, who predominantly operate through advisors but have decided they need to cut services and offer a direct product to compete with the “industry funds” mantra of low fees = better super, regardless. Here are just a few …

  • $555.00
  • $480.00
  • $400.00

So you can see that there is a healthy bunch of competition out there. No-one is going to dispute the impact of the “compare the pair” advertising campaign in that regard. It has been an outstanding success. However…

Are Fees Really The Issue?

i will stand out on a limb and say that the ISN is fully aware that they are not. How can i make such a comment?

IF fees were really the issue, and IF you were always better off in the lowest fee fund THEN the industry funds would allow you a simple comparison of ALL funds, and that includes all industry funds.

If you are the average person out there, who has been subject to years of exposure to the “industry funds = lower fees”/ “retail funds = high fees and commission” mantra then you are pretty much primed to miss the elephant in the room when it comes to fees. You will look at the excellent fee comparators on the various industry fund websites and accept that you are far better off where you are than you would be in a retail fund. Every time you look at the website, you will be reminded that there are no commissions paid to advisors and that this is a good thing. You will be reminded of that benefit every time you are exposed to the Compare the Pair campaign advertising. Yet you would be oblivious to how the wool is being pulled over your eyes in all of this process.

How do you compare between industry funds?

There may be a little used part of the internet world, where you can easily compare between industry super funds. To date, i have not found it. i have certainly looked. Most sites will offer calculators to compare fees but they will NOT allow you to compare between industry funds. That would be contrary to the entire idea behind the advertising campaign, would it not?

And yet, in the same way that we can compare two people standing side by side and watch one accumulate a larger balance than the other because they are in an industry fund while the other person is in a retail super fund, we could go further and put two people next to each other that are in different industry funds.

But that would mean the industry funds competing with each other, and that is not the aim of this campaign. In other words, it is not aimed at helping the members of those funds to determine how to obtain the lowest cost fund. It is clearly aimed at something else.

i will actually post the results of my own research into the different Industry Funds. There are some extremely good options on offer in some of these funds, and the scope of services on offer increases as they morph into standard public offer funds.

 

Disclosure

i am a Financial Planner. That means i am one of the people that the ISN is telling you that you are better off NOT seeing. This is obviously my little blog site, and therefore what i say here is going to be biased completely by my point of view. If you follow the mantra put out by the ISN then i am a lazy financial planner, living off undeserved fees being earned for work i do not do.

i am also a founding partner in the financial planning business operated through WSP Financial Services Pty Ltd (although remember this is my blog, and what i am saying here is my opinion and not necessarily that of the business itself or the other owners). This business has evolved over many years, with clients who can trace their original contact through the father of one of the retired business partners, so that gives you some idea of the timeframe our business covers. This means we hold a number of very old accounts – insurance, investment or superannuation through a number of companies. Many of those policies and accounts pay a “trail commission” to the business. Planners in our business continue to offer a choice of paying a direct fee or where there is a financial product, having our fees taken from that product. For those clients who have an ongoing relationship in which i have a high level of involvement in their accounts, there will also be a fee that is tied to the assets held in the accounts. This is the aspect of financial planning that the ISN would like to see outlawed – and current legislative work is pretty much going to achieve that eventually. Under the eyes of the spokespeople of the ISN, this makes me ill equipped to comment on any such matters. Again, this is my bias and you, the reader, are free to ignore every comment i make as being nothing more than the railing of an outdated dinosaur, who can’t cope with change and cannot see past his own self-interest. If that is the way that you take my comments then i have no real problem with that. After all, we are not yet in a country that tells everyone how they should think. We’re getting close – but not yet.

** Disclaimer

All of my comments are simply my opinions. If they are opinionated opinions then that simply reflects the fact that they are my comments. They probably also reflect the understanding that i am not as thick skinned as i would have thought i was. That means i have found it difficult to not take the thrust of the ISN and it’s actions as a personal insult to my value as a financial planner. It is quite possible that i have misunderstood the intentions or the actions of the spokespeople for the ISN. If that is the case then i withdraw all comments unreservedly. i doubt very greatly that this is the case but i am quote open to the possibility, and would ask that every reader of this post adopt a similar attitude. This is my disclaimer for any liability for any misrepresentation that this post may exhibit, whether intentionally or not. Given the suitability of the miniscule disclaimer in the Industry Funds advertising and the scope for it to be misunderstood, missed or pointless, i would expect that my disclaimer is at least as good as theirs.

Feel Free To Comment

If you particularly disagree with my Soapbox Rant or simply want to have a say then please feel free to do so.

Apologies…

To the trees that were disadvantaged by the extent of this research.

it takes a lot of paper to do good research

This is just some of the paperwork that was rifled through to ensure that the material provided in this post is current.

 

 

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  3 comments for “Industry Funds – “Compare the Pair”

  1. December 8, 2011 at 9:52 pm

    It is just as I thought – overwhelming and complicated, perhaps deliberately so.
    Seeing as I trust you, couldn’t you just TELL me which fund or funds are the best? Please?
    Regards,
    Carolyn

  2. December 9, 2011 at 12:47 pm

    Hi Carolyn,

    It can be more than a little overwhelming, and rather complicated.

    However, that is not a deliberate point, so much as a restatement of the current state of affairs. The focus of my note was to highlight the ways in which large institutions and pressure groups and government authorities use their marketing power and authority to push respective agendas. And to express some of the frustration that exists for planners who just want to be able to give a simple answer to a simple question, at a reasonable cost.

    For example, one of the key changes happening within the financial services industry is a raft of legislative moves, lumped under the moniker “FOFA” (Future of Financial Advice). One component of these changes states that all fees and charges must be discrete and disclosed. However, there is a loophole put in there, which excludes those providing “intra-fund advice” (eg, an Industry Fund providing advice to the industry fund member) from having to disclose fees. Theoretically, the major ethical push behind all of these changes is for a pure “user pays” system. That is, you only pay for advice when you want to take it. However, the people with the lowest likely account balances, and the lowest engagement with their super funds, are the people who will end up subsidising advice provided to other people in their fund. The hypocrisy behind this is so blatant that it hurts.

    And even though you have been lovely enough to ask me nicely, neither i nor anyone else is allowed to suggest to an individual “which fund or funds are the best” as an answer to a website question. Even if a person says “please…”!

    That comes down to personal advice, and personal advice can only be delivered when specific regulatory minimums have been met (ie, an advisor must fulfill the “know-your-client-rule” requirements, and point out how a specific fund is appropriate to that individual’s specific circumstances. By making a specific recommendation for a single fund, the advisor is specifically stating that no other funds are AS APPROPRIATE. So you can begin to see why advisors have to be so careful about even the seemingly innocuous recommendation.

    That doesn’t stop me from being able to provide general advice, of a non-personal nature. In fact, you’ve triggered a challenge to my Friday brain… i’ll work on a mind-map of the decisions that a person must take when considering issues such as the most appropriate super fund for them. It’ll take a little while to make it workable in a website way but i will see what i can do. If you are not already registered as a user on the website then register and you will be notified when i post it. Otherwise, just check back every now and then to see when it is updated.

    i’ve covered a few areas for comparing superannuation on this blog but have really only touched on the subject. A financial planner will consider many more points than i have suggested so far. Of course, it does depend which planning group you ask the question of – some are limited to working with a very small “approved” list of super funds, at which stage the decision of which is best is easy – because there aren’t many to choose from.

    Going back to general advice, when looking at which super fund is ‘best’ it can be worthwhile to work through these key points in any comparison : Insurance cover options and costs; Fees at different account value levels; Investment options that suit your preferences and understanding; the level of control you can exercise in these areas and finally, any improvements that may come about by ‘grouping’ (ie, additional employer support or discounts, multiple account fee reductions, ‘family’ discounts or concessions). This is not a complete listing but it’s a pretty good start. Financial planners will also consider the administration of the funds – some are a nightmare to deal with, and we all know stories of people shifting millions of dollars simply because of bad customer service!

    Of course, the other alternative is to see a financial planner!

  3. February 17, 2012 at 11:51 am

    Hi Michael, I like this article and I like your website. As a fellow financial planner I too have a great interest in Industry Funds and what they get up to. What galls me the most is how they are so bad at disclosing things that listed companies and other super funds must disclose by law. For example if you read the Annual Report for Australian Super you will not even be able to tell how much the trustees pay themselves.
    I also find their catch cry of only serving the members ironic when they spend so much on advertising; how does that benefit the existing members?

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