Almost half the investment returns made by Australian savers over the past five years has gone on management fees.
This extraordinary finding, from funds manager Chris Brycki, is based on a study of 497 managed funds; and it mirrors what is going on in superannuation.
Over the past five years, the pace of this gravy train has only been quickened by industry lobbying and government favours.
The Australian Securities and Investments Commission provided the big retail funds with exemptions from having to disclose their fees in their marketing materials.
That was five years ago, after lobbying from the peak super fund body – then called IFSA (Investment and Financial Services Association) and now FSC (Financial Services Council).
The Brycki research of the actual fees charged by the wrap platforms showed the average management cost of a balanced fund at 1.91 per cent. The basic management fee that is: before any establishment fees, contribution fees, exit fees, switching fees, performance fees, financial planner fees and buy/sell spreads.
(Wrap accounts revolve around a central cash account, which pays interest and serves as a transitional account, funding buy transactions for shares and managed funds, and receiving the proceeds when shares and managed funds are sold.) Over the five years to June 2013, the average Australian share fund returned 2.3 per cent a year, said Mr Brycki, the founder of a funds management operation, Stockspot, which competes with the banks. On those numbers, 45 per cent of the average customer’s investment return has been extracted in management fees alone since 2007.
“Our managed fund findings are mirrored in super – however I think industry funds have kept the super space slightly more competitive,” Mr Brycki said. ”Fees on super are now closer to 1.2 per cent (1.5 per cent for retail, 0.90 per cent for industry) versus 1.9 per cent for managed funds. This should be lower still but industry funds are in bed with the big investment managers.”
Since 1990, assets under management have risen from less than $250 million to $2.1 trillion but it still costs the average Australian roughly the same to invest as it did 20 years ago.
In dollar terms, the fee-take from the funds managers is more jarring. Jordan Eliseo, chief economist at ABC Bullion, calculates – assuming $150,000 as a starting salary for a couple earning the average salary of $70,000 each – and rounding up the $140,000 to $150,000 – super contribution over life would be $830,000 and fees $338,000.
Eliseo assumes 2 per cent wage growth, 5 per cent returns and a 12 per cent contribution rate starting at the age of 35.