If you want to know why the financial services industry keeps rolling in cash and bonuses, one of the biggest reasons is the billions of dollars in annual flows ($39.0 billion during the December quarter) that add to the $1.2 TRILLION in funds under management. Contributions to funds with at least $50 million in assets over the December quarter were $19.2 billion in itself.

The super funds and administrators charge a fee for their services, which is usually linked to the size of the funds they are managing. As the share market goes up, so does their share of your super returns, without them having to lift a finger on your behalf.

Percentage-based fees have been a bonanza for those who manage your super. For example, if your fund charges you 2 per cent all up, and you fund makes a return of 5 per cent after tax, the fees amount to 40 per cent of your after-tax returns.

When the market goes up, your fund goes up, but so do the fees you pay, simply because they are a percentage of the total fund value. This is a free lunch for those who manage your fund, at your expense. The fees do not reflect any value that the managers have added. Instead, the fees are simply the price you pay for having someone sitting there and benefitting from having been appointed to a watching brief over your investment funds.

The super industry shares more than $10 billion each year in fees. Ferraris, Lamborghinis, Mosman homes, super yachts, beach houses, overseas holidays, private schools, and similar are all made possible by this river of cash that has nowhere else to flow to other than to the fund managers who sit and wait for its monthly arrival. Much of the income that flows to the managers is simply for showing up for work, rather than anything special that they do for you. Market growth does the work for them, and you end up paying fees for it.

The sheer size of super funds means that it is difficult for fund managers to outperform the broader share market. After fees and costs, they will generally lag the share market. So what is it that you are actually paying for, through the fees that drain your super fund?

The answer is – in my opinion – simply the comfort of having some ‘expert’ or ‘trusted fund’ in place that you have nominated as the caretaker of your retirement funds. The fact that they then get rich on this arrangement, and you don’t, is a fact that is not seen by most of us because the total flows are not really visible.

What can you do about this situation? One good thing is that the Cooper review into superannuation is underway. The spotlight will certainly be trained on the issue of fees and commissions that eat away so much of our retirement nest egg.
One option is to consider establishing your own Self Managed Super Fund (SMSF). This makes good sense if you have a healthy balance in your super fund, and has the added advantage of enabling leveraged investments into for example investment property.

If you are considering an SMSF, you need to ensure that you get expert advice so that it can be set up correctly. McCarthy Group is able to assist you with this and provide all the support and specialist advice required.

If you would like to learn more and discuss how McCarthy Group can assist you, click here.