Australia’s $2.6 trillion superannuation sector has been deemed an “unlucky lottery”, but according to an investment expert, there’s one simple solution.
The Productivity Commission controversially suggested new workforce entrants choose from a top 10 ‘best in show’ list upon starting work, in its final report last week.
However according to the CEO of online investment adviser Stockspot, Chris Brycki, this will only entrench the dominance of superannuation’s current giants and actually weaken competition in an already bloated sector.
“Rather than cherry pick the best of a bad bunch the government should focus on removing conflicts of interest and rent-seeking behaviour and simply reduce costs for all members,” Brycki said.
And, he continued, the best way to do this is by investing in low-cost index funds.
“Ninety-six per cent of balanced super funds failed to outperform an equivalent low-fee index fund after fees and taxes due to having too high fees,” Brycki said.
“A simple, low-cost indexing strategy achieved top quartile returns in each risk category over five and ten years.”
Across all risk categories, only 13 per cent of managed super funds will outperform index-tracking funds.
He expressed concern that the top 10 funds would be skewed towards those investing in risky assets and the selectors would also be faced with extensive industry lobbying as well as personal conflicts of interest.
“This recommendation will likely embed existing high costs, create incentives to ‘game’ the system and lead to lobbying to be selected as one of the ten shortlisted funds.
“We need to reduce costs and improve transparency across all funds, rather than promote existing practices and costs which have resulted from an oligopoly immune from price competition.”
The CEO of recently-launched Student Super, Andrew Maloney agreed. He told Yahoo Finance that low cost indexing is a simple way to achieve returns.
The fund, which launched last year, uses a diversified low cost investment strategy and low fees to meet its members needs.
Maloney also shared Brycki’s concerns that the ‘best in show’ list will encourage the opposite of competition.
“It means no competition,” he warned.
“The problem with the default system is no one has to choose, so no one has to learn and that’s why some of the retail funds have done terrible things. I think it’s not a great idea to reduce competition even more.”
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