It seems like a simple enough question. If you had a balance investment option in your super, would you choose a 7% or 12% return? Yet, before you decide it’s a no-brainer, it’s worth probing a little deeper into what could cause this 5% variance, as the reporting returns are not standardised.
Let me explain.
Using the mortgage industry as an example, when you consider look at taking out a home loan, the lender will normally quote two interest rates. The first is the principal interest rate, which might be around 4.86%. However, right next to it will be the ‘principal and interest comparison rate’, which might be around 5.25%.
You might reasonably ask, what do home loan interest rates have in common with superannuation?
Well, home loan providers have historically been really great at disguising the real cost of a mortgage. Even today, they might advertise a very cheap interest rate, but then they load up the product with fees throughout the life the loan, or top and tail it with some expensive loan application or exit fees. A comparison rate was introduced as a way for loan applicants to quickly determine the total costs of a loan, by factoring in most of the fees and charges incurred during the life of the loan. Essentially, it allows lenders to easily make an informed, like-for-like comparison of the true costs of this financial product.
The issue with superannuation is there is no standardised reporting or common ground. Personally, I believe that for the ‘Mysuper’ option, standardised reporting is well overdue. The government introduced these low-cost, default investment products were introduced into the superannuation industry to enable consumers to easily select which investment option might be best for them, given a range of variables.
So, getting back to the 7% or 12% question; it is important that you understand the drivers for such discrepancies. It’s probably time that government decided to introduce changes to avoid the barely disguised tricks of superannuation funds, such as calling a product a ‘balance fund’, but investing the assets at a growth asset allocation (refer to our recent article, Could Your Hostplus Index Balanced Fund be a disappointment?). They might also provide a great return, but then hike up the administrative fee structure and other costs that might not be reflected in the net return reported.
So, similar to the mortgage industry, super funds get up to a number of shenanigans. For financial professionals and expert investors, these are often easily spotted, but to the majority of average, day-to-day investors, it is a bit of a minefield.
I feel that the idea of a comparison rate return is a sensible approach, as if super funds are over-inflating an investment option with risky assets, they would be required to standardise the returns. ASIC and/or APRA could set strict formulas between growth-based assets and defensive assets.
In addition, all funds would be required to adjust their reported return as if the asset allocation was a true balanced investment, which would be 50/50 between growth-based asset to defensive assets. This would mean that investors would have a fairer way to assess the true merits of a super fund, and also be able to have a sensible discussion on their overall net return.
Until this occurs, however, investors will continue to be bamboozled by the returns offered by super funds.
Before selecting an investment option or super fund, it’s important that you seek suitable advice from a qualified, practising financial planner and, of course, I recommend AJ Financial Planning. Contact us today.