Superannuation Industry Revenue

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SUPERANNUATION INDUSTRY REVENUE 2016 Highlights Rainmaker estimates that in 2016 a total of $31 billion was paid in superannuation fee revenue. The superannuation industry drew an estimated $35 billion in gross fee revenue in 2016 but discounted for revenue that one party receives but which must be passed-on to others (eg, funds collecting fees to pay financial advisers) this reduces the net amount to an estimated $31 billion. This net amount is the same that was estimated for 2015. The similarity despite the increase in funds under management (FUM) is because: More money is shifting away from higher cost retail funds towards lower cost profit for member super funds - also known as not for profit (NFP) super funds - and self managed super funds (SMSF). See Figure 1. In response to the financial advice reforms known as FOFA and the MySuper reforms, retail funds are both restructuring their fees and lowering some of them in key markets. As shown in Table 1 and Figure 2 this $31 billion in total net fee revenue can be segregated into the following components: $8.1 billion or 26% for trustee offices and administration, net of financial advice fees paid through the trustee office. $7.8 billion or 25% for investment management net of adviser, asset consulting and custodial services fees. $8.4 billion or 27% for group insurance premiums noting that personal insurance purchased by super fund members is not charged to super funds and so is excluded from this analysis. $5.9 billion or 19% for adviser ongoing and investment services. $400 million or 1% for custodial services. $200 million or less than 1% for asset consulting. Fig 1: Superannuation segment shifts 2012-16 1,000 900 Source: APRA Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 800 700 $billion 600 500 400 300 200 100 0 NFP Retail SMSF 2

Table 1: Net fee revenue analysis - summary of results, 2016 $Bn Net revenue, after discounting for possible interrelationships NFP Retail SMSF Total Trustee Offices & admin 2.8 3.9 1.4 8.1 Investment management 5.2 2.2 0.4 7.8 A dvisers 0.0 5.4 0.5 5.9 Group insurers 4.7 3.8 8.4 A sset consultants 0.1 0.1 0.2 Custodians 0.2 0.2 0.4 Total 13.0 15.5 2.3 30.8 Trustee Offices & admin 35% 48% 17% 100% Investment management 66% 29% 5% 100% A dvisers 0% 91% 9% 100% Group insurers 55% 45% 100% A sset consultants 56% 44% 100% Custodians 44% 56% 100% Total 42% 50% 7% 100% Trustee Offices & admin 22% 25% 60% 26% Investment management 40% 14% 18% 25% A dvisers 0% 35% 23% 19% Group insurers 36% 24% 27% A sset consultants 1% 1% 1% Custodians 1% 1% 1% Total 100% 100% 100% 100% Rainmaker estimates financial advisers received $5.9 billion in total superannuation fees and payments. Share of m arket FUM 42% 29% 30% 100% A ccounts 52% 45% 4% 100% Members (est) 45% 45% 10% 100% Fig 2: Superannuation fee revenue by function Asset consultants 1% Custodians 1% Group insurers 27% Trustee Offices & admin 26% Advisers 19% Investment management 25% 3

NFP super funds and SMSFs attract a lower share total superannuation fees than expected based on their FUM share than do retail funds: NFP funds which account for 42% of FUM and an estimated 45% of members, receive 42% of all fees. Retail funds account for 29% of FUM but attract 50% of all superannuation fees. SMSFs with 30% of FUM and 10% of members receive 7% of all fees. But retail super funds with 29% of FUM and an estimated 45% of members receive 50% of all fees. For profit wealth management groups (including platform, investment, advice groups, insurers, consultants and custodians), including fees paid via SMSFs, account for 91% of all superannuation fees or $28 billion. Rainmaker estimates that Australia s major banking groups and AMP (ie the Big 4 + Macquarie + AMP) receive 40% of all superannuation fee revenue paid in Australia being $12.3 billion this is based on Rainmaker s research into each component of the value chain that finds that in Australia these groups control: 83% of the platform retail super fund market. 66% of the advice market. 22% of the asset consulting market. 42% of the group insurance market. 19% of the investment management market. Banking groups alone receive 28% of all fees or $8.7 billion. NFP super fund trustee offices, including for associated administration operations, account for 9% of superannuation fees being $2.8 billion. 5% of superannuation fees are paid to SMSF accountancy and administration groups. Financial advisers receive $5.9 billion in fee revenue with 40% estimated to be paid as fee for service, 20% as grandfathered ongoing trails, 22% as investment manager ongoing compensation and 18% as entry advice fees. Relative investment returns The high share of total superannuation industry fees being paid into the retail segment, and banking groups and AMP in particular, is significant because of the relative gap in investment outcomes delivered to fund members over the longer term in their respective default workplace investment options. This is demonstrated in Figure 3 and Figure 4 that show rolling 5 year and 10 year annual average returns delivered through these workplace defaults or MySuper products. In both cases the performance gap in favour of NFP fund default options is a consistent differential excess return of 2% pa. While following the introduction of MySuper in 2013 some retail funds improved their relative performance, this has only occurred in a small number of cases and has thus not impacted the strategic sectoral differences that are still overwhelmingly in favour of NFP super funds. Retail products making up only 16% of MySuper account balances further dilutes this retail effect. 4

14% Fig 3: Default/MySuper returns - rolling 5 years Excess return NFP Retail 12% 10% 8% 6% 4% 2% 0% -2% -4% Retail super fund default options over the longer term have consistently underperformed NFP funds by 2% pa. Jun-16 Jun-15 Jun-14 Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08 Jun-07 Jun-06 Jun-05 8% Fig 4: Default/MySuper returns - rolling 10 years Excess return NFP Retail 7% 6% 5% 4% 3% 2% 1% 0% Jun-16 Jun-15 Jun-14 Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08 Jun-07 Jun-06 Jun-05 In Rainmaker s view, these structural difference are a major reason why the retail superannuation sector and especially bank-owned MySuper products have recalibrated their product offerings and placed heavy emphasis on Life Cycle product designs and associated investment strategies - which over a fund member s full life superannuation journey are more conservative than regular investment strategies. Revenue components Trustee offices and administration Trustee office services refer to services associated with operating the super funds themselves, including providing the fund board and governance oversight, secretariat and executive management. This aspect of the fund can include marketing and business development functions. 5

Administration operations refer to the management and execution of taxation compliance, contribution collection, benefit payments, insurance administration and preparation of communications, annual reports and member statements. In the retail superannuation sector the prudentially regulated superannuation Fund is often not the product the consumer fund member sees with its Product Disclosure Statement (PDS). While trustee office and administration services are associated although different functions, not all segments of the market segregate these functions the same way. As a result it is difficult in this report to separate these revenue items. For example, in NFP funds, members are normally charged an explicit fee for administration that is usually handled by a third-party service provider but in retail funds the administration function is highly integrated into the platform operations of the wealth management group that sponsors and promotes the super fund or product. Moreover there are differences regarding how each segment charges for these services. For example, NFP funds normally charge separate dollar-based fees for administration and a small percentage-based ongoing fee, but retail funds normally charge an integrated FUM-based fee similarly to their investment related fee. Reinforcing this blurring of retail fund trustee office, administration and platform services is that in retail wealth groups there is almost always a corporate trustee structure in place with the same trustee board overseeing all that wealth group's superannuation business. In such cases the super funds/products that members pay fees to in accordance to the Product Disclosure Statements (PDS) are overseen by Product Managers employed by the entity sponsoring the product rather than the fund itself. Trustee office and administration revenue is estimated for 2016 to amount to a gross $10.4 billion being 30% of gross fee revenue. However, after discounting for financial advice fees that may be paid through a fund s trustee office this amount can reduce to $8.1 billion which is 26% of net revenue. More specifically: 35% of this revenue is raised by NFP funds even though these funds account for 42% of superannuation FUM and 45% of members. 48% of this revenue is raised by retail funds even though these funds account for 29% of superannuation FUM and 45% of members. Fig 5: Trustee office, and Invest fee rev share, 2016 70% Accounts FUM Trustee office & admin fees Investment management 60% 50% 40% 30% 20% 10% 0% NFP Retail SMSF 6

17% of this revenue is raised by SMSFs even though these funds account for 30% of FUM and 10% of members. See Figure 5. Investment management Investment management fee revenue refers to fees paid for investment services including fees paid for asset consultancy and custodial services noting these fees are minor compared to investment management fees themselves. While gross investment fees amount to $9.6 billion, 6% of this amount covers asset consultancy and custodial services which is equally shared across both activity areas and a further 13% is estimated to be paid to financial advisers for their ongoing investment advice support of retail and some SMSF fund members. See Figure 6. Because SMSFs use managed funds for only an estimated 15% of their FUM, investment revenue paid to investment managers from this source amounts to 4% of investment management gross revenue which incidentally illustrates the massive potential for investment managers and institutional superannuation funds if over time they can increase their penetration of this segment. Rainmaker estimates 13% of fees paid to investment managers are distributed to financial advisers. Financial advice Financial advisers source an estimated $5.9 billion in revenue from superannuation made up of entry advice fees, grandfathered ongoing trail commissions for business entered into pre-2013 before the introduction of FOFA, fee for service portfolio advice fees and investment advice fees. See Figure 6. Entry fees and grandfathered ongoing advice trails are normally paid to advisers through the fund s Trustee Office which collects them from fund members via their regular fund fees. Fee for service portfolio advice fees are in theory negotiated directly between the adviser and their client although some retail superannuation funds and advice groups provide guidance on these amounts for their aligned advisers. Investment advice fees are normally a share of the investment management fee than is distributed back to the adviser. Fig 6: Investment related revenue components, 2016 9 NFP Retail SMSF 8 7 6 $billions 5 4 3 2 1 0 Investment managers Adviser fees Asset consultancy Custody 7

4.0 Fig 7: Adviser related revenue components, 2016 NFP Retail SMSF 3.5 The 2015 Trowbridge Report noted that upfront commissions on personal life insurance could exceed 100% of the first year s insurance premium. $billions 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Entry Ongoing Investment Insurance Modelling these interactions in a post-fofa advice environment is difficult as these fee amounts and their nature is often times Commercial In Confidence. Nevertheless, Rainmaker has made some assumptions based on previous research and experience to facilitate this analysis: 80% of retail super FUM goes through advisers even if notionally which makes it eligible for advice fees to be applied. Grandfathering of ongoing advice trail fees is considered to apply to 50% of an adviser s client portfolio. The ongoing fees applied in these cases are 0.5% for personal, retirement and legacy retail products. For corporate superannuation products the ongoing fees applied are half that being 0.25%. The remaining 50% of the adviser s client portfolio is considered covered by fee for service. The fee for service rate applied in these cases are 1.0% for personal, retirement and legacy retail products, and half that, ie 0.5%, for corporate superannuation products. The share of the investment fee distributed back to financial advisers for investment advice services and support is estimated at 30%. The results of this analysis, shown in Figure 7, reveal that ongoing related advice fees make up 61% of advice fees, investment related advice fees make up 21% and product entry related advice fees 18%. Adviser fees are also overwhelmingly sourced through retail super funds. As stated earlier, personal insurance commissions are not counted here as post-fofa advisers should not be receiving commissions from group insurance but advisers may nevertheless sell personal life insurance directly to fund members. But as that is not through a super fund s group arrangement it is not defined as being within the formal umbrella of superannuation. Note that these commission revenue amounts for financial advisers are likely to be significant. The 2015 Trowbridge Report that was commissioned by the Financial Services Council (FSC) and the Association of Financial Advisers of Australia (AFA) to investigate the operation and quantum of insurance commissions found 8

2016 RAINMAKER SUPERANNUATION FEE SURVEY The 2016 Rainmaker super fund fee survey that has been used to develop the analysis in this report is based on a detailed review of 2500 fee offerings available from more than 500 workplace, personal and retirement NFP funds and master trusts as well as 61 separate SMSF administration groups. The survey sample covers $1 trillion in FUM and nearly 20 million accounts, not including funds overseen by the SMSF administrators. Main findings Total fees paid by superannuation fund members across Australia decreased marginally during 2015-16 from 1.19% to 1.18%. This stability masks how fees fell sharply in previous years due to the effects of major reform. Eg, since 2013 when MySuper and FOFA were introduced, while fees for already low-cost NFP funds have stayed at about their average rate, fees for retail default funds have fallen sharply. As shown in Figure 8 they dropped a quantum in both the workplace and personal segment. In workplace they fell from 1.96% to 1.59%, and in personal they fell from 2.39% to 2.05%. Focusing on retail MySuper products, in 2012 the average member in a workplace retail fund was paying 1.96% (assuming no corporate volume discounts) but that same person if they swapped into the average retail MySuper product would one year later have paid fees only half that level being 1.01% - this is as a direct result of retail workplace funds unbundling previously embedded advice commissions. This reinforces the fact that about half the fees previously charged by retail funds to default workplace members were diverted to pay financial adviser commissions. This has forced advisers post-fofa to switch to fee for service portfolio fees while preserving ongoing trail commissions as much as possible for business that was written prior to FOFA s introduction. The 2013 introduction of MySuper and FOFA that stripped embedded adviser commissions from default workplace products allowed retail MySuper products to on average drop their fees by 50%. 3.0% Fig 8: Super fund fees 2010-16 Source: Rainmaker 2016 super fund fee survey 2.5% 2.0% Personal retail 1.5% 1.0% Personal NFP Workplace retail MySuper retail Workplace NFP SMSF 0.5% 0.0% 2010 2011 2012 2013 2014 2015 2016 9

Fig 9: Investment and admin fees 2016 0.8% Investment Mgt Fees Admin % and member $ fees Workplace products only Since the introduction of MySuper fund administration fees have fallen sharply. 0.7% 0.6% 0.5% 0.4% 2016 2015 2014 2013 2012 2011 2010 2009 2008 2016 2015 2014 2013 2012 2011 2010 2009 2008 This explains how MySuper products have dramatically lowered fees in the retail sector but have had only a small impact in the NFP sector as these funds were already low cost. In dollar terms, total fees not including insurance premiums and fee for service financial advice costs, converts to an estimated $25 billion, up from $24 billion in 2015. The increase is driven by the rising amount of superannuation assets partially offset by continuing economy of scale effects. Fees are coming down predominantly because of falls in administration fees (out of which adviser commissions were often previously paid) rather than falls in investment fees. See Figure 9. Reflecting this, since the introduction of MySuper administration fees have continued to fall, while investment fees have plateaued. SMSFs are the lowest cost superannuation segment with benchmark fees of 0.82%. Large employers able to negotiate bespoke fee arrangements can achieve discounts of 50% or more. Fee benchmarks and sector decompositions from the 2016 Rainmaker super fund fee survey are described in Table 2. 10

Table 2: Rainmaker 2016 superannuation fee benchmarks Total Expense Ratios 2010 2011 2012 2013 2014 2015 2016 Overall 1.33% 1.28% 1.26% 1.26% 1.19% 1.19% 1.18% By segment Workplace Overall 1.43% 1.40% 1.38% 1.39% 1.25% 1.22% 1.19% Not-for-profit 1.05% 1.00% 0.97% 1.01% 1.00% 0.96% 0.95% Retail 2.09% 2.08% 2.04% 1.96% 1.59% 1.58% 1.53% With discount ($10m acnt) 1.24% 1.19% 1.18% 1.19% 1.12% 1.09% 1.13% MySuper All 1.10% 1.09% 1.08% Not-for-profit 1.01% 0.99% 0.99% Retail 1.25% 1.26% 1.22% Personal Overall 2.00% 2.00% 2.01% 1.92% 1.82% 1.75% 1.76% Not-for-profit 1.09% 1.06% 1.03% 1.03% 1.15% 1.04% 0.98% Retail 2.39% 2.36% 2.39% 2.39% 2.05% 1.99% 2.01% Retirement Overall 1.88% 1.84% 1.84% 1.77% 1.65% 1.63% 1.53% Not-for-profit 1.08% 1.05% 1.03% 1.03% 1.01% 1.04% 0.97% Retail 2.38% 2.39% 2.41% 2.41% 2.03% 2.00% 1.86% ERF 2.20% 2.63% 2.68% 2.92% 2.34% 2.00% 1.70% SMSF 0.90% 0.83% 0.87% 0.85% 0.80% 0.80% 0.82% In detail Workplace Personal Retirement Establishment fees 0.07% 0.07% 0.07% 0.05% 0.01% 0.01% 0.01% Contribution fees 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Withdraw al fees $29 $30 $30 $30 $32 $30 $30 Termination fees $8 $8 $9 $9 $11 $13 $16 Management Costs - Ongoing 0.61% 0.60% 0.60% 0.60% 0.51% 0.48% 0.45% Management Costs - Member p.a. $54 $55 $57 $57 $61 $61 $63 Management Costs - Investment 0.71% 0.69% 0.67% 0.68% 0.62% 0.62% 0.62% Sw itching fees free 2 2 2 2 2 2 2 0.01% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% $9 $9 $9 $7 $7 $6 $6 Buy/Sell Spreads 0.08% 0.06% 0.07% 0.07% 0.07% 0.08% 0.12% Establishment fees Contribution fees 2.31% 2.29% 2.25% 2.12% 1.56% 1.33% 1.34% Withdraw al fees $17 $18 $18 $19 $21 $18 $19 Termination fees $6 $6 $7 $8 $10 $11 $14 Management Costs - Ongoing 0.90% 0.96% 0.94% 0.84% 0.81% 0.77% 0.74% Management Costs - Member p.a. $83 $65 $83 $98 $104 $94 $101 Management Costs - Investment 0.77% 0.75% 0.75% 0.74% 0.69% 0.69% 0.72% Sw itching fees free 2 2 3 2 2 2 2 0.08% 0.07% 0.07% 0.02% 0.02% 0.02% 0.02% $7 $6 $6 $6 $5 $4 $4 Buy/Sell Spreads 0.09% 0.10% 0.10% 0.10% 0.10% 0.10% 0.15% Establishment fees Contribution fees 2.08% 2.10% 2.11% 1.94% 1.50% 1.34% 1.37% Withdraw al fees $17 $16 $15 $15 $16 $15 $15 Termination fees $5 $5 $6 $6 $7 $8 $12 Management Costs - Ongoing 0.98% 0.98% 0.97% 0.96% 0.92% 0.91% 0.78% Management Costs - Member p.a. $91 $75 $82 $55 $57 $60 $65 Management Costs - Investment 0.73% 0.71% 0.71% 0.69% 0.67% 0.66% 0.68% Sw itching fees free 2 2 3 3 2 2 2 0.07% 0.07% 0.07% 0.04% 0.04% 0.04% 0.03% $8 $7 $7 $6 $6 $6 $5 Buy/Sell Spreads 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% 0.16% 11

ABOUT THIS REPORT Objective Rainmaker was commissioned by Industry Super Australia to provide a description and quantitative estimate of the fee revenue interrelationships in the superannuation industry. Data Sources Data used within this report was sourced from the Rainmaker Roundup Report, Rainmaker Benchmarking Report, the Rainmaker Advantage Report, APRA superannuation statistics, the Australian Bureau of Statistics employment and earnings statistics, and Australian Taxation Office SMSF statistics. Note that to estimate fee revenue paid during 2016 Rainmaker applied 2016 fee benchmarks to FUM estimates as at June 2016. About Rainmaker The Rainmaker group was founded in 1992 and has established a reputation as one of Australia s leading information, market intelligence, research, publishing, events, communications and media groups in the financial services marketplace. Through its range of products that include market directories, research reports, analytical tools, web services, news gathering, magazines, journals, and internet TV that reach deep into the wholesale and retail wealth management markets, Rainmaker is able to deliver totally integrated information solutions to help organisations understand their market, its opportunities and to communicate this with their stakeholders. Rainmaker consults to many of Australia s leading wealth management groups, super funds, investment managers, platforms, adviser groups and relevant government regulators and interest groups. Rainmaker executives also regularly appear at industry conferences and in the national and local print and electronic media as thought leaders and industry commentators. /ends 12