Home / Devil in the detail with ASIC’s revised fee reporting

Frontier Advisors is putting its new information technology system to good use with a special reporting service for funds to comply with ASIC’s revised ‘RG 97’. In a new study Frontier has presented the challenges for big super funds, noting disparities between for-profit and not-for-profit fund reporting. One thing is certain: compliance costs are about to rise.

ASIC widened the proposed regulatory guide’s coverage last month, at the same time extending the mandatory deadline for its implementation by funds from March next year to September. According to many industry participants, including Frontier, the guide still has pitfalls.

In its report, entitled ‘Fees and Costs Disclosers’ Frontier says the revised RG 97 is designed to remove most of the issues that are present in reporting procedures by funds. “However, it is yet to be seen how successful the requirements contained within the new guide will be and whether the lack of true comparability due to inconsistent approaches taken by the industry will be rectified.”

The new RG 97 impacts the common investment sectors differently and impacts the various investment structures very differently as well, Frontier says. There may be some investment sectors where fees and costs are unchanged, or in some cases even reduced, though this will be partially offset by investments in some of the more expensive sectors, such as real assets.

Frontier says: “We expect not-for-profit superannuation funds to see a material ICR [indirect cost ratio] increase post implementation of the new rules, and this is supported by early analysis of likely changes by some funds themselves. What is less clear at this time is the impact on the retail/for-profit sector.

“Notwithstanding some of the issues with the underlying data… there was a 0.15 per cent overall difference in ICR between the average industry fund and the average retail fund in the year to June 2016. So far, it seems that the average industry fund will disclose an additional 0.15 per cent to 0.25 per cent, which will neutralise the difference if there are no changes to retail disclosures.

“However, this seems unlikely based on the underlying numbers … so it is probable that the not-for-profit sector will retain its overall cost advantage with the new disclosure requirements and it is, indeed, possible that this advantage could widen depending on the changes in disclosures by retail funds.”

Frontier notes that the ICRs for investment expenses as currently reported appear to be “clearly too low” as expressed by the for-profit retail funds who currently do not report, or perhaps capture, the type of information that RG 97 will require.

The Frontier report says: “The enhanced fees and costs disclosure requirements will be initially cumbersome for most superannuation funds, however we think it is important not to lose sight of the fact that the changes are a disclosure and reporting issue and should not drive a fund’s investment strategy.

“The common example here is the potential for a reconsideration of investments in real assets and other private or niche strategies, which often have higher transactional and other costs that are now captured by RG 97 and so will push up the ICR. However, we continue to believe that the focus should be on net returns as well as the overall achievement of the objectives set, within an overarching framework of value for money and alignment of interest.

“Increased transparency and the ability to more accurately compare costs is positive for funds and their members, and hopefully will further shift the balance of economics in favour of the investor. Improved disclosure should also facilitate funds in negotiating better terms and in making more informed decisions.

“What will be a challenge, though, is the communications effort involved in the likely higher ICR to be disclosed to members and the market, not to mention the lower forecast net returns and the lower final benefit payment forecasts therefrom. Fortunately, those issues are for member communications experts at superannuation funds to ponder.”

Frontier’s new technology system, called “Mercury”, which was unveiled in 2015, is part of the advisory firm’s “Partners Program” with its international affiliates. Mercury includes a range of detailed manager performance numbers and other data.