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Vanguard’s lost decade in retail super
Can it make a comeback?
Vanguard launched its much-anticipated retail superannuation product last week. Vanguard first flagged its intention to re-enter the retail superannuation space in November 2019. The strategy is to compete directly for retail super rather than seeking institutional mandates to manage the same money.
Before Vanguard could make a retail super offering, it had to obtain a registrable superannuation entity (RSE) licence from APRA. Vanguard is the first entity to do so in years, which is in itself a pretty good indication of the extent to which a RSE is a barrier to entry. The RSE wasn’t obtained until 26 August this year, but with that hurdle cleared, a product disclosure statement was finalised in early October and the product launched last week, making it three years all up from conception to product launch. That it takes one of the world’s biggest wealth managers three years to launch a retail super product says a lot about the regulatory barriers to innovation and competition in financial services.
The tragedy is that Vanguard had a retail superannuation product from the early 2000s until the early 2010s. I was one of Vanguard’s first retail super clients when they launched circa 2002. Then we had the MySuper ‘reforms.’ Vanguard assumed this would lead to a proliferation of low-cost default products, leaving it with only a small market. It offloaded its retail super clients to Plum (then part of the NAB/MLC wealth management complex). You could still put Vanguard products into a SMSF, but you would need a balance of at least $200,000 before that became worthwhile.
Default super turned into a hot mess, which the government and the regulator have been trying to clean up more recently. The reforms were a very good example of what happens when bad behavioural economics (now in the middle of massive replication crisis) is allowed to inform policy.
Vanguard has re-entered the market with a default product of its own, although new clients are not limited to the default offering and can elect their own investment strategy. The default offer has a dynamic life-cycle asset allocation that is designed to be set and forget. Prior to launch, Vanguard sought to lower expectations for what the management fees might be. In the US, Vanguard ETFs come with expense ratios as low as three basis points. That was never going to happen in a heavily regulated product like retail super, although there are some other indexed super products that get down into single digits, at least on investment fees. In the event, Vanguard has pitched its product to make it broadly competitive with, yes, you guessed it, default super, the same product class it worried about competing with in the early 2010s.
The basic fee structure is 0.35% in admin fees and costs on balances up to $850,000, 0.21% in investment management fees and 0.02% in other transaction costs for 0.58%, plus the flat annual fees. Unfortunately, I no longer have any of my old Vanguard super statements or the old PDS to compare to its former offering from 10-20 years ago, but I doubt it was much cheaper. There are no switching fees, although buy-sell spreads apply. There is an insurance offering, as well as the ability to transfer existing cover. Paying for insurance out of super balances is obviously tax effective.
Vanguard says fees might come down as it scales. It is competing against industry behemoths with hundreds of billions under management who can spread their fixed costs. One large Australian super fund aspires to have $1 trillion under management. The regulator is pushing funds to consolidate to achieve scale economies and Vanguard can certainly vouch for the fact that it is not encouraging new entrants. Vanguard Super probably needs to get $50 billion under its belt in fairly short order.
The rest of the global asset management industry has seen a race to the bottom in fees and a big shift from active to passive management. Australian super funds have not been completely immune from these trends and Vanguard has probably already exerted some competitive pressure just by threatening entry. But as the industry consolidates and the regulatory moat grows, super funds will be more insulated from competitive pressures. The Australian policymakers have largely sought to promote competition through regulation, with predictable results.
For my part, there is a 10 basis point saving in fees in moving to Vanguard. As Jack Bogle use to say, there is only one way to enhance returns and that is to lower investment costs. Last time I looked, Vanguard was the underlying manager of most of that money anyway. The difference in fees is the existing fund clipping my ticket on the way through. There is also something to be said for encouraging a new entrant into retail super. I doubt there will be many more after this. We are probably going to be stuck with a few mega funds. Vanguard might as well be one of them.
Needless to say, none of this is financial advice.
Suggested reading: The Arithmetic of Active Management.