Speaking at a CIFR (Centre for International Finance and Regulation) workshop on the FSI interim report yesterday, Mr Warren said there are three possible explanations for “why fees are where they are”.
First, product providers are making excess returns; second, inefficiencies in the system are pushing up costs and being passed on in the form of higher fees; and third, the Australian system is high cost but has a number of ‘value-added’ services that do not exist in other markets, he said.
“If it’s [providers seeking] excess returns, you try to work out who the rent-seekers are and why competition’s not working,” said Mr Warren.
If inefficiencies are to blame, the FSI needs to understand why it is happening and what to do about it.
Finally, if value-added services are to blame, the question to ask is: Are members paying for services they are going to value?, he said.
Mr Warren also took aim at the FSI interim report’s “presumption that active management involves a dead-weight loss”.
“It’s very dangerous to say either active or passive is better, and the first thing I’d say is be very wary of generalising based on US findings,” he said.
The US is the largest and most efficient market in the world, whereas there is evidence it is still possible to make excess returns in Australia, he said.
“But I’m not making a case for active. It depends on the market that you’re talking about – some markets you’re better off in active, some markets you’re better off in passive,” Mr Warren said.
“Let trustees and management make the decisions – with the caveat that they need to be informed and they need to be aligned.”
Indeed, the FSI may be looking in the wrong places when it comes to fees, Mr Warren suggested.
“[The inquiry] tends to be looking for answers in regulation and product but some of the answers could be in firming up fiduciary duty and stewardship [of trustees],” he said.
Finally, Mr Warren pointed to the ‘price discrimination’ that exists in Australia between the fees offered to retail investors and those paid by institutions.
“What’s the basis of that price discrimination? Are retail investors paying more because they’re more costly to service and they’re getting more services attached to them, or is somebody extracting money out of them and making rents?” he asked.
