There’s been a big response to the amusing video we ran earlier in the week — in which pranksters from the Australian robo-adviser Stockspot attempted to present awards for underachievement to some of Sydney’s worst-performing fund houses. To find out more, we thought we’d interview Chris Brycki, Stockspot’s CEO and founder, about how the video came about.
First Chris, congratulations, on your video, which gave all of us here at TEBI a good laugh. The video was to highlight your Fat Cat Fund Report. Tell us about that.
Stockspot launched the Fat Cat Funds Report in 2014 and it is the largest analysis of superannuation and managed funds in Australia. The report is a comprehensive analysis of 3,820 funds that names the worst and best performers. It highlights the issues of high fees, poor transparency and conflicts of interest in Australia’s investment industry and the impact on long-term savings. A fund is classified as a ‘Fat Cat Fund’ when it underperforms its peers over one, three and five years and by more than 10% over five years. We think that’s pretty generous!
What were the key findings of the 2016 report?
The report shows that $59 billion is trapped in superannuation and managed funds that consistently underperform and that Australians are losing $777 million in fees every year to these Fat Cat Funds.
Fat Cat Funds charge 2.04% in fees on average. Compound this over many years and the 30-year-olds of today might lose nearly a quarter (24%) of their lifetime pension savings if their money is stuck in one of these funds. Men could lose $285,208 and women could lose $232,514. Furthermore, people in their 50s could lose over $100,000 in the years leading up to retirement.
Simply by moving out of a fund charging 2% per year to 0.5% per year, all other things being equal, a 30 year old could increase their superannuation by $328,704.
We also found that Australia’s big four banks and AMP control the majority of the 638 Fat Cat Funds. On the other hand, the majority of the 574 ‘Fit Cat Funds’ that have performed well and consistently delivered above average returns for their customers, tend to be managed by small boutique fund managers.
Are there any firms that have a particularly high number of fat cat funds?
Australia’s big four banks and AMP dominate the rankings with the most Fat Cat Funds. They represent nearly three quarters (72%) of the 638 Fat Cat Funds. ANZ (OnePath) places first, with a total of 239 funds that charged customers $142,509,306. Followed by AMP/AXA with 81, Westpac (BT) with 63, Commbank (Colonial First State) with 50 and NAB (MLC) with 32.
So how did you come up with the idea for the video?
Superannuation and retirement are topics a lot of people switch off to or put in the too hard basket. There’s a lot of complacency here in Australia despite many people being aware that they’re probably paying too much in fees. We wanted to create something that would get cut through the apathy and raise awareness with consumers with a call to action that they need to check if they’re in a Fat Cat Fund today. We decided humor would engage consumers more than the usual ‘shock and hard-hitting facts’ that people have become desensitised to.
We thought it was only fair to present the Fat Cat Fund managers with awards for their outstanding achievement in underachievement.
What sort of response have you had to the video?
People love it! In just under a month the video has been viewed over 500,000 times across social media. People seem to have really connected to the humour but also the seriousness of the message of how unfair these fees really are. We’ve had some great feedback and we’re all really proud to have worked on it. For every person that makes a change of fund because of our campaign we could be saving them a quarter of a million dollars over their lifetime. We think that’s something to celebrate.
One part of the Australian active fund sector, specifically small cap managers, have done relatively well in recent years. Why do you think that is?
Good question. My view on why small cap managers have done better than large cap managers in Australia is simply less competition for returns. The share prices of obscure small companies tend to be significantly less efficient than the top 200 companies because less people are scrutinising them. This creates opportunities for generating alpha. For small cap managers this is a blessing and a curse as the flipside is that their strategies aren’t always scalable. A growing number of small cap managers have closed their funds to new money over recent years in order to maintain that outperformance. There is also much less index hugging in small cap land, whereas many of the giant large cap funds are practically mandated follow the index. After subtracting their high fees, index huggers are destined for underperformance over the long-run.
Clearly, Australia is a long behind the US in terms of the take-up of passive investing. And yet Vanguard has been Australia for 20 years — far longer than in the UK?
Yes! What are we doing wrong over here? I think a lot of it comes down to distribution and the incentive structure for distributors. Australia has the most concentrated banking market in the world and our banks control almost all financial advice. As our Fat Cat Report shows, bank aligned financial advisers are much more likely to recommend an ‘approved’ active fund on their banks platform rather than an unlisted index fund, passive ETF or investing with Stockspot. Over time I believe this will change as more people become educated about passive investing. There are also a growing number of financial advisers breaking away from the banks’ control. Technology and access to information and products online is accelerating this process.
Do you see things starting to change in the Australian investing industry? Are people starting to realise that active management isn’t all that it’s cracked up to be?
Slowly but surely. The ETF market has grown 71% over the past 2 years here to AU$24 billion. Strong growth but to put that in perspective, our ETF market is only a quarter of the size of Canada’s despite the size of our economies and stock markets being very similar. We still have a long way to go but I suspect ETFs and passive investing will continue seeing strong growth here.
Tell me about Stockspot. What makes you different and how are you doing as a business?
I started Stockspot in 2013 when I realised that consumers were being ripped off by unfair fees when they invest. So we launched Stockspot to help more Australians access transparent, low-fee online investment advice and portfolio management.
Stockspot is Australia’s first automated investment service (robo-adviser), which means we invest on a client’s behalf, into a diversified and balanced portfolio of ETFs that match their financial goals and their risk capacity.
Unlike many parts of the traditional wealth management industry we believe in transparency and simplifying investing to help our clients make better informed decisions. The personalised advice we give clients is not clouded by commissions from product providers. Our fees are low, simple and clear, and we don’t charge brokerage or exit fees.
We’re the largest and fastest growing automated investment business in Australia.
There has been concern recently about the commercial viability of robo-advisers. What do you make of that?
Australia’s largest banks which currently control 75% of the financial advice and investment market have net promoter scores in the negative double digits. They’re constantly in the news for acting poorly, ripping off consumers and doing the wrong thing by the community. People detest them yet they still command a combined market capitalisation of $500 billion dollars.
We have a fast growing client base that trust us to give them sound financial advice, adore our product and are prepared to pay us for that. Financial services will be completely transformed over the next 10 years by businesses like ours that deliver a great experience at a fair price.
The robo advice model in two or three years from now will look very different to today – there’s a huge opportunity to help clients make better financial decisions using data and businesses like ours are in a great position to do that.
Finally, what are your predictions for the investing industry in Australia over the next 20 years?
Money will continue to drain out of the index hugging large-cap managers into majority low cost beta (index funds/ ETFs) plus some high quality alpha (proven boutiques and absolute return funds). The active funds management industry in Australia and similar developed markets like the UK and US will continue to hollow out for many years. You’ll know when funds management has finished its structural re-sizing when salaries for typical money managers have reverted back to other professional industries like marketing and engineering.