Australian Financial Review (AFR), Opinion, 15 April 2019
Why super start-up Spaceship was always going to struggle to lift off
With superannuation industry fees on a trajectory to increase from $31 billion to over $90 billion by 2035, it is not surprising that super start-ups like Spaceship are attempting to carve out a niche in this market.
But launching a new start-up in the super space is hard work.
Not only is it high risk, tightly regulated and capital intensive, these new ventures also face two additional risks: their core product is fully outsourced and most of their targeted young customers could not care less.
Building a super product
To launch a new super fund, the only option available to a start-up is to re-brand and promote an existing fund. This is called a sub-plan.
With a change of investment strategy (passive with the fees of an active manager) and an engaging front-end, an off-the-shelf fund is ready for digital marketing liftoff.
“Hey kids – we invest in ‘technology’, it is where the world is heading, or we invest ‘ethically’, so you can put your money behind the things you care about.”
This is why so many start-up super entrepreneurs have marketing backgrounds. The start-up is a promoter of the super fund, not the manufacturer.
The traditional super capabilities of trustee services, administration and investment management are all outsourced.
Founders of these new start-ups are therefore not the trustee responsible for ensuring the best interests of their members.
It is near impossible for founders – who are typically the executive, board of directors and major shareholders – to meet APRA governance requirements.
As we’ve recently read, not even Spaceship Super, with its deep pockets and dedicated compliance team, could overcome the APRA hurdle, and most new super start-ups never try, outsourcing trustee services to specialists.
Super administration has changed dramatically over the last 20 years. Where once most super funds were self-administered, now nearly all outsource to a specialist administrator.
So what does a new fund need to administer member super money? Not much – typically just a strong vendor management function.
Super fund investments
Let’s consider the use of full or partially passive (indexed) investment products as a mechanism for funds to reduce the fees charged to member accounts.
In 2016, super fund members paid $7.8 billion to “active” fund managers, an average of 0.6 per cent of member account balances.
Given active managers deliver returns that are 90 per cent correlated to individual benchmarks, the appeal of indexed investments with costs as low as 0.07 per cent are obvious.
Unfortunately for new super funds, profits can only be made if they charge members the equivalent of an active investment fee while sourcing an indexed portfolio.
It is a bit of a commercial straitjacket, and ethically challenging.
While most new funds are upfront or at least quiet about it, some, like Spaceship, market too aggressively and consequentially, and are pulled up for false and misleading conduct.
Spaceship was fined by ASIC because it had young members believing its fund was made up of hand-picked companies.
Most young Australians don’t care about super
So while it is a hard pill to swallow when you personally care deeply about super and the long-term financial health of workers, let’s not kid ourselves: most employees, especially young Australians don’t think much about it.
Nor do they have to. When a worker lacks engagement, their employer pays their super into an employer-nominated default super fund (and I know from experience that unbeknown to the employer, this can often be an under-performing investment).
Default super relieves people of a complex financial decision and it is very powerful – over 10 million employees remain with an employer default.
The reality is that super has little network effect. We don’t stand around the barbecue discussing our super fund like we would property or shares.
This almost non existent word-of-mouth, makes it all the more difficult for a new super start-up to achieve rapid growth, become financially sustainable, or justify a strong exit valuation.
Mark MacLeod is the founder and CEO of Roll-it Super.