The super conference heard a multitude of ways that charges can be disguised.
Fee disclosure by investment managers is easily manipulated and needs a radical overhaul.
That was the message given to super fund trustees last week at the Conference of Major Superannuation Funds in Brisbane.
The chief investment officer of Sunsuper, David Hartley, said there were several ways under the current system that managers could run investment products and disclose zero fees - even though the costs could be quite substantial.
How does that work? Hartley gave several examples. For instance, he said one option was for a fund manager to sell all its investments to an investment bank, put the cash received on deposit and enter into a swap arrangement with the investment bank to receive the earnings on the investments.
Another strategy, he said, was to transfer the investments to a company structure, list the company on the stock exchange and credit investors with a return on the share price.
Yet another option was to sell the investments to a third party and lend the cash generated by the sale to that party as a loan with the interest rate equal to the net return on the investments. Sound unlikely?
Hartley says all have been used in the Australian market by hedge funds, exchange traded funds and other investment products.
He said while some funds may use these strategies for only a portion of their assets, the common features were the addition of intermediaries and apparently lower costs but the potential for increased costs and risks.
"It's a triumph of form over substance," he said.
The director of Financial Viewpoint, Brett Elvish, said he had identified at least 35 ways in which costs were either knowingly or inadvertently being distorted by funds. He said some of these distortions were minor but others substantial. A review of four custody services found in one case that only 30 per cent of costs were disclosed in another, 65 per cent.
Elvish said instead of trying to identify every individual cost, the emphasis should be on the end result - the net return to investors after all fees and charges.
The claims come as the government is considering its MySuper legislation, which will include a "product dashboard" allowing investors to easily compare super funds. This is likely to include a new fee-disclosure measure, known as the Total Annual Expense Ratio. This was proposed by the Cooper Review into super and is intended to take account of all the expenses involved in running a fund.
The senior executive leader of investment managers and super at the Australian Securities and Investments Commission, Ged Fitzgerald, said the final form of this measure was still under discussion but it was important that fee disclosure be consistent so that it provided meaningful information for investors.
However, Elvish said it could create further distortions where managers would try to hide costs at the expense of investors. He gave one example as the inclusion of brokerage in the new measure. This could lead to an increase in principal trading where, rather than acting as the fund's agent and charging a commission, the broker processes the transaction on its own account with "fees" built into the price of the shares.
Because these costs would not be required to be disclosed, Elvish said there would be an incentive for funds to operate through principal trading even though the real cost of the trade would often be higher.