Vanguard on track to disrupt super market

By Elizabeth Fry

Asset managers are rethinking their business models with the rise of in-house assets and industry consolidation.

Some like BlackRock are teaming up with asset owners to show them how to manage funds.

Others are taking a different path.

For instance, the $11 trillion Vanguard is poised to compete with former clients for a slice of the $3.4 trillion superannuation pool.

The world's second-largest asset manager is set to launch a super fund and managing director Daniel Shrimski would not be surprised to see other asset managers following suit.

"Organisations that are willing to take a long-term view as we do, have a differentiated approach and feel that they can deliver great results to members could potentially enter the superannuation market," he says.

Shrimski acknowledges the challenges ahead.

"We understand that superannuation is a very competitive market, and we will be up against some very mature businesses that have been in the market for a long time," he adds.

Vanguard has been working on its super fund for the best part of 24 months. "We are certainly making progress, but it is a big lift, and it was a big decision."

Entering the superannuation sector is a bold move even for a fund of Vanguard's size and reach. But Shrimski argues it was the right one for the US giant.

Still, the decision to enter the Australian super industry was far from a no-brainer.

"There were a lot of lengthy discussions, but long term, launching a pension is the right thing for our future. And, we are excited about the interest that already exists in the market," he states.

"But as we have learned, it's a high bar that we need to clear to get a license, and so it should be.

"Running a superfund is a huge responsibility."

Walking away from industry funds 

Ahead of declaring the new fund as open for business, Vanguard has gradually withdrawn fund management mandates from pension funds as it moves to design a super product.

"We have intentionally walked away from a significant amount of business - we made a very conscious decision to pivot towards communicating directly with members, investors, and advisers who are aligned with members."

This sentiment underlines the Pennsylvania-based group's global strategy of delivering for the end investor. Vanguard provides low-cost product offerings and advice on both accumulating retirement savings and drawing down money.

So, Vanguard is hardly starting from scratch.

Shrimski notes that Vanguard will leverage its vast global scale and learnings from the US 401k pension market.

"Our global investment expertise is a proven advantage for us. Leveraging our experience with 401k investors in the US is also an advantage," he says.

"While the US has a different pension system, I think the underlying spirit is similar. Many of the investment products we will offer will be based on member characteristics like age and demographics, as in the US. We have had success with that."

Buoyed by the Retirement Income Covenant, super funds have finally shifted their focus from the accumulation phase of superannuation to the decumulation phase.

Shrimski agrees that the renewed policy focus on retirement solutions was a welcome development for the super industry.

Competitive edge

From where he sits, retirement is a big point of difference for Vanguard. "As with accumulation, we can certainly take advantage of some of the things we have done abroad with the decumulation phase and apply local thinking."

Shrimski points out that member engagement will be another area of differentiation, adding that the industry has not done as well as it could with member communications.

"You can engage with members ten times a month, but unless it is meaningful and builds trust, it doesn't achieve what it needs to."

Shrimski says while the compulsory savings rate within super makes Australia's system one of the world's largest, the counterpoint is that it often results in disengagement.

"Members may not be interested in the topic, find it too distant to relate to, or simply find the information difficult to understand or overwhelming," he argues.

"Beyond member disengagement, super providers have been hindered by their inability to easily access data and by legacy technology which has impacted customer experience and ability to personalise."

Pension funds are now focused on getting closer to members to design the right retirement products for them.

But there are huge data gaps in the data which prevents proper segmentation critical to identify cohorts with similar characteristics and risk tolerance.

For Shrimski, technology and the ability to access data are central to personalising the customer experience.

In partnership with GROW, the fund administrator, he goes on to say, and through Vanguard's global expertise and experience in driving positive retirement outcomes, Vanguard plans to build a highly member-centric offer over time by using modern technology, powered by data, machine learning, and AI.

"This will allow us to better understand members and develop experiences not based on how we see the world, but how they see it."

"Super funds can't move at the pace we hope we can move at, and that is can something the member will experience.

He believes Vanguard is unique in terms of the way it approaches the Aussie market.

Shrimski should know.

Hands-on US experience

He moved to the US in 2017 to run the finance department at Vanguard's US retail investor group, which has assets of $US2 trillion and more than seven million retail investors.

"I understand what it takes to run a retail business and the importance of engaging with investors and investing in client experience and services," he states.

"This experience was valuable in terms of what we will need to do in Australia to be successful."

There's more.

A solid 60 percent of advisers have a relationship with Vanguard and will be able to access super products on the firm's personal investor digital trading portal.

Introduced two years ago, Vanguard has accumulated almost $10 billion in on-platform investor assets and has tens of thousands of clients.

"We have been encouraged by the significant interest in Vanguard Super from the general public and also from our growing retail investor base. "We're excited by the opportunity to provide them a compelling super offer, he adds.

As for assets under management, the executive is reluctant to make any predictions but reckons that fees and costs will be competitive with the big players over time.

Neither is he ruling out a merger given the potential advantages of economies of scale for super funds in reducing costs.

"Scale will be critical. If you want to deliver the best result for members at the lowest cost, it's a math game," he concludes.