Agile fintech upstarts give staid industry super funds a challenge

Millennials and Gen Z investors are flocking to ETFs which back their causes and needs, such as focusing on thematic and ESG investing. Picture: AAP

The coming year will be a pivotal one for industry superannuation funds as they face the unrelenting pressure from sharp, agile and well-funded online fintech companies who are better meeting the demands of savvy younger investors.

While industry super funds have long dominated the super industry, more nimble fintechs are filling the void as young people seek a frictionless experience, instant transparency and, importantly, control — something industry funds struggle to provide.

A dominant segment of Australia’s labour force is aged under 40, millennials and generation Zers, who want more control over their retirement investments.

They are increasingly managing their own wealth including their super. Money management is mobile and online.

The acceleration of digitisation is making the trend more pronounced.

And it is not just about digitisation enabling access. Social media forums such as the ASX Stock Tipping Group on Facebook, r/AusFinance on Reddit and others have fuelled this change, with a wealth of content and ideas available any time, anywhere in the world.

COVID-19 has pushed the change forward and incumbent superannuation providers have had to adjust their business models accordingly to reduce costs and speed up their operations and services. Many have struggled to adjust. In response, others in the industry have moved to fill the void.

Vanguard, one of the world’s largest asset managers, will soon launch an online super fund, intended to target a younger demographic.

The largest fund manager in Australia has already commenced returning the mandates it managed on behalf of institutional investors, potentially to avoid any conflicts of interest — market expectations are its competing product will be in the market by the end of the year, but it could be sooner.

But being an incumbent, it may lack one competing trait: speed. Enter the fintechs.

Superhero, the latest fintech and challenger brand, has been disrupting the wealth management landscape with its marketing strategy taken straight out of the Silicon Valley textbook: loud, contemporary and ubiquitous.

Its tongue-in-cheek campaign urges us to “Give trading a kick up the ASX” with Australia’s cheapest brokerage costs of $5 and commission-free ETF trading.

It is now slated to shortly launch a superannuation platform, Superhero Super, enabling its growing customer base to invest their super in ASX-listed shares and ETFs.

With zero-commission trading on ETFs it is unequivocally focusing on the user experience and driving costs down to zero. The incumbents are lagging here.

This most definitely is a new era for superannuation. Welcome to Super 2.0.

The millennials and gen Zers are the target market, but even older cohorts who have had enough from traditional financial service providers that have let them down at times, as the Hayne royal commission so clearly showed, may also follow suit or at least take a look.

COVID-19 forced us all to stay at home, and most of us stayed online for a lot longer, and then we all realised just how much we could do online.

Not just stream movies or go on social media, but we could buy and sell shares, ETFs, crypto assets — some call it entertainment, others wealth accumulation and preservation. We discovered how easy it was to manage our futures financially.

Low-fee trading platforms and low fee funds such as ETFs increased in popularity. Booming sharemarkets spurred by ultra-accommodative fiscal and monetary policies have added fuel to the fire of fintechs and upstarts keen to be a part of this paradigm shift to wealth engagement.

We’ve seen an explosion of online brokerage platforms since 2020 such as online trading platforms Superhero, Stake, Selfwealth and Pearler, which are undercutting incumbents, and their growth will be exponential this year.

The Superhero start-up has been backed by major players in the Australian fintech segment, including the founders of leading buy now, pay later operators Zip and Afterpay. There will be new heroes in super.

This disruption of the super industry doesn’t come easy but the wheels are in motion. Change is inevitable. Today’s leaders may become tomorrow’s laggards.

For 30 years, the industry has enjoyed money flowing in, arguably one-way traffic.

It is fair to say transparency and the client experience has not been at the forefront of the industry’s mind. Naturally there have been competing priorities.

Morningstar recently ranked Australia last out of 26 for “investor-friendly” disclosure.

Take a tour online and you don’t get anywhere near as much information as you could or should — in a world of immediacy, transparency is paramount, innovation is key to drive engagement, and costs are expected to be low.

And, as younger people take the reins, they will naturally look to those investments that are most transparent and low cost, investments that align with their values and desire for efficiency such as ETFs.

Millennials and Gen Z investors are flocking to ETFs which back their causes and needs, such as focusing on thematic and ESG investing.

All of this is quickening the pace of the movement towards choice and financial products such as ETFs and share broking platforms that satisfy immediate needs and deliver on their promises — something many industry funds are failing to offer.

Size has its advantages but it also can be an Achilles’ heel.

Arian Neiron is CEO and managing director, Asia-Pacific, at VanEck.