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Vanguard says super launch is on track

“I wouldn’t use the word ‘retard’,” Mr Lovett told the Financial analysis. “When we started this process, we knew it was going to be complex, and he lived up to that…We are happy where we are and are now very confident that we will be in the market in the not- too- distant future.”

Recruitment in preparation

The pandemic has added complexity, said Mr Lovett, who was recalled to Melbourne in late 2019 from Vanguard’s global headquarters in Malvern, Pennsylvania. The Australian national had been running the firm’s lucrative accounts with independent wealth advisers across the US since 2017.

He confirmed that Vanguard Australia had not yet obtained a Registerable Pension Entity (RSE) license from the Australian Prudential Regulation Authority. “The regulator has high standards, which we agree with,” Mr Lovett said.

But he pointed to Vanguard’s recruitment of around 100 new employees to work for the pension firm as evidence of the company’s commitment to the Australian project.

Vanguard’s entry into the market is expected to put downward pressure on retirement system fees, given the company’s historical focus on low-cost investments. Australians pay at least $30 billion a year in administration and investment fees to super funds, according to the Treasury.

Mr. Lovett said he was aware of growing expectations from consumers and wealth advisors that Vanguard Super would charge some of the lowest fees in the market. But he said watchers shouldn’t assume the product would be the cheapest in the country at launch.

“We are starting from scratch,” he said. “We don’t have the scale to reduce the cost until it’s probably over in the long run.

“We certainly have a mantra around low cost, although we’re not always the cheapest. The more we gain in scale, the more we will reduce these costs. We think outside the box, [our fees] will be very competitive.

Index creation only

Mr Lovett revealed that the first iteration of Vanguard Super would be an index-only product, meaning it has a passive investment strategy that seeks to mimic market performance rather than trying to beat it. Because they are governed by rules and not by investment skills, passive investment products generally charge unitholders lower fees than active funds.

While many super funds offer index investing options — which were often managed by Vanguard before it exited the “separate mandate accounts” business last year — only a handful are said to have a fully indexed strategy.

The model would be “a bit unique”, Mr Lovett said, and provide a point of difference from gargantuan industry super funds, which have argued that active investment in unlisted assets such as infrastructure and real estate was a major competitive advantage.

An indexing strategy would help Vanguard “position well” in the Morrison government’s annual performance test of super funds as part of its controversial Your Future, Your Super reforms, Mr Lovett said.

“We think benchmarking is important and makes sense,” he said. “We believe in the management that the regulator and [former] the government took it.

In his bid for rapid growth, Mr Lovett said Vanguard was open to mergers and acquisitions of other funds, although he admitted it was difficult to enter into proper negotiations with prospects without a CSR licence.

“We hope to be able to play in this space once we develop a track record,” he said. “The funds that will survive will be those that can develop enough scale.”

But he also said he hoped the fund could achieve organic growth, convincing clients to switch providers based on advertising campaigns and the recommendation of loyal financial advisers.

While Australia has traditionally seen low levels of organic consumer change, some industry players have backed Vanguard’s chances.

“The cult of Vanguard is extraordinary,” said former Financial Services Council chief executive Sally Loane. Financial analysis in November last year.

“I have young adult children and the first thing they wanted to do was invest in a Vanguard [exchange traded fund]and I didn’t even know where they heard the name Vanguard.