When assessing an investment, most investors focus on expected returns: how much money might they make? Fewer consider risk: how likely are those returns to materialise? But very few consider a third, equally important factor: transparency.
Transparency is about how much you can see and understand for yourself, and how easily you can verify what you are being told. It matters because problems often hide in the dark. If you cannot see a potential problem, you can’t assess it, price it in, mitigate it or avoid it. That’s why transparency is one of the best ways to protect your money.
In this blog, I will explore how transparency varies across different investments, what warning signs to look for and how to protect your wealth.
One of property’s greatest advantages is transparency
Property is one of the most transparent investments you can own. It is a physical asset that you can inspect and understand firsthand. You also have considerable control over it, including the ability to improve it, change its use and decide when to sell. Few other asset classes offer this degree of visibility and control, which I think is a significant part of the brick-and-mortar appeal.
The one area where transparency can be lacking is the buying process. Private sales, including expressions of interest campaigns, can be quite opaque. Buyers have little visibility over competing offers or how much genuine interest exists. Price guides can also be misleading, particularly when underquoting is used to generate interest and urgency rather than provide a realistic indication of the likely selling price.
Auctions, by contrast, tend to be more transparent. Bidding takes place in public, allowing buyers to see the competition, assess their behaviour and make more informed decisions.
However, these shortcomings relate to the transaction rather than the investment itself. When it comes to understanding what you own and the risks involved, property remains one of the most transparent asset classes.
ETFs are also quite transparent
One of the advantages of passive ETFs is their simplicity and transparency. Investors can see exactly which shares the fund holds, how they are weighted and the investment methodology it follows. Fees are typically straightforward, with one management fee and no performance fees. Future fees are also relatively predictable too, as competition and economies of scale tend to drive passive ETF fees lower over time, benefiting investors.
The business model is equally transparent. ETF providers earn a small margin on a large pool of funds under management. Their success does not depend on picking winning stocks, beating the market or justifying their fees through a compelling investment story. Their job is simply to replicate the index as closely as possible, minimise tracking error and maintain sufficient liquidity for investors to buy and sell.
Contrast this with actively managed funds. Many charge performance fees, making it harder to predict the total cost of investing. And other unascertainable costs include portfolio turnover, transaction costs and tax, which can further erode returns. More importantly, performance depends on the decisions of a relatively small number of individuals (portfolio managers). Investors have limited visibility over how those decisions are made or how likely they are to succeed.
This makes passive ETFs considerably easier to understand, evaluate and monitor than most actively managed funds.
Industry super funds are relatively opaque
Industry super funds ask members to take a considerable leap of faith. Members can see what fees they are paying and what returns the fund has delivered historically. However, they have limited visibility over how important investment decisions are made.
For example, how does the fund decide which investment managers to appoint or terminate? How many underperforming managers have been retained, and for how long? How do internal investment teams perform compared to external managers? And what proportion of investments is managed internally versus outsourced, and how has that changed over time?
These are important decisions that can materially affect investment performance. While most Australians are unlikely to investigate these matters themselves, industry analysts and journalists certainly would, potentially exposing weaknesses or concerns that members deserve to know about. This transparency is important.
The fundamental problem is that without this information, it is difficult to assess whether historical returns are a reliable guide to future performance.
For example, if a fund has progressively shifted more investment management in-house, that represents a material change to its investment process. Its ability to replicate past outperformance may now depend on an internal team with a different track record and capabilities. That is a risk members should be able to assess.
I have previously written about the lack of transparency surrounding unlisted investments and their impact on reported returns. APRA has also raised concerns with super funds about the valuation and governance of these investments.
Another well-documented concern is spending on marketing, sponsorships and partnerships, particularly those involving unions. While funds disclose their aggregate spending on promotion, marketing and sponsorships, there is limited visibility over individual arrangements or accountability for staff productivity – the number of staff employed has ballooned. Given these expenses are ultimately paid from members’ retirement savings, greater transparency and accountability seem entirely reasonable.
Without sufficient disclosure, neither members nor independent analysts can properly evaluate industry funds – they avoid scrutiny. In that sense, industry super funds can operate like a black box. Investors are left relying heavily on historical returns without being able to properly assess whether the conditions that produced those returns still exist.
Greater transparency would expose investment decisions and expenditure to more scrutiny, creating stronger incentives to improve performance, control costs and eliminate inefficiencies. Ultimately, that could translate into better investment returns and lower fees for members.
Private credit and private equity are even more opaque
Private credit involves lending money to businesses and property developers outside the traditional banking system. Private equity involves investing in unlisted businesses, while venture capital is a subset of private equity focused on start-ups. Although these investments differ, all three typically aim to deliver higher returns than their listed, more liquid and transparent alternatives.
The challenge is that many of these investments lack transparency around fees and remuneration structures, related-party transactions and valuation practices. Different classes of investors may also receive preferential treatment, including lower fees or priority access to withdrawals.
Understanding how returns will be generated and assessing the likelihood of achieving them can also be difficult. Performance often depends on the decisions of a small number of individuals, such as which loans to approve or businesses to acquire. This is inherently less transparent than a rules-based investment strategy, where clearly defined criteria determine what investments are made, rather than the judgement of individual managers.
Complexity can feel sophisticated
An interesting observation is that investors with substantial wealth, particularly those who have received a large lump sum through an inheritance or business sale, are often attracted to more complex investments, such as private credit, private equity and unlisted funds. These investments can feel more sophisticated, despite often lacking transparency.
I suspect these decisions are sometimes driven more by ego than investment fundamentals. Some wealthy investors regard broad-based index ETFs as too simple for a large portfolio and assume their circumstances warrant something more sophisticated.
However, complexity and sophistication are not the same thing. The more complex an investment becomes, the more reliant investors are on the people managing it, particularly when there is limited visibility over how decisions are made. This lack of transparency introduces additional risks that may not be reflected in reported fees or returns.
I would argue that the more money you have to invest, the more important transparency becomes, not less. After all, the more wealth you have accumulated, the more you have to protect.
A perfect example of what happens without transparency
One of the promises of cryptocurrency is decentralisation, allowing people to transact directly without banks or other intermediaries, often without revealing their identities. While blockchain transactions are publicly visible and traceable, investors generally cannot identify who controls individual wallets, verify whether exchanges hold the assets they claim, or determine how much genuine trading occurs. This anonymity can attract participants seeking to avoid scrutiny, making market integrity difficult to assess.
Wash trading is a good example. It occurs when the same party buys and sells an asset to itself, creating the appearance of genuine trading activity without any change in ownership. A peer-reviewed study of 29 cryptocurrency exchanges, published in Management Science in 2023, estimated that wash trades accounted for more than 70% of reported trading volume on unregulated exchanges. Regulated exchanges, by contrast, exhibited normal trading patterns.
Wash trading can distort both prices and trading volumes. By repeatedly trading at higher prices, a participant can create the appearance of rising demand, potentially attracting genuine buyers. Inflated trading volumes also give investors a misleading impression of liquidity and how easily they can buy or sell. These risks are greatest in thinly traded cryptocurrencies. For larger assets such as Bitcoin, trading across multiple exchanges limits price distortions on individual exchanges, although the broader impact is harder to measure.
This illustrates why transparency matters. If investors cannot distinguish genuine demand and liquidity from artificial trading activity, they cannot reliably assess the risks they are taking. And risks that cannot be properly assessed are difficult to manage or avoid. Problems hide in the dark.
What transparent investments have in common
The most transparent investments tend to share several characteristics. These provide a useful framework for assessing any investment opportunity, including those you might consider in the future.
- You can see what you own. The underlying assets are identifiable, whether that is a physical property or a published portfolio of shares.
- Valuations are independently verifiable. Prices are determined by an open market.
- Costs are clear. You can identify the total fees and expenses, including any performance-based charges.
- Incentives are aligned. You understand how the provider makes money and whether its interests align with yours. For example, an ETF provider can attract more investors by reducing fees, benefiting both parties.
- Decision-making is accountable. You know who makes investment decisions and how their performance can be assessed.
- There is independent oversight. Auditors, regulators or other independent parties provide checks on the information being reported.
- You understand your exit options. You know when and how you can sell, and how the sale price will be determined.
The fewer of these characteristics an investment has, the more you must rely on trust rather than independently verifiable information.
Trust is not necessarily a problem, but it introduces a risk that investors rarely consider. Before investing, ask yourself which of these characteristics are present, where transparency is lacking and whether the expected return adequately compensates you for the additional uncertainty.
Transparency has limits, and it does not guarantee returns
Transparency helps investors assess risk, but it does not guarantee returns. Even transparent investments, such as shares and property, can fall sharply in value. The advantage is knowing what risks you are exposed to.
Not all ETFs are equally transparent either. Synthetic, leveraged and actively managed ETFs can introduce additional complexity, while even simple index ETFs incur transaction costs and tracking error.
Also, a lack of transparency does not automatically make an investment poor. Many industry super funds and unlisted investments have delivered strong returns. The challenge is assessing whether those returns are repeatable and identifying potential problems before they arise.
In our view, all investors, regardless of how much wealth they have, should insist on a high degree of transparency. Only invest in assets where you can clearly understand what you are investing in, the fees you will pay and to whom, how investment decisions are made and the other important factors discussed above. Transparency is one of the best ways to protect your wealth.
