It’s Financial Planning Week, if you didn’t know, or at least the Financial Planning Association has declared it to be.
Financial planning and HR multinational Mercer celebrated the week yesterday by releasing a new poll showing most Australians wanted the compulsory superannuation guarantee rate lift from 9% to 12 or 15%.
That increasing the compulsory rate would move Australians closer to sustainably self-funded retirement is accepted wisdom, particularly thanks to Paul Keating’s regular condemnations of John Howard and Peter Costello for nixing a planned increase to 12% in the 1990s. But Ken Henry’s tax review raised doubts about the wisdom of lifting the compulsory level, pointing out in its December retirement incomes paper that lifting the compulsory rate to 12% would add a further $2b a year to the $26b a year in taxation revenue lost to superannuation concessions.
With those sorts of numbers, increasing the aged pension starts to become an economic alternative to boosting compulsory superannuation. The entire cost of the aged pension will be $32b in 2010.
There is another way, though, to increase the capacity of superannuation to provide for a retirement that is not dependent on the aged pension. Modelling done by Access Economics for industry superannuation’s peak body shows abolishing sales commissions on superannuation products paid to financial advisers would yield the equivalent rise in retirement incomes of increasing compulsory super to 12%. Industry Super Network in fact suggests that if commission were abolished and members’ money directed into the best-performing funds, around $180b extra income would be available for superannuant between now and 2020.
Industry super, of course, makes that case as part of its ongoing conflict with retail super. But another report, from Rainmaker, showed that commissions had cost super fund members $1.4b in 2008. $546m of that was on compulsory super funds.
Industry super aren’t the only ones to criticise commissions for financial advisers. In late April, the Financial Planning Association also called for a move away from commissions, issuing a discussion paper proposing a shift to fee-based remuneration by 2012. Or, at least, it appeared to. FPA members apparently reacted with anger to the threat to commissions, and a few days later Association CEO Jo-Anne Bloch told members in an internal newsletter to calm down:
We are not recommending banning commissions at all. We are recommending transitioning away from commission based advice from, say, 2012, and with regard to legacy products which will be grandfathered; life insurance products which will need further discussion with product providers and planners; and with sensitivity and attention to longstanding commission based businesses that cannot change their remuneration models at this stage.
Bloch went on to explain the difference between “commissions” and the FPA’s proposed model. “We are recommending three types of client-directed charging models which include hourly rates, service based charging, and asset based charging. The difference between commission and asset based charging is that with asset based charging, the percentage fee will be negotiated between the client and the financial planner, it will be deducted from the client’s account, and it can be switched off if the service is no longer required.”
That would appear to mean commissions, just not compulsory commissions.
Even that, however, had other groups fuming. The Association of Financial Advisers (the financial advice industry is divided into People’s Front of Judea-level complexity) criticised the FPA paper and declared that banning commissions “took away consumers’ right to choose” (yep I don’t understand that claim either).
However reluctant to entirely ban commissions, the FPA has sensed the regulatory shift coming from the Federal Government, with Superannuation Minister Nick Sherry condemning the high level of fees and promising an inquiry into superannuation industry, including the level of fees and the problem of conflicted advice from financial planners on commissions — kickbacks — from funds they “independently” advise customers to join. The joint Committee on Corporations and Financial Services has also launched an inquiry into the Storm collapse. Some of the submissions from Storm clients misled by financial advisers make for harrowing reading.
For more than a decade, superannuation has been a central component in both Australia’s retirement incomes and national savings policies, despite the Coalition’s antipathy toward industry superannuation. That has coincided with an extended period of economic growth and rise in equity prices.
But the financial crisis, gouging by financial planners and over-generous tax concessions have combined to undermine perceptions of the long-term benefits of superannuation. The Sherry inquiry has the critical task of arresting that process and restoring consumer confidence. But it might help if financial planners realised just how damaging commissions actually are to their image and industry performance.