How fair dinkum is the retail superannuation industry about unhooking itself from commissions?
The Investment and Financial Services Association, the peak body for the wholesale and retail funds management, garnered plenty of praise for its draft super charter last Wednesday. Lindsay Tanner, who addressed an IFSA function held in Parliament House last week, said it was “evident that the underlying principles of this charter are very much in line with the Government’s approach… in particular, I welcome the decision by IFSA to propose the removal of hidden commissions paid to financial advisors.” The draft Charter garnered positive headlines like “Superannuation gets a clean up” and “Superannuation industry to scrap commissions”.
Well, not quite.
IFSA’s draft charter proposes two types of advice fees — “Member Advice Fees” for personal Super and “Plan Service Fees” for corporate Super. The first is where the biggest change is proposed: members would select their payment method — an up-front fees or an ongoing dollar or % fee. If an ongoing fee was chosen, it could be turned off by the member if they wanted to sever their relationship with the planner.
Plan service fees would be agreed between an employer and an adviser and could include commissions, but individual employees/members could opt out.
In short, there’ll be a process for new members to avoid commission, but existing commissions won’t be scrapped at all, and nothing will happen until 2012 in any event, after a phase-in period. All existing accounts are grandfathered, preserving the current $1.4b a year in superannuation commissions — more than a third of which is from compulsory super.
Industry super funds argues that the entire industry should move to a fee-for-service model, so that planners, like other providers of professional advice like lawyers and doctors, are paid a flat fee and have a stronger commitment to independent advice.
IFSA’s media manager Simon Disney, however, told Crikey that IFSA believes competitive pressure will drive a move away from commissions once the transition period is complete.
“Those companies with only, or mainly, ‘legacy products’ on offer, won’t profile well with those planners who are active in advising on voluntary contribution,” Disney told Crikey. “The corporate market is already intensely competitive and those who are not ready for the new regime will be disadvantaged commercially. There will not be much incentive in being ‘last to market’.”
Disney also says the industry will not move to a full fee-for-service model because it requires a large upfront — multi-thousand-dollar — payment that few can afford, although the fee-for-service model does form a growing part of planners’ revenue.
The new model would be a voluntary approach, as part of the industry’s own standards. The alternative, of course, is greater government regulation, foreshadowed by former Superannuation minister Nick Sherry’s calls for lower fees and the major review of the super industry Sherry announced at the end of May.
IFSA’s self-regulatory approach stops, however, when it comes to trying to prevent industry super from advertising its better performance. IFSA is concerned about “the use of average or aggregated performance and fee data risks misleading super members and does not support sound super decisions” and wants a ban on the use of aggregated performance and fees data, and a prohibition on the use of performance or fee estimates and forecasts, in promotional material.
“Government and regulator support will be required,” the IFSA draft charter says, although Disney says in fact it is a call “that all in the industry lift our game and that ASIC… be ever vigilant” rather than a call for regulatory or legislative change.
To its credit, however, IFSA has also proposed that funds provide an “appropriate default investment option” for members who do not make an active decision, which would help end the practice of some funds of offering an default option so unattractive members are encouraged into other, high-fee options.
Just as the Financial Planning Association discovered after its own call to move — very slowly and fitfully — away from commissions, IFSA has learned just how hard to can be to take even babysteps toward a fee-based model. While supportive of the Charter, the Association of Financial Planners said it “is not convinced that simply being fee-based will ensure consumers receive good and appropriate outcomes every time or that advisers will build better businesses.” AFA President Jim Taggart reckoned “the issue of adviser remuneration is about identifying and managing conflicts.”
The thrust and timing of the Charter, coming barely three weeks after Sherry announced his Super review, suggests an industry determined to head off regulatory intervention — except where in its own interests – by adopting a perceived tougher self-regulatory approach. But IFSA is hamstrung because a move away from commissions would damage the remuneration model of the majority of the group that in essence constitutes its members’ workforce — financial planners. Like the FPA, which found itself under attack from another financial planners’ group when it proposed a gradual move away from commissions, IFSA can move slowly at best, and only in a way that locks in the existing commission-based revenue stream.
Oddly enough, a legislated process to end commissions would solve IFSA’s and the FPA’s problem on that front, however much they would object to it.