The industry super network (ISN), in its continued assault on financial planners, recently released a self commissioned report from Rice-Warner that states financial planners will be better off under their proposed system of advice. The report also indicates that the nation may be $117 billion better off over the next 15 years under this system.
Further, they have released an internal research report – Supernomics – that suggests that competition should be outlawed as the continued use of higher fee super funds implies competition has failed. The reports, however, do not stand up to much scrutiny on a number of grounds.
The ISN suffers from a severe case of financial myopia. They seem to believe that superannuation is the source of the only significant financial decision that individuals need to make and further, that it should be seen in isolation from other financial decisions. Having worked as the executive manager of advice in a quasi-industry (not for profit) fund, my experience was that the demand for advice from superannuation members was simply not met by limited information about the features and benefits of the particular fund to which they belonged.
There was, and is, an absolute demand from people to link superannuation advice (how much, which investment, type of contribution, insurance inside or outside super) to mortgage and debt repayment levels, investments other than super, income protection and life insurance needs, education savings plans, cash flow management, estate planning, Centrelink planning and the myriad other issues that relate to their financial decision making. The true role of a professional financial planner is to provide an integrated approach to financial decision making. Treating any of these issues in isolation will always be tainted as transaction based financial advice – not planning.
The recently released ‘The Future of Financial Advice’ information pack (provided by the Hon. Chris Bowen MP) outlines the government’s plan to further regulate the financial advice industry. Most professional planners will welcome this as the recommendations are aligned with the professional association’s (FPA) approach.
An apparent unintended consequence of this report, however, is to further undermine the role of professional financial planners by suggesting that super funds should be able to provide strategic advice (transition to retirement), estate planning advice (advice regarding beneficiaries), welfare advice (advice regarding Centrelink) and even “retirement planning generally” . Intra-fund advice is generally provided over the phone or in a very limited interview situation where there is little time for a complete fact find. The scope of this advice is limited to the member’s super fund and cannot consider all of the issues regarding the financial circumstances of the client in a holistic manner.
The author welcomes the introduction of a fiduciary duty into law – it is a principle already ensconced within the Profession’s code of professional practice. Similarly, ASIC’s increased powers to deal with unscrupulous individuals and corporations are very welcome. Clearly, their lack of power was what allowed for the Storm Financial debacle – not an inability to detect unscrupulous behavior.
Passing more of the roles of financial planners to call-centre based offers of ‘advice’ is likely to do little in the way of creating actions. The ability to get clients ‘engaged’ is a key difference between those who use financial planners and those who do not.
Information from the APRA 2009 Annual Superannuation Bulletin indicated that average member balances from retail super and industry super fund were $18,400 and $16,600 respectively. Average ‘trail’ commissions on superannuation accounts are between 0.4% and 0.6% per annum mean that adviser revenue from these clients is in the order of $70 per annum. For this fee clients are entitled to contact their adviser and ask questions specifically about their own needs. Whether they do or not is surely their decision – the same decision to either leave the funds where they are or move them to a different super fund. Both of the above figures pale into insignificance when compared to SMSF average balances of more than $429,000. Clearly people are exercising their discretion to choose appropriate superannuation structures as their balances increase – and they are choosing neither industry nor retail funds.
Assuming that the percentage of future retail funds drops from the current 27% down to say, 20% over the next 15 years (given the growth in the SMSF sector), and assuming that the level of funds held in super grows to $2.3 trillion over this time , the $8.2 billion fee figure implies a 2% commission level. This is almost 4 times the current commission rate – and hard to reconcile with a reducing commission base. Maybe the authors of the reports have confused fund fees with commissions? The report’s authors assert that these fees may amount to $117billion over the next 15 years and that this money is ‘lost’ to the economy. Clearly these fees do not ‘evaporate’ from the economy but simply move around with the same multiplier effect on employment and consumption.
It is also interesting that the industry network reports imply there is a significant cost to members regarding final balances yet the average balance in retail funds is higher than the average balance in industry funds. Perhaps an adviser has personally encouraged their clients to make additional contributions for their long term benefit?
Industry network’s research indicates that at least two thirds of their members are either ignorant or apathetic regarding superannuation choices. This could perhaps be extrapolated past super fund choice to contribution level choice. Surely the level and type of contributions that individuals make is relevant to future wealth. Without some prompt (advice) to increase contributions, we are likely to maintain these very low average balances.
The Rice-Warner paper is reported to have identified a 125% increase in ‘pieces of advice’ over the next 15 years but this ‘extra’ work would only generate a 38% real increase in revenue per adviser. I find it difficult to extrapolate how this is of benefit to the financial planning industry. Are the report authors suggesting that advisers perform 125% more work for 38% more revenue? They also fail to explain that while the ‘work’ is real to an individual planner; the ‘revenue’ has an expense component and does not produce this increase in actual earnings.
Of more concern, however, is the concept of a ‘piece of advice’.
Clearly this conceptually fits with the industry funds view of advice; that all clients want is an answer to a simple question about their super – but it is far from the public’s expectation of comprehensive advice. The introduction of the ‘piece’ concept perhaps is at the heart of the misunderstanding that the industry network has regarding financial planning. A ‘piece of advice’ implies an answer to a specific question without due consideration to the person’s overall financial circumstances.
This is specifically defined within corporations law as ‘limited advice’ and must come with a warning attached that the advice ‘may be inappropriate to the client needs as their overall situation has not been considered’. Regulatory Guide 90 (RG90) identifies that ‘where the personal advice is based on incomplete or inaccurate information, a statement setting out the warning is required by s945B (s947B (2) (f)) and 947C (2) (g))’
The requirement for a warning suggests both the government and the regulator may, and should, have concern regarding the provision of such pieces of advice.
Naturally, not everyone wants or will seek out comprehensive advice, but the lack of financial literacy evident in the ‘Supernomics’ report surely indicates that most will need more than simple super advice.
There is a very clear and deliberate move away from commissions to agreed fees within the financial planning profession. The position of the FPA makes this very clear, even though it is treated with skepticism by both the media and industry network. Over the past 5-7 years there has been a great improvement in the professionalism of the industry. Of course there are still a reasonable number of advisers paid based on transactions (pieces of advice?), but more and more are focused on holistic, relationship based financial planning. There is little reward or recognition from the media regarding this move, which is a source of frustration amongst professional financial planners.
Instead of supporting the transition, the industry funds have chosen to take the opportunity of the GFC to attack the profession - this is unfortunate on a couple of fronts. The industry super network is not a part of the financial advice profession; they are part of the funds management industry. They often charge investment fees based on asset values alone – something they insist financial planners should not be permitted to do. They have avoided introducing data interfaces so that advisers can act and transact on their client’s behalf. Many funds still operate on a ‘crediting rate’ system that lacks any reasonable transparency regarding returns at a client level. Regarding the payment of agreed advice fees (which is specifically allowed under the proposed government changes); industry funds currently do not allow this form of remuneration for advisers.
Most certainly, their outright aggression towards financial planners is reason alone for advisers to be skeptical about their methods and motives in wanting to gain market share. A barking and snarling dog is hardly likely to elicit affection.
The clarion call that fees make up the only difference in fund returns ignores that one of their own fund’s conservative options (MTAA Super) managed to fall almost 20% in the 08/09 financial year. On a $20,000 superannuation balance, the fee would have been 1.05%. The one year figure in an alternative industry fund (REST Super Capital Stable option) for a similar portfolio produced a return of -2.78% at a fee of around 0.50%. A for profit fund (Colonial First State Employer Super Conservative option) produced a return of -2.24% for the same period net of fees which are between 1.05% and 1.65% depending on the employer plan. Remember, the for-profit fund fee includes an advice fee.
I guess the question is therefore – which industry fund is for you.
The latest attack suggesting over-selling of life insurance is surely a bad joke. The industry fund offering of nominal insurances through an employer sponsored plan does nothing to provide for those who choose to roll-over into a new fund based on the advertising that is conducted via the mass media. There is little warning that rolling out of an employer sponsored fund with life insurance into another fund would most likely cause the loss of the intrinsic insurance plan. An adviser that recommends this must provide a clear warning to the client regarding the loss of the insurance benefit. No such warning is required if the client chooses to ‘roll-over’ based on an advertising campaign.
Choosing any fund that is not your employer-sponsored plan will require a member to actually apply for life insurance – it is not granted automatically on voluntary joining. The vast majority of individuals simply do not choose to purchase life insurance without a prompt.
Typically, the amounts of cover provided within most employer sponsored plans are less than the average mortgage – let alone being able to provide for the real cost of death needs (for example replacing the income of a breadwinner). It is widely held that Australia is one of the most under-insured countries in the developed world. Additionally, the more common form of insurance within the industry network seems to be unit-based insurance where the amount insured reduces as you get older. This ignores the current trend to hold debt until much later in life. There is no doubt that the premiums may (but most certainly will not always) be lower in a group plan and a professional adviser would consider this in framing their recommendations. However, there are other factors involved such as estate options, continuation options, taxation considerations, binding nomination and policy quality. The legislative definition for a claim of TPD (Total and Permanent Disability) within super means it may be possible to claim on a policy outside of super, but not inside super, for the same condition.
Isolated extreme cases of over-selling should never be the reason to attack a whole profession. If there is a complaint, surely a dispute resolution process should be used. If commissions are the cause of this so-called problem, I wonder if any of the industry funds receive ‘commissions’ from insurance providers for their group plans? I am not sure there have been many formal complaints made of over-selling insurance (by the way, a problem easily resolved simply by reducing or cancelling a policy), but many lawyers have drilled into financial planners the need to make adequate recommendations for fear of being sued for ‘not meeting the client needs’
The provision of holistic, long-term advice involves helping clients to articulate their financial goals, analyzing their current strategies to identify gaps, making recommendations to fill those gaps in an efficient manner and then encouraging them to act on the recommendations. Once implemented, it is to review progress and provide dynamic adjustments to their strategies as their circumstances and the environment around them changes. How many times in the past 5 years have the superannuation rules changed?
The industry super network might be better served by engaging with the financial planning profession. If they want to increase their market share then surely they would benefit by improving relations with those that they send their clients to. Remember the general warning provided with all financial product providers (including Industry Funds) that before making a decision, investors should seek financial advice that takes into account their personal circumstances.
Financial planning as a profession is a work in progress where great steps have been taken over the past few years. The continued expansion of Australia’s Certified Financial Planner (CFP™) program – considered to be world’s best practice – should be recognized as a significant move in the right direction. Let’s not confuse a funds management marketing strategy as commentary on a profession’s development.
1. Future of Financial Advice Information Pack 26/4/2010 Minister for Financial Services, Superannuation and Corporate Law Pg 6
2. 2009 Annual Superannuation bulletin pg 6 APRA Feb 2010
3. Contributions growth at 3.5% pa and earnings at 5% current balance $1.07 trillion
4. Supernomics pg 8 Industry Super Network March 2010
5. ASIC website www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Example_SOA_guide.pdf/$file/ example_SOA_guide.pdf Accessed 30/3/2010
6. Supernomics pg 10 Industry Super Network March 2010
7. http://www.mtaasuper.com.au/fundperformance/2008-09-final/2008-09-super-ytd/ accessed 8/4/10
8. http://www.rest.com.au/getdoc/f8e92c0b-46e4-40b9-9d78-3bc0e66e7212/Performance.aspx accessed 8/4/10
9. From the Colonial First State Employer Super PDS dated 22nd March 2010
Further, they have released an internal research report – Supernomics – that suggests that competition should be outlawed as the continued use of higher fee super funds implies competition has failed. The reports, however, do not stand up to much scrutiny on a number of grounds.
The ISN suffers from a severe case of financial myopia. They seem to believe that superannuation is the source of the only significant financial decision that individuals need to make and further, that it should be seen in isolation from other financial decisions. Having worked as the executive manager of advice in a quasi-industry (not for profit) fund, my experience was that the demand for advice from superannuation members was simply not met by limited information about the features and benefits of the particular fund to which they belonged.
There was, and is, an absolute demand from people to link superannuation advice (how much, which investment, type of contribution, insurance inside or outside super) to mortgage and debt repayment levels, investments other than super, income protection and life insurance needs, education savings plans, cash flow management, estate planning, Centrelink planning and the myriad other issues that relate to their financial decision making. The true role of a professional financial planner is to provide an integrated approach to financial decision making. Treating any of these issues in isolation will always be tainted as transaction based financial advice – not planning.
The recently released ‘The Future of Financial Advice’ information pack (provided by the Hon. Chris Bowen MP) outlines the government’s plan to further regulate the financial advice industry. Most professional planners will welcome this as the recommendations are aligned with the professional association’s (FPA) approach.
An apparent unintended consequence of this report, however, is to further undermine the role of professional financial planners by suggesting that super funds should be able to provide strategic advice (transition to retirement), estate planning advice (advice regarding beneficiaries), welfare advice (advice regarding Centrelink) and even “retirement planning generally” . Intra-fund advice is generally provided over the phone or in a very limited interview situation where there is little time for a complete fact find. The scope of this advice is limited to the member’s super fund and cannot consider all of the issues regarding the financial circumstances of the client in a holistic manner.
The author welcomes the introduction of a fiduciary duty into law – it is a principle already ensconced within the Profession’s code of professional practice. Similarly, ASIC’s increased powers to deal with unscrupulous individuals and corporations are very welcome. Clearly, their lack of power was what allowed for the Storm Financial debacle – not an inability to detect unscrupulous behavior.
Passing more of the roles of financial planners to call-centre based offers of ‘advice’ is likely to do little in the way of creating actions. The ability to get clients ‘engaged’ is a key difference between those who use financial planners and those who do not.
Information from the APRA 2009 Annual Superannuation Bulletin indicated that average member balances from retail super and industry super fund were $18,400 and $16,600 respectively. Average ‘trail’ commissions on superannuation accounts are between 0.4% and 0.6% per annum mean that adviser revenue from these clients is in the order of $70 per annum. For this fee clients are entitled to contact their adviser and ask questions specifically about their own needs. Whether they do or not is surely their decision – the same decision to either leave the funds where they are or move them to a different super fund. Both of the above figures pale into insignificance when compared to SMSF average balances of more than $429,000. Clearly people are exercising their discretion to choose appropriate superannuation structures as their balances increase – and they are choosing neither industry nor retail funds.
Assuming that the percentage of future retail funds drops from the current 27% down to say, 20% over the next 15 years (given the growth in the SMSF sector), and assuming that the level of funds held in super grows to $2.3 trillion over this time , the $8.2 billion fee figure implies a 2% commission level. This is almost 4 times the current commission rate – and hard to reconcile with a reducing commission base. Maybe the authors of the reports have confused fund fees with commissions? The report’s authors assert that these fees may amount to $117billion over the next 15 years and that this money is ‘lost’ to the economy. Clearly these fees do not ‘evaporate’ from the economy but simply move around with the same multiplier effect on employment and consumption.
It is also interesting that the industry network reports imply there is a significant cost to members regarding final balances yet the average balance in retail funds is higher than the average balance in industry funds. Perhaps an adviser has personally encouraged their clients to make additional contributions for their long term benefit?
Industry network’s research indicates that at least two thirds of their members are either ignorant or apathetic regarding superannuation choices. This could perhaps be extrapolated past super fund choice to contribution level choice. Surely the level and type of contributions that individuals make is relevant to future wealth. Without some prompt (advice) to increase contributions, we are likely to maintain these very low average balances.
The Rice-Warner paper is reported to have identified a 125% increase in ‘pieces of advice’ over the next 15 years but this ‘extra’ work would only generate a 38% real increase in revenue per adviser. I find it difficult to extrapolate how this is of benefit to the financial planning industry. Are the report authors suggesting that advisers perform 125% more work for 38% more revenue? They also fail to explain that while the ‘work’ is real to an individual planner; the ‘revenue’ has an expense component and does not produce this increase in actual earnings.
Of more concern, however, is the concept of a ‘piece of advice’.
Clearly this conceptually fits with the industry funds view of advice; that all clients want is an answer to a simple question about their super – but it is far from the public’s expectation of comprehensive advice. The introduction of the ‘piece’ concept perhaps is at the heart of the misunderstanding that the industry network has regarding financial planning. A ‘piece of advice’ implies an answer to a specific question without due consideration to the person’s overall financial circumstances.
This is specifically defined within corporations law as ‘limited advice’ and must come with a warning attached that the advice ‘may be inappropriate to the client needs as their overall situation has not been considered’. Regulatory Guide 90 (RG90) identifies that ‘where the personal advice is based on incomplete or inaccurate information, a statement setting out the warning is required by s945B (s947B (2) (f)) and 947C (2) (g))’
The requirement for a warning suggests both the government and the regulator may, and should, have concern regarding the provision of such pieces of advice.
Naturally, not everyone wants or will seek out comprehensive advice, but the lack of financial literacy evident in the ‘Supernomics’ report surely indicates that most will need more than simple super advice.
There is a very clear and deliberate move away from commissions to agreed fees within the financial planning profession. The position of the FPA makes this very clear, even though it is treated with skepticism by both the media and industry network. Over the past 5-7 years there has been a great improvement in the professionalism of the industry. Of course there are still a reasonable number of advisers paid based on transactions (pieces of advice?), but more and more are focused on holistic, relationship based financial planning. There is little reward or recognition from the media regarding this move, which is a source of frustration amongst professional financial planners.
Instead of supporting the transition, the industry funds have chosen to take the opportunity of the GFC to attack the profession - this is unfortunate on a couple of fronts. The industry super network is not a part of the financial advice profession; they are part of the funds management industry. They often charge investment fees based on asset values alone – something they insist financial planners should not be permitted to do. They have avoided introducing data interfaces so that advisers can act and transact on their client’s behalf. Many funds still operate on a ‘crediting rate’ system that lacks any reasonable transparency regarding returns at a client level. Regarding the payment of agreed advice fees (which is specifically allowed under the proposed government changes); industry funds currently do not allow this form of remuneration for advisers.
Most certainly, their outright aggression towards financial planners is reason alone for advisers to be skeptical about their methods and motives in wanting to gain market share. A barking and snarling dog is hardly likely to elicit affection.
The clarion call that fees make up the only difference in fund returns ignores that one of their own fund’s conservative options (MTAA Super) managed to fall almost 20% in the 08/09 financial year. On a $20,000 superannuation balance, the fee would have been 1.05%. The one year figure in an alternative industry fund (REST Super Capital Stable option) for a similar portfolio produced a return of -2.78% at a fee of around 0.50%. A for profit fund (Colonial First State Employer Super Conservative option) produced a return of -2.24% for the same period net of fees which are between 1.05% and 1.65% depending on the employer plan. Remember, the for-profit fund fee includes an advice fee.
I guess the question is therefore – which industry fund is for you.
The latest attack suggesting over-selling of life insurance is surely a bad joke. The industry fund offering of nominal insurances through an employer sponsored plan does nothing to provide for those who choose to roll-over into a new fund based on the advertising that is conducted via the mass media. There is little warning that rolling out of an employer sponsored fund with life insurance into another fund would most likely cause the loss of the intrinsic insurance plan. An adviser that recommends this must provide a clear warning to the client regarding the loss of the insurance benefit. No such warning is required if the client chooses to ‘roll-over’ based on an advertising campaign.
Choosing any fund that is not your employer-sponsored plan will require a member to actually apply for life insurance – it is not granted automatically on voluntary joining. The vast majority of individuals simply do not choose to purchase life insurance without a prompt.
Typically, the amounts of cover provided within most employer sponsored plans are less than the average mortgage – let alone being able to provide for the real cost of death needs (for example replacing the income of a breadwinner). It is widely held that Australia is one of the most under-insured countries in the developed world. Additionally, the more common form of insurance within the industry network seems to be unit-based insurance where the amount insured reduces as you get older. This ignores the current trend to hold debt until much later in life. There is no doubt that the premiums may (but most certainly will not always) be lower in a group plan and a professional adviser would consider this in framing their recommendations. However, there are other factors involved such as estate options, continuation options, taxation considerations, binding nomination and policy quality. The legislative definition for a claim of TPD (Total and Permanent Disability) within super means it may be possible to claim on a policy outside of super, but not inside super, for the same condition.
Isolated extreme cases of over-selling should never be the reason to attack a whole profession. If there is a complaint, surely a dispute resolution process should be used. If commissions are the cause of this so-called problem, I wonder if any of the industry funds receive ‘commissions’ from insurance providers for their group plans? I am not sure there have been many formal complaints made of over-selling insurance (by the way, a problem easily resolved simply by reducing or cancelling a policy), but many lawyers have drilled into financial planners the need to make adequate recommendations for fear of being sued for ‘not meeting the client needs’
The provision of holistic, long-term advice involves helping clients to articulate their financial goals, analyzing their current strategies to identify gaps, making recommendations to fill those gaps in an efficient manner and then encouraging them to act on the recommendations. Once implemented, it is to review progress and provide dynamic adjustments to their strategies as their circumstances and the environment around them changes. How many times in the past 5 years have the superannuation rules changed?
The industry super network might be better served by engaging with the financial planning profession. If they want to increase their market share then surely they would benefit by improving relations with those that they send their clients to. Remember the general warning provided with all financial product providers (including Industry Funds) that before making a decision, investors should seek financial advice that takes into account their personal circumstances.
Financial planning as a profession is a work in progress where great steps have been taken over the past few years. The continued expansion of Australia’s Certified Financial Planner (CFP™) program – considered to be world’s best practice – should be recognized as a significant move in the right direction. Let’s not confuse a funds management marketing strategy as commentary on a profession’s development.
1. Future of Financial Advice Information Pack 26/4/2010 Minister for Financial Services, Superannuation and Corporate Law Pg 6
2. 2009 Annual Superannuation bulletin pg 6 APRA Feb 2010
3. Contributions growth at 3.5% pa and earnings at 5% current balance $1.07 trillion
4. Supernomics pg 8 Industry Super Network March 2010
5. ASIC website www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Example_SOA_guide.pdf/$file/ example_SOA_guide.pdf Accessed 30/3/2010
6. Supernomics pg 10 Industry Super Network March 2010
7. http://www.mtaasuper.com.au/fundperformance/2008-09-final/2008-09-super-ytd/ accessed 8/4/10
8. http://www.rest.com.au/getdoc/f8e92c0b-46e4-40b9-9d78-3bc0e66e7212/Performance.aspx accessed 8/4/10
9. From the Colonial First State Employer Super PDS dated 22nd March 2010
Hi Paul, Had the pleasure of your sage tutoring in 1999 when I switched from a boring accountant to a financial adviser. More than 10 years later I still regret the move. Are we talking fees, financial planning as a profession (really?), or legislating to make unethical operators ethical? The whole legislative regime is getting progressively worse - just as the Aust tax system have done, patches on patchwork. I raised a simple comment about clarity of fees in statements produced by platforms in a focus group recently. Comments from group is - it won't change. This could be symptomatic of the industry. Find the will, unclouded by conflicts of interest, raise the education standards and you will have your way. Who's going to overturn the applecart?
ReplyDeleteHi Anonymous - Thanks for the comment.
ReplyDeleteThere are good planners out there, but they are certainly in the minority. Hopefully we can work to make some practical changes to the industry from within, rather than constantly being told how to behave by others. I am just so sick of the constant focus on transaction based advice rather than proper financial planning...
I have been advising for the last 12 years and have seen a huge amount of reform and change within the financial planning industry.
ReplyDeleteOur industry is one of the most regulated industries in Australia and I hope the proposed changes recently released by the Hon. Chris Bowen MP don’t have an adverse affect on financial planners offering advice. I can’t help feel that we have to be very dynamic to maintain a profitable existence and it gets harder and more expensive each year to offer a high level of advice. Hopefully the changes will offer more correlation with industry funds and financial planners, though I haven’t seen anything to prove this point to date. Secondly I don’t think the average industry fund will advertising as heavily regarding their returns out performing. It was only a matter of time that their underlying assets exposed to private assets, infrastructure and alternative assets came unstuck. Chant West completed an article illustrating that the median performance (super) for a growth fund till the 31st March 2010 was:
Industry funds returned 18.2% compared to a Mastertrust was 25.8%. These are median returns and don’t even take into consideration advice that a client could have received which could offer more potential benefits. In the end will it cost the client more money or actually save them money?