The Moran Principle

ASIC fails shadow shopping - again!

2012-01-24T15:49:00.000-08:00

Talk about the pot calling the kettle black. ASIC has trotted out its regular review of the 'quality of advice' survey by randomly selecting 64 pieces of advice from around Australia - and extrapolating the results to suggest that Advice is not very professional.

Out of the 64 advisers 'checked' (out of a pool of authorised representatives of 15,000), they are able to judge just 2 as 'good'.

My issue with this is that the judgment is based purely on the written document and does not provide any guidance as to the real advice offered. ASIC has yet to come up with a suitable methodology of evaluating financial advice and so we seem stuck with this flawed approach. We don't see ASIC broadcasting that 1/3 of their sample of written plans needed to be improved - we see a headline that 1/3 of financial advice is poor. Perhaps under the new limited advice regime, where no written plan is required for many of the guinea pigs sent out to evaluate, we will score far better!

Speaking of these 'clients'; will ASIC also publish the scope of the advice requested by each of these clients. Further, will it also identify the relative value of the clients and how much they were willing to pay for advice.

Notwithstanding this, I often get disappointed with the quality of written advice within our field - there are many who still operate in an industry rather than a profession. However, the fact of life is that we do live in a world where we are expected to provide professional advice irrespective of the ability of the clients to pay for it.

I hate to use this analogy, but if we were doctors offering a level of service for a fee that had to be paid for by the patients (as in private practice), if you couldn't pay, you would get a different service or no service at all. Does this mean doctors are conflicted?

ASIC is still not able to tell the public what constitutes good advice or how to find it - surely this is a failure on their behalf.
Further to this, we have seen reports in the press about the shadow shopping exercise today (25/01/12) yet the report is not available on the ASIC website - and as such is not open to any scrutiny.
Anyway...what do you think?

Industry funds agenda exposed - world domination

2011-06-18T15:26:00.000-07:00

This week, an interview in Investor Daily helped to shed some light on the agenda of the industry super network. The head of the organisation clearly indicated that once they have sorted out financial planners and FOFA, they will be coming after self managed super funds.
"I tell you one thing: once we get this commission thing [FOFA] out of the way, we are coming after self-managed super, not because we want to burden it in any way, but we want them to be on the same footing as industry funds," is the quote used in the article and attributed to Garry Weaven. (see http://www.investordaily.com.au/11846.htm )
This is of concern on so many levels I hardly know where to start - but here goes...
Mr. Weaven clearly thinks that "this commission thing" is his problem to solve - not the regulator or government. Since when does one product provider in the market get to increase their market powers by changing (setting) government policy to the detriment of other providers. Oh, sorry, forgot about the legislative bias that already exists through the default industrial awards system!
Obviously the 'rivers of money' Industry Super Network (ISN) pay for advertising is not quite enough to change the public's view that Financial Planners actually do some good.
Do they also think that FOFA is just about commissions? Industry funds have never paid commissions to advisers (well except their asset advisers and fund managers...) and look at the appalling levels of insurance taken out by the average fund member. Of course, perhaps they think that insurance is really quite unimportant and that they will look after their members when things go bad for them. It will be interesting to see the first person to sue a fund because they "rolled their money over to a cheaper fund that doesn't pay commissions" only to find that they have lost or reduced their insurance.
Then despite the clean bill of health given to the SMSF sector in the much quoted Cooper review - Weaven thinks that they will be next in the firing line. I can see the advertising campaign now: Industry super - the super that takes away all control from members so you don't make the mistake of choosing your own investment path - after all, we know best. Fiona Reynolds (CEO of industry super funds lobby group AIST) then discusses the 'blatant' recommendation by her accountant to set up a SMSF. Perhaps as part of the new financial police she should report this breach of Corporations law by naming her alleged shonky accountant.
I can't help but think of the Dr. Evil line in Austin Powers where he is discussing taking over the world with his "laser" and wants to ransom the world for "ONE BILLION DOLLARS". Mr. Weaven thinks that the billion dollars or so that Financial Planners earn is a really, really big deal. Until of course you compare it to the $1,400 billion dollars currently sitting in super. The percentages you can work out.
What we get over and over again is the non-reviewed, so-called research that is trotted out by ISN 'proving' the benefits of how they see the world. This research is not open to scrutiny as it is never actually released. Rather, they issue press releases that are accepted without question as to methodology...but that may be another topic!
With so much capital wealth in Australia tied to superannuation, the ability to influence our country by controlling capital is a real risk. In the same way that the markets would stop functioning if everyone only used indexed investing, when investment decisions are controlled by so few people we risk the same outcome.

Love to hear your thoughts.

Which way are you going to go with the FPA proposals?

2011-02-12T17:39:00.000-08:00

Hi - long time no speak...
I was wondering which way people were going to go regarding the FPA proposals to limit memberships to CFP's or AFP's (those who are enrolled in the CFP program)?
I guess you will get some idea of my views on this, but I am worried that there will be a lot of vested interest in maintaining the status quo. After all, when a body such as the FPA transitions from an industry body to a professional association it carries a lot of baggage.
There surely can be no doubt that something has to be done about our reputations as financial planners and advisers, and the FPA is the logical body to be at the front of this. However, the lack of clear action in the past has left many wondering if they are up to it. My position is that until the proposed changes are made, the FPA would not have the credibility to be able to actively lobby our position.
Most of us know that most of our clients like to deal with us. In fact, most are strong advocates for us when anyone asks. This it at odds with the public perception of planners by people who have had no experience, or who have had a negative experience. We also know that when the s%#t hits the fan, no matter what role the perpetrator has (accountant, broker, real estate agent), they all suddenly become financial advisers.
The FPA aims to differentiate between the generic terms financial adviser/planner by promoting the designation CFP as a sign of professionalism. This must be a good thing for the professionals amongst of us as the public and media wil be forced to ask 'were they a CFP?'. The FPA has been compiling a lot of evidence that shows the level of complaints and problems with CFP's are only a small fraction of those by non-CFP's. This will be used frequently by the association. If this occurs, the arguments about remuneration styles will become less important. Currently, anyone who charges their clients via 'commissions' is being vilified irrespective of their level of professional behaviour.
If you haven't completed your CFP - for whatever reason - now is looking like a very good time.
On the other hand, maybe you don't believe the FPA is on the right track and that they should remain embedded with the fund managers and large dealer groups. Perhaps you see nothing wrong with being closely aligned to a product provider, or indeed, being a part of a product distribution industry.
Most certainly the AFA is waiting in the wings to try to poach advisers and planners who are disillusioned with the FPA changes. I just have a real problem with an organisation that has completely tied itself to a remuneration model that sees nothing at all wrong with commissions - irrespective of their size and value. This sounds a bit like the advisers who actively seek out the dealer groups with the lowest level of compliance...
If this is the case, I would love to hear your comments.
Talk soon (hopefully)
Paul

The Future of Financial Advice

2010-07-01T22:30:00.000-07:00

I am a bit furious at the moment.

On the 30th June 2010 I attended the Department of Treasury’s Melbourne briefing on the “Future of Financial Advice” (www.futureofadvice.treasury.gov.au). I was hoping to hear about Treasury’s view on the future of our industry/profession. I took a couple of hours out of my day on the last day of the financial year to attend because I am committed to the development of my profession.

At the table in front of a group of about 100 interested people sat 3 Treasury officials and one ASIC representative. I have no issue with any of these representatives (although I must say that the ASIC rep did not open her mouth and seemed less than interested) – my problem is that the entire session was overtaken by life insurance salespeople panicked by the prospect of a ban on commissions.

I use the term life insurance salespeople, rather than financial adviser/planner, on purpose as this is the only way that these people could be characterized. It was an embarrassment that the government bureaucrats given the responsibility of influencing the future direction of my profession had to listen to the rubbish being spoken by these dinosaurs.

Despite the official’s continued explanation that there is currently no discussion of a ban on insurance commissions until at least 2012, attendee’s had to sit and listen to comment’s like the following:
“This year marks 50 years me of selling life insurance”, “I’ve been in this industry for 40 years”, “let me tell you a story about what a great man I am because I sold someone a life policy who died”, “you just don’t understand”, “commissions are a good thing because I wouldn’t sell any life insurance without them”.

You get my drift!

I am sorry to say that I lost it part way through the presentation. After listening to the first 40 minutes of a one hour Q & A and having only 3 of these dinosaurs ask questions from the front row (no hands up – just yell out your opinion), I respectfully asked the officials if they could at least get to some people who patiently held up their hands to ask questions. I think my exact words were “WILL YOU PLEASE SHUT-UP!”

My point here is that if you have been operating in the industry for 50 years – you are hardly going to be a part of the future of the profession. I am happy to respect the pioneering work of the life insurance advisers – they are clearly the originators or our profession. But surely people can understand that things have moved on.

I guess I tend to argue that there is a difference between someone who sees themselves as a professional sales-person and someone who sees themselves as a professional financial planner.

Over the next couple of years, the profession will have moved way beyond RG146 as a minimum qualification. The CFP mark will become the qualification and designation that the public comes to expect as the rightful minimum. This qualification currently requires a degree (albeit in anything) before applying to enter the program. In a couple of years, there will be specific degree pre-requisites candidates will be required to complete before you can apply for CFP status.

This is a long way from the concept of authorized representative, which originated in an environment where product manufacturers ‘qualified’ you with product training.

A modern day professional financial planner needs to be able to converse with clients authoritatively in the areas of superannuation, personal insurances, cash-flow management, taxation, estate planning and investment strategy. Most importantly, a professional needs to be able to link client goals to appropriate recommendations. More and more, this is separate from specific product based recommendations. Indeed, we have all seen the commoditization of many products in the market place. Is there any real difference between the various wrap platforms or life policies? Sure they all have little variances and nuances, but in principle these differences get less and less relative.

I have no problem, with someone who wishes to specialise in only certain aspects of financial planning – surely this is an inevitable professional development – but a specialist is someone who first learns to be a competent generalist, and then moves on. Can you imagine going to a cardiac specialist who said – “no, actually I know very little about the circulatory system – I’m just a heart man”. Remember our medical system is based on a generalist having to evaluate a client need prior to a referral being made. This is not too far removed from where our professional future is headed.

We are not too far from the day when we will all be expected to be CFP’s, and then some of us will become estate planning specialists, or life risk specialists, or aged care specialists, or investment specialists.

My message should be clear by now – if you are not currently enrolled in, or have completed, the CFP – you risk being left behind as our industry moves towards a professional future.

Anyway, I am keen to hear your feedback on this - positive or negative.

Professionals don't get objections

2010-05-18T00:29:00.000-07:00

Hi All,

I have linked an article I found recently on the Financial Services Journal which succinctly comments on many of the issues we all face as we develop our industry into a profession.

His comments on home visits are particularly relevent - how many of us have made after hours appointments only to find the 'client' is a 'tyre-kicker'.

I hope you find this interesting...

http://www.fsonline.com/fsj/articles/110108OHara.shtml

All the best,

Paul

Financial Planning education must go back to the future

2010-05-04T05:38:00.000-07:00

There are four educational cornerstones that are unique to Financial Planning. The first is investment planning – not investment selection as many think, but the matching of appropriate investments and savings strategies to match a client goal or goals. Secondly, increasing complexity in the area of superannuation and retirement income streams (at odds with our previous Treasurer’s view…) has meant that this has become an area of specialist knowledge. Thirdly, financial planning emerged from the distribution of life insurance products and advising on appropriate personal insurances has always been a natural area of expertise. Lastly, the demography of our client base places us at the forefront of dealing with retirement, and therefore Social Security, issues. This is rapidly expanding into assistance with aged care advice as older Australians are faced with a complex system of means tests. For this reason, Social Security and Aged Care becomes the fourth cornerstone.

The ancillary areas of taxation and estate planning, while clearly the expert areas of accounting professionals and legal professionals respectively, need to integrate seamlessly into the overall client strategy. Debt management has also become an important component of personal financial management as we tend to hold debt for much longer than previous generations.

Competent financial planners are able to establish detailed client goals, and co-ordinate each of these into an effective financial plan and cash flow and asset model that meets their client’s long term needs. They must then manage the future activities of the client so that they keep to the plan.

The core knowledge provided through formal education is greatly supplemented with employment based training. This is why so many of today’s experienced financial planners started their careers with one of the major banks. The banks did, and still do, provide excellent technical departments available to assist inexperienced advisers with the many strategic options available to clients. They also provide a source of new clients. However, the payoff for them is that products sold will naturally be skewed towards their own company’s product range. This is, of course, exactly the same as meeting with an adviser from a superannuation fund (either not-for-profit or for-profit). They are hardly going to recommend an alternative provider’s product.

The failure of credible financial planning in the retail banking system (in the eyes of the community at least) is that there has been far too much reliance on attracting new business for an up-front commission, and very little emphasis placed on the on-going relationship between a planner and their client. Where the emphasis is different, both clients and planners seem to be happy.

Similarly, superannuation funds that offer financial advice cannot possibly provide the long term relationship required for true financial planning – consider the mathematics of 400,000 members and 20 advisers. Both are examples of transactional based financial advice – not financial planning. The true value in financial planning comes from the on-going relationship and advice that is provided over many years. Helping clients to anticipate life events and plan for them, as well as dealing with the unexpected, is our raison d’etre. When people have only experienced transactional based advice it is hardly surprising that they see little value in our profession, and see us as little more than part of a product distribution network.

It is unfortunate that many new graduates from financial planning courses are not skilled in all of the foundation areas of financial planning. Indeed, courses can be completed without developing a working knowledge of personal insurances, social security and aged care and a minimal level of knowledge regarding superannuation.

We are being let down by our educators – including university educators – who have yet to come to terms with the development of Financial Planning as a stand-alone specialization/profession. In the main, we have university education for financial planners that sits somewhere between the finance faculty, accounting faculty and economics faculty. With some exceptions we therefore have a system that either cobbles together courses based on existing modules from their existing faculties, or uses lecturers to teach outside of their expertise. Perhaps we have both. The real problem with this is that the end result is education based on (often incorrect) perceptions of what financial planning is about. The concept of the camel being a horse designed by a committee springs to mind. It is imperative that the industry demands more from our tertiary institutions – from both an educational, as well as a research perspective. We need more Australian data regarding personal financial benchmarking and factors that affect our population.

We also need the acceptance by faculty heads that a recognized body of knowledge needs to be developed for our industry/profession. In short, we need research and education not developed for the funds management and broking industry, but rather for financial planners. At the 2009 FPA national conference there were 33 sessions provided and exactly no academic papers presented.

The introduction of a minimum education standard for financial advisers by ASIC (Policy Statement 146, and later Regulatory Guide 146) created a plethora of providers eager to develop courses that would meet these minimum standards. Almost overnight, educational standards began to reduce as courses were offered at lower and lower standards (but which ‘met’ the minimum). This has contributed to the public’s perception that a qualification in financial planning means little. The promotion of the higher standard Certified Financial Planner designation is moving towards restoring a sense of professionalism amongst financial planners. The current work by the FPA in enhancing this qualification and developing higher education standards is to be applauded.

The attraction of providing education programs by all aforementioned providers is the demand for education in this field. There are many people who would like to move into financial planning as a profession and need education. Indeed, existing practitioners are hungry for further education if it is of good quality and not simply a re-hash of old material.

There are gaps in the education of new financial planners, particularly (but not exclusively) around behavioural finance and marketing. There could be many reasons for this, but in part may be the result of the industry being fairly immature. This immaturity manifests in a very large number of small practices who find it difficult to bring new practitioners into the profession.

While there are some, we do not have many large practices that can afford to absorb the costs of hiring young planners without a client base (income source) and with as yet unproven skills at attaining future clients. One of the reasons for the lack of large practices is the availability of a corporate clientele. Large accounting and legal firms generate significant incomes from large corporations with the means and needs for their services. Financial Planning is almost by definition personally focused. Without the revenue from large corporations, necessarily smaller firms will be the norm.

The problem of employing 'new' planners is, however, only in part related to formal education - the real issue is an ability to develop a client base. Most experienced planners had to go out and generate opportunities, then convert them to clients. Many new advisers who have completed the technical component of their education think this conversion is about ‘product flogging’. They make this mistake at the risk of a career in financial planning. If they believe that this compromises good advice (many do) - then they are very wrong. Instead understand that an individual’s success as a future financial planner is about being able to 'sell' their advice to a client.

Clearly, though, if you are 'selling' a financial product specifically for a commission (as per the ASIC definition), you are not behaving like a financial planner (FPA and CFP definition). If, however, you are able to sit with clients and 'sell' your skills as a communicator, strategist and goals-based thinker - you will be successful. But what is required first and foremost is an ability to get in front of clients.

As a separate issue, where the regulator is only able to ‘regulate’ based on financial product sales, we will always have public confusion regarding quality advice. We currently have a regulatory framework that provides for only compliant (good) advice or non-compliant (bad) advice. The differentiation is unrecognizable to members of the public as it is based on a disclosure regime where the emphasis is on ‘documentation correctness’ and not quality, appropriate strategic advice that is goals based.

The push for a professional standards board is long overdue, but must be functionally separate from both the industry associations and the regulator. A professional standards board would be able to identify good advice from bad advice; not simply based on completing paperwork in the correct manner, but also by looking at the likely client outcomes and ensuring that the recommendations were appropriate for the achievement of client goals as well as the client’s tolerance for both investment risk and liquidity. It is extremely disappointing that the recently announced overhaul of the industry by the Hon. Chris Bowen MP specifically denied the need for such a board.

A successful financial planner is technically competent, but also has the networking and interpersonal skills to actually build a true client base. This is no different to lawyers, accountants and others who consider they work in a profession. Clearly the industry needs to mature and perhaps consolidate to be able to facilitate ‘new blood’ becoming practitioners, but formal education must focus on the foundations of our profession.

Industry super network’s myopic view on Financial Planning not helping anyone

2010-04-27T18:34:00.000-07:00

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

Welcome to The Moran Principle

2010-04-27T05:02:00.000-07:00

Hi there, this blog is a series of short essays relating to Financial Planning for you to consider and comment on. With the huge changes that are going on within our industry at present, I thought this would be an appropriate means to get some dialogue going. It doesn't seem that many in the media are interested in this - let's see how it goes.