Fiona Reynolds, Chief Executive Officer of the AIST, shares her view on advisor commissions.
There will be some very sober figures to digest in the coming months as millions of super fund members across Australia receive their annual member statements. The continuing downturn in investment markets both here and overseas means just about every super fund in the country has recorded a second (financial) year of negative returns. While no one would celebrate a negative return, it should be some comfort for members of not-for-profit superannuation funds, that – on average – these funds significantly outperform their retail rivals both in good times and bad. And one of the key factors in this out performance – in addition to good governance and differing investment strategies – are the commissions paid to financial advisors by members of retail funds. Long regarded by the not-for-profit super sector as a scourge on our industry, advisor commissions are now under fire from the very Industry bodies that have spent years staunchly defending their role in the sale of superannuation products.
The Industry agrees
Earlier this year, the Financial Planning Association, urged its members to abandon commissions and adopt a fee-based model by 2012. This was followed by the Investment and Financial Services Association’s (IFSA) announcement of a draft charter to roll back commissions in favour of a fee-for-service model for the sale of super products. Industry estimates are that commission paid to financial advisors cost consumers an estimated $2.5 billion last year, $863 million of which was on compulsory super contributions. Commissions not only hide the cost of advice to the consumer they drive bad behaviour. Many investors of retail super funds have spent years either paying for advice they never received or, worse, paying for compromised advice. IFSA’s draft charter proposes that the current upfront and ongoing trailing commissions planners receive for recommending retail super funds be replaced by a member advice fee. This fee will be agreed upfront by the planner and the investor and paid either inside or outside the super account. Getting rid of trailing commissions is certainly a welcome move. But the draft charter falls well short of addressing the wider conflict of interests embedded in the financial advisory Industry.
Commissions are only half the problem.
If we just simply replace a commission with a fee, without removing the inherent conflicts of interest that are built into the relationships between many financial institutions and the financial planners they employ, then little will be achieved. No one can serve two masters. Unless we stop payment between financial advisors and financial institutions or at the very least make that payment more transparent consumers cannot be assured of getting impartial advice. The draft charter also falls short when it comes to members of corporate master trusts. Under the new regime, advice fees applying to corporate super arrangements are agreed between the employer and the corporate plan advisors. Members can only “opt out” of the fees after the initial payment period. But there is no detail on how long this “initial” period may be and the question remains whether there is any justification for paying the “initial” fee in the first place.
And what of the millions of existing investors in retail funds?
As there is no intention to apply the charter retrospectively, many retail fund members will continue to pay trailing commissions for many more years to come, even if they no longer derive benefit from the advisor receiving the commission. Equally concerning is the limited nature of the draft charter, which doesn’t apply to all financial products. If there is widespread acknowledgment that commissions are an unnecessary evil, then why limit their removal to super products? The move by both IFSA and the FPA to put commissions under scrutiny follows intense pressure from the not-for-profit superannuation sector, in particular Industry Super Funds. Over more than a decade IFS and, in more recent times, Industry Super Network have waged a very public campaign through the enormously-successful Compare-The-Pair advertisements and other media campaigns. More recently, the collapse of Storm Financial as well as several managed investments schemes that paid generous commissions to financial advisors, has seen consumer groups like Choice join the opposition to this insidious practice.
Government focus
The Government also has commissions in its sights, having made no secret of its desire to reduce costs for super fund members. The former Minister for Superannuation and Corporate Law, Senator Nick Sherry, has long been a key driver for reform and he leaves the Industry having instigated several important reviews and inquiries in this area. It is widely hoped among those in the not-for profit sector that the Government’s Cooper Review of the superannuation Industry, in particular, will deliver on its promise to “ruffle feathers” and recommend sweeping regulatory – and possibly legislative changes - affecting the commissions paid on retail super funds. For when it comes to sales commissions, feathers will need to fly. While IFSA’s draft charter is a welcome step in the right direction, it is unlikely to bring about significant change without robust regulatory backing and a government that is willing to push both the Retail fund Industry and the financial planners that serve it a lot further along the reform path than they are currently prepared to travel.
Only then will members of retail super funds be confident that any financial advice they receive truly serves their best interests.
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