It’s been a long, long fall for the retail superannuation industry and financial planners.
In 2005 they were triumphant. A re-elected Howard Government — which had never hidden its antipathy toward industry superannuation and particularly the involvement of trade unions — had overseen the introduction of superannuation choice, designed to encourage the shift of compulsory superannuation contributions away from industry super toward poorer-performing retail funds owned by the big banks, to the benefit of financial planners earning commissions from the funds they steered clients into. The Howard Government had been pushing for superannuation choice since 1996, but had been stymied by the Senate. In the end, they didn’t need the Senate majority handed to them by Mark Latham: the Democrats (remember them?) buckled and handed the Government victory in 2004.
Scroll forward five years and the financial planning industry is under fire from multiple fronts; the Government is reviewing superannuation and ASIC, normally the country’s most timid regulator, is calling for bans on commissions and a slew of tighter regulatory requirements to end conflicted advice and impose greater responsibilities on financial planners. Some are predicting doom for the financial planning industry, which is itself split over the issue.
ASIC’s call for an end to commissions and a fiduciary duty for financial planners is vindication for the Industry Super Network and consumer advocates like Choice, who have been waging a lonely battle against commissions for years.
Commissions represent a goldmine for financial planners, who according to ASIC rely on them for more than 60% of revenue. In 2008, despite the financial crisis, financial planners received $1.4b in commissions — including a staggering $546m from compulsory Superannuation Guarantee contributions. The extent to which financial planning advice is warped by commissions was shown in 2007 when a Rainmaker survey showed none of the top thirty financial adviser groups had industry super funds, which have consistently and significantly out-performed retail super funds, on their recommended product lists. ASIC specifically mentioned the failure of advisers to recommend industry funds in its call for reform.
Ultimately it took the financial crisis and the greed of a small minority of financial planners to draw attention to a system seemingly structured to encourage the rip off clients, in the Westpoint and Storm debacles.
The Investment and Financial Services Association understood the implications of the stories emerging from Storm and other financial disasters. So did the Financial Planning Association. Both, to their credit, announced earlier this year a transition away from commission-based remuneration to fees, although the moves were more than a little half-baked. Just how half-baked is revealed by the FPA’s own response to ASIC. FPA CEO Jo-Anne Bloch complained that a move to fee-only advice would “present a potentially detrimental step economically that would end up in significant job losses, enormous restructuring, and even further loss of confidence in financial advice”.
Even so, the FPA and IFSA copped criticism from financial planning industry dinosaurs convinced they should still be allowed to give conflicted advice and gouge clients with trail commissions.
Just how “detrimental” economically the move to fee-only advice would be can be fairly accurately gauged. Modelling done earlier this year by SuperRatings showed that, even assuming equal performance by industry and retail funds, fees rather than commissions meant average punters would be over $80,000 (in current dollars) better off over a forty-year contribution period.
A separate study showed that the cost to Australia’s national savings in both lower fees and forgone higher investment returns would total around $250 billion in today’s money, over the period 1997-2020.
Implementation of ASIC’s proposals would start to claw a significant proportion of this loss back from big bank-controlled funds and financial planners and transfer it to ordinary punters for their retirement — with flow-on savings to the Budget through lower pension take-up in the future.
The removal of the blight of commissions and other incentives that skew financial advice is well overdue. And both superannuation contributors and taxpayers will benefit significantly in the long run.
Financial planners can see the writing on the wall. When my partner & I engaged a planner to provide services, the up-front contract we were asked to sign specified a flat fee of $x, plus ongoing commissions of %y. We said we would sign, provided the commissions clause was deleted. The planner agreed immediately, no questions asked.
Try it – you might be surprised.