ISN's financial planning research raises more questions than answers

The Industry Super Network has again used research it commissioned from Rice Warner to substantiate its arguments on opt-in but, as Chris Kennedy reports, many of the Rice Warner findings appear to fall well short of being truly representative assessments.

The Industry Super Network (ISN) recently re-released a study by Rice Warner Actuaries, and ISN chief executive David Whiteley is holding it up as proof that consumers need opt-in to be introduced to protect them from trailing commissions and/or asset-based remuneration.

The planning industry has responded by suggesting that the study is flawed, and that its conclusions are unrelated to its findings.

The study was commissioned by the ISN, and uses case studies from Industry Funds Financial Planning (IFFP), which along with the ISN is a division of Industry Fund Services.

The study compares the cost of advice provided by planners at IFFP to the same advice provided by a retail super fund planner, using retail superannuation products and asset-based remuneration.

The five real-life case studies used in the analysis were provided by ISN stablemate IFFP. In each scenario IFFP charged on a fee-for-service basis and the retail advice was indexed at 1.95 per cent per annum to account for ongoing product and advice costs. It was assumed in each case that investment performance would be identical prior to the deduction of fees. Unsurprisingly, in each case the industry fund model comes out a long way in front.

In the most extreme case, a 46-year-old man who makes $75,000 per year wishes to retire at 55. He does not own his home but co-owns two negatively geared investment properties with his sister. To meet his goals the IFFP planner identifies him as an aggressive investor, recommends he salary sacrifice $18,000 per year up until his retirement, and make a once-off non-concessional contribution of $112. The advice is based on his retirement expectations and does not take into account his gearing obligations in either case.

The estimated retail cost of $4,887 results from applying an asset-based fee on the entire portfolio for nine years and is almost 18 times the one-off $275 fee charged by the IFFP planner.

This is the statistic Whiteley is relying on when claiming that asset-based payments result in consumers paying up to 18 more times for advice.

The Rice Warner report openly states that it “does not evaluate the quality of the advice provided, nor the products recommended or selected to implement the advice”.

It also states that “while there are other elements of value obtained from all financial advice such as simplicity or peace of mind, these qualitative elements were outside the scope for measurement to be included in the model used”.

The report is also open about the fact that only simple advice is considered, and factors such as integration with business financial plans, complex family trust and estate matters, gearing, and investment instruments outside the superannuation arena are not considered.

Report author and Rice Warner director Richard Weatherhead told Money Management that his brief was not to consider the full range of possible advice circumstances, just to compare some typical IFFP advice outcomes against what might have occurred if the client had sought advice from an external adviser. The brief was also to assume advice outcomes would be the same in each scenario.

Weatherhead added that there is no evidence to suggest retail funds perform better in terms of investments and it would be hard to argue that the quality of advice is better in one segment than another.

Weatherhead also points out that there are retail super products, such as BT’s Super For Life, that would compare favourably in this study – a point conveniently and repeatedly ignored by Whiteley.

Given the list of exclusions, the parameters leave the possibility of only one outcome. Essentially the report proves that if you have two identical portfolios and take ongoing fees from one but not the other, the first portfolio will underperform.

The ISN press release states that opt-in will make advice up to 17 times cheaper – presumably by eliminating cases such as the hypothetical one outlined above.

This highly tenuous claim relies on the logic that once-off advice provided under limited advice by an industry super fund planner is always going to be directly equivalent, in quality and outcome over the longer term, to that provided within a retail super fund charging an ongoing fee. It assumes these clients will receive no ongoing service and that they will never elect to opt-out of such a payment structure unless prompted to by an opt-in provision.

Whiteley told Money Management that he was confident the research stood up and that as a large organisation operating on a fee-for-service basis, IFFP serves as a suitable proxy as a fee-for-service advice provider.

Whiteley said it was uncontested that many clients were still paying commissions without receiving advice and the report highlights the difference between someone paying for advice on a genuine fee-for-service basis with someone paying an asset-based fee.

The planning industry has expressed concern that the ISN has commissioned this research, placed its own strict parameters on what is being examined, and then used it to justify its argument while glossing over the exclusions. Whiteley argues that all the information is publicly available in the report, although it does not appear in press releases.

If there were evidence that these types of examples were actually occurring in a retail super fund scenario, and that the clients were unaware of the fees they were paying despite having the option of opting out, and these same consumers would elect not to opt-in if they were prompted to on a regular basis, that would constitute a coherent argument for opt-in.

But to claim that the industry needs opt-in because ongoing fees add up to more than a once-off payment draws a dangerously long bow for an organisation that tasks itself with representing millions of consumers in negotiations with the Government.