The trouble with industry super funds
There are several reasons why many financial planners avoid recommending industry super funds. Cameron Darrow outlines a few.
There does not appear to be any meaningful ‘thawing’ in the relationship between the industry super funds and financial planners.
The most obvious manifestation of this standoff is the prolific industry super fund advertising campaign promoting the central message that they “do not pay commissions to financial planners”.
The fee differential is then projected over the lifetime of typical superannuation fund members to supposedly represent the benefit that an industry super fund member stands to gain.
This advertising also incorrectly promotes a perception that financial planners deal only with superannuation matters.
The key assumption of the campaign is that financial planners charge fees but do not add any long-term value to a client’s portfolio or financial position. I am not aware of any research that supports this assertion.
Ironically, I have personally seen a disclosure in a statement of advice (SOA) produced by an industry super fund that acknowledges the payment of asset-based bonuses to their financial planners.
There are also other industry super fund websites that offer the opportunity for their members to pay for their SOA directly from their super (which are arguably both forms of commission too).
This highlights the hypocrisy of the advertising campaign and does nothing to encourage professional financial planners to engage with the industry super fund sector for the superannuation component of their financial plan.
The industry super fund movement has focused the debate on the commissions issue and claims that financial planners do not recommend industry funds to their clients because commissions are not (generally) payable.
I believe that they are missing the real point.
The financial planning industry is increasingly moving away from commissions and will continue to do so as the Future of Financial Advice reforms unfold.
From my perspective, there are some very important reasons why industry super funds are generally a poor option for my clients.
Industry super funds do not generally provide a reporting capability for financial planners to cost-effectively manage client portfolios.
If I had a large number of clients in an industry super fund, I would have to ask each client to give me their member log-in details and log in separately for each client query/report.
This is time-inefficient compared with state-of-the-art platforms that enable reports to be run across a client base seeking to identify clients with specific characteristics or requirements.
This encompasses both superannuation and non-superannuation assets, which are equally important.
In many cases, industry super fund websites do not provide ready access to important taxation component information (for tax and estate planning) and Centrelink income schedule reports.
This would require phone calls to call centres on behalf of clients to seek the required information.
The additional time it would take to source the client information would inevitably raise the cost of providing ongoing financial advice (which could undermine much or all of the cost savings from using an industry super fund in the first place).
Many industry super funds only offer a very restricted, streamlined investment menu under the assumption that most members will direct their capital into one or two diversified funds (a ‘one size fits all’ approach).
However, this is not how financial planners manage client capital. Most planners assess their clients’ risk profile and personal objectives before proposing a portfolio of assets tailored to suit them.
These portfolios may include specific tilts into specialist sectors such as local smaller companies, global smaller companies, emerging markets funds, resources funds, geared funds and, at the other end of the spectrum, higher-yielding defensive assets such as term deposits.
The capacity for this level of portfolio management is beyond the scope of most industry super funds.
A related investment issue is the fact that many industry super funds provide poor visibility of the underlying assets within their diversified funds.
Financial planners have a legal obligation to understand the nature of the investments that they recommend for clients (particularly when building portfolios).
We cannot take a simple ‘leap of faith’ that many of the unlisted assets (including private equity and hedge fund investments) are appropriate for all clients.
The extent of the unlisted assets was evident when industry super funds dominated the performance ratings in 2008, deserted them in 2009 and stormed back to the top in 2011.
This is not about superior returns but symptomatic of only infrequently revaluing assets when the market values are changing significantly.
It also raises the ethical question for industry super funds of accepting contributions from their members at prices knowingly overvalued, prior to significant revaluations.
Some industry super funds have poor fee transparency.
Published research contends that some industry super funds incur greater costs than they openly charge their members in management fees, with the remaining costs being garnished from fund earnings (the funding of the extensive prime time television advertising campaign is a case in point).
This also makes it difficult for financial planners to accurately meet stringent fee disclosure requirements.
Industry super funds have been keen to promote ‘intra-fund’ and ‘scaled advice’ so that their staff can look after their members without involving independent financial planners.
Intra-fund advice is limited and by definition does not take into account all of a client’s financial circumstances and needs.
It also does not consider investment options not offered by the superannuation fund, and therefore could be criticised as being designed essentially to enable a superannuation fund to maintain existing assets.
How this measures up to best interests advice is unclear.
Simplistic, single-issue advice or scaled advice using a low frills industry super fund platform will only appeal to a limited demographic within the financial planning market that may be apprehensive about paying the fees for more holistic advice.
These are often the very people who most need comprehensive advice, yet scaled advice on a single issue like rolling superannuation into an income stream may not pick up important broader planning issues such as:
- Centrelink eligibility
- estate planning strategies
- debt reduction
- mortgage planning
- gearing
- cashflow
- risk planning, and
- lifestyle issues.
Many of the people who have breached superannuation contributions caps and received harsh penalties have not had financial planners guiding them (our practice has prevented many clients from inadvertently making this mistake).
If industry super fund members accidentally breach these caps, then cheaper management fees can be a poor compensation for the penalties that can apply.
Rather than criticising financial planners for not using them, industry super funds’ focus should be on building the functionality that assists financial planners to provide effective services to their superannuation clients.
Offering cheap, no-frills superannuation platforms will not address the client’s need for proper financial advice.
Financial planners increasingly do not mind how they are paid and are looking for the best overall value proposition for their clients.
As a financial planner, I am looking to provide efficient services to my clients and to act in their best interests.
Quite simply, industry super funds have a way to go to provide a viable business option.
Cameron Darrow is an authorised representative of Fiducian Financial Services.
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