IFSA charter leaves corporate super advisers out in the cold

While many advisers welcome the remuneration initiatives of the Investment Financial Services Association (IFSA) and the Financial Planning Association (FPA), others feel betrayed and undermined by them. A number have even suggested that the IFSA Charter is a plot against them by fund providers. In reality, advisers should feel grateful to these associations for regaining a voice for the industry in shaping its own future, when it was at risk.

Consider the environment: financial services in the UK currently faces the prospect of an outright ban on commissions. In Australia, Jeremy Cooper, who chairs the Super System Review, has declared trailing commissions paid in respect of members of default funds who have not received advice as “egregious”.

It is hard to fault Cooper’s efficiency — announcing the conclusions before undertaking the inquiry. Such a policy would certainly clear any backlog in the courts: deliver the verdict first and get around to the evidence later. Nonetheless, there are cases where this view is reasonable.

There is no chance of existing commission arrangements remaining. Had the industry maintained a head-in-the-sand approach, its future would have been mandated for it — perhaps following the UK approach that would decimate much of the advice industry. While I am no fan of commissions, there is little benefit from an implosion of the advice industry.

The FPA’s and IFSA’s phased approach gives notice that change is required, but allows time for businesses to change remuneration models. For this act of industry leadership, the associations are being pilloried by advisers who are out of touch with the direction of international regulation.

Clearly one objective of the charter is to position retail funds to compete with industry funds on cost. IFSA’s Super Charter includes proposals to separate the Plan Service Fee (PSF) and Member Advice Fee (MAF) from the cost of the product, and to empower members to turn these fees off if they do not feel they are getting value for money.

The industry funds have won the debate on commissions because their central argument is true: if you build commission into the cost of a product, it increases fees, which impacts long-term returns. Now all segments of the financial services arena will need to accommodate the new environment.

It is hard to argue with the idea that members should be able to opt out of paying for something they find of little value.

This is a straightforward issue in financial planner/client relationships. The planner provides service and if the client finds it is not good value, they terminate the relationship.

The situation is much more complex with corporate superannuation, where three parties are involved: adviser, employer and employee.

Historically, employers appoint the adviser who provides services to both the employer and employees, and the employees’ fund assets pay the adviser.

Under the charter, members will be able to terminate the MAF at any time, and terminate the PSF at the end of an initial period negotiated between employer and adviser.

Some corporate superannuation advisers (CSA), having set up a plan for a corporate client, provide minimal ongoing service and collect a lazy annuity income stream from trail commissions.

Others provide a token financial advice service to members on request, using cursory procedures that quality financial planners would consider negligent. In such cases, it is reasonable for members to opt out of adviser payments.

However, there are first-class CSAs who provide valuable services.

One fundamental service is to negotiate with superannuation plan providers, seeking lower plan costs for their clients, say, on the grounds that the employer has high average balances, or other factors that make it attractive to the plan provider.

Some advisers also use their market power with providers to negotiate, not higher commissions for themselves, but lower costs for all their clients.

Similarly, the CSA may be able to arrange a higher than standard automatic acceptance level of insurance for all employees of a company, reducing the requirement for medical examinations.

What will happen in this situation if a member opts out of the PSF after an adviser has negotiated lower than standard fees and/or higher levels of insurance cover with less underwriting?

Will they continue to benefit from the lower fees or superior life cover negotiated by the adviser whose services they have opted out of, creating the anomaly of a member retaining the benefit of the adviser’s negotiation without paying for it? Or would they revert to standard fees and cover, perhaps meaning that they pay more after opting out? This needs to be clarified.

The PSF can be opted out of at the end of an initial period, agreed by the adviser and the employer, from when the plan is ‘established’. If a client’s staffing and plan balances increase, the plan will need to be reviewed periodically. If the adviser recommends the employer move to another provider, a new plan will be established, triggering another initial non-opt out period.

By contrast, if new plan conditions are negotiated with the existing provider there will not be another initial period.

Similarly, if the original adviser ceases to provide adequate service and a new adviser is invited to review the company’s needs, the second adviser will obtain an initial non-opt out period only if a new fund is established. Both of these could bias recommendations.

Thus, a number of potential anomalies can arise under the charter. Nonetheless, the adoption of the user-pays principle, with its corollary that non-users don’t pay, is a step regulators will welcome.

These anomalies all have a common basis: the CSA provides services to employers and employees, but product providers write the rules determining remuneration. These rules can never be appropriate for all possible situations.

The anomalies would disappear if corporate superannuation advisers were paid directly by their clients, tailoring fees to particular circumstances.

The complication is that advisers negotiate with employers to be appointed to service the plan, but their work is partly for the benefit of members.

There is no practical possibility of hundreds or thousands of members entering into a fee arrangement with the adviser.

Yet a fee-for-service arrangement is necessary to avoid factors that could bias advice.

It seems to me that this situation is ripe with threats and opportunities.

The future for many CSAs will see a growing portion of members opt out, without even having the opportunity to argue their value-for-money case.

An alternate business model must be found, on which a sound corporate superannuation advice business could be based. In contemplating this, it is important to understand the ongoing role of service-oriented CSAs, and who benefits from it.

As an example, leading CSAs spend a lot of time ensuring members’ accounts are set up properly, chasing missing or misallocated contributions and pursuing unpaid benefits. Anyone with experience in attempting to disentangle administrative issues with large institutions will know how time consuming this is. Chasing misallocated contributions is not only valuable for the member but also benefits the employer, whose Superannuation Guarantee obligations are not met if money is not credited correctly.

Most of the functions that are provided under the PSF will benefit both employers and employees. Employers need efficient superannuation services as much as do individual members.

The only robust model for CSAs that I can see is to present the case that employers should engage their services for a fee, thereby providing all their employees with the saving of being able to opt out of the PSF. Some employers already engage advisers and pay them, but there will be initial resistance from many employers, as employees’ superannuation assets currently pay for the services of advisers.

However, employers need their superannuation arrangements to work efficiently, and they want advice provided to them to be unbiased and in their interests and the interests of their employees. Only fees can ensure this, and only employers can pay it.

Likewise, CSAs will be not enthusiastic about negotiating superior plan conditions or chasing missing contributions or benefits for members who may opt out of paying them. Advisers need to know their future revenue before committing to a level of service. The only practical means to this is a fee negotiated with the employer.

This may prove to be the future for corporate superannuation advice. The fee versus commission debate raged for two decades in the financial planning field. It is now clear which side has won the day. The same debate may now begin for corporate superannuation.

CSAs will ultimately have to develop new revenue models. This will take time, while advisers experience how the new rules affect them. In financial planning, Monitor Money was the pioneer of fee for service in the late 1980s, and enjoyed early mover advantage. Those CSAs who first develop a robust fee model will also enjoy this.

Every participant in financial services has the opportunity to adapt to a changing world. Presumably, as the commission issue fades, one element in this will be less antagonism between advisers and industry funds. Apart from legacy resentments, there is no fundamental reason for advisers and platform providers to be at each other’s throats.

During the transition phase, there is one important detail that advisers will clarify with fund providers about their transition plans. Will the current rate of trail become the PSF, or will it be split into MAF and PSF? This will materially impact the opt-out prospects for individual funds.

Co-incident with the major remuneration advances taking place across the advice industry, there have been several retrograde steps.

Despite the changes above intended to lift industry standards, super fund providers have recently been empowered to give advice, returning us to the era of tied agents pushing in-house products. Very few funds will undertake the expense of bringing administrative staff to the skill level of first-class financial planners, so there will be pockets of low skill allied with an in-house bias.

How long before the first claim arises from, say, the recommendation of a beneficiary option in a fund that was incompatible with the provisions of a will — which the in-house advice-giver was not trained to review?

If a member of a fund that does not offer contribution splitting asks about it, what are the odds of the staff member advising: “Income splitting is an important benefit in your case, Sir, and I suggest you transfer to another company to get it”; or suggesting that a member pay off a mortgage instead of contributing more to super?

And no doubt, some funds will pay their staff a bonus, based on volume of funds brought in, retained in the fund, or rolled over from accumulation into pension mode.

Thus, we will have reintroduced commission by another name when it is under attack elsewhere.

Finally, there remains the absurdity of nominating only one default fund in awards.

Earlier I noted the possibility of negotiating fees or insurance with a fund, to benefit members. However, no default fund needs to negotiate, or even to provide good service to members, if it has a monopoly on that industry.

Even if the authorities are committed, for ideological reasons, to nominate only industry funds as defaults, they should nominate at least three such funds as alternatives under each award to create competition. Only a monopolist benefits from a monopoly.

The super league years are over for much of financial services. We are at a major transition point, particularly for those who provide advice. Those who accommodate to the times will materially grow their businesses, at the expense of those who try to hang on to the past.