Industry repairs should be first priority

Every time I hear that fund choice is back on the agenda I wonder, as an industry, are we ready for it? Do we expect it will happen without any additional controls or regulation by government? Do we think we can avoid the mis—selling scandals that beset the UK? My answers are no and, unfortunately no.

To take the mis-selling point first, we already have it today. There are numerous examples that would show that the industry, including the adviser, has put its own interests ahead of the client. We have it almost every day when advisers recommend that clients roll their money out of government/corporate/industry funds into their pet master trust. Why do they do this? Because the current adviser remuneration models have them being rewarded only if they do this.

There are very few, if any, advisers who conduct a pure advice-providing business, that is, get rewarded solely for the advice they give. I mean they don’t get rewarded for implementation, either through a fee or commission. I would also argue an ongoing fee, based on funds under advice, is not a true advice fee because it is not related to the advice being provided but to the funds under advice.

Firstly, the current adviser remuneration models reward the adviser on implementation. So if you don’t move the client’s money there is no implementation — so no reward is earned. Secondly, on an ongoing basis, advisers like master trusts because they provide them with a convenient way to charge and collect their ongoing fees — bulk billing I call it. No confronting invoices for the client, which would be the case if the client stayed in their existing government/ corporate/industry fund.

Even with DIY funds, advisers are recommending that the DIY funds be placed through a wrap, thus providing the adviser with a surrogate master trust.

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This whole industry is built around selling product. The Financial Services Reform Act is all about product advice. Even the financial planning six-step process has an implementation step. It may be argued that it meant the implementation of the plan, but today it invariably means the implementation of the investment portfolio, in other words, placing product.

Some people still try and argue that a platform (master trust/ wrap) is not a product, but just an administrative service. Semantically that may be true, but when so much of an adviser’s revenue and potential wealth is tied to these platforms, it is difficult not to regard them as products.

It is not only advisers that like master trusts, but the rest of the industry too. Fund managers earn money out of government/corporate/industry funds, but not as much as they earn out of retail and master trusts. And, probably just as important, this money is stickier. Most of the government/corporate/industry funds use mandates, which have to be competitively priced and reviewed on a regular basis. Losing a mandate can mean losing hundreds of millions of dollars. Also there is the chance of a domino effect. So retail business (which includes master trusts) is more profitable and stickier.

If further evidence is needed to support the contention that fund managers prefer retail (including master trusts) just look at the generous commissions, both up front and ongoing, that are paid, the marketing and technical support that is provided and the online systems that are provided to intermediaries. There is a confluence of interests.

Most of the money that advisers place is superannuation monies, estimates put it as high as 70 per cent. Interesting my use of language. I’ve said ‘monies placed’, this is the language of the industry. We never talk about fees earned on advice provided. I rest my case, this is a product-based not advice-based industry.

Anyone who has read any of my recent articles knows that I argue that this industry has been too successful for its own good. One outcome of this is that it is very inefficient at all levels. And who pays for this inefficiency? I don’t think I need to answer that question.

It has been successful (if your definition of success is about growth and profitability) not because of its own efforts, but because successive governments have mandated its success through the superannuation guarantee (SG) — at least nine per cent growth per annum. The industry would be a mere shadow of itself without SG.

So what effect will fund choice have on the industry? Would it exacerbate the current self-interest of the industry or would the industry become more consumer sensitive? The answer is obvious, which is a shame because if the industry does not voluntarily become more consumer sensitive, the government will force it to and then everyone will lose.

Which brings me to my second question. Do we expect fund choice will happen without any additional controls or regulation by government? I don’t, but it may surprise you to know that I’m not in favour of further regulation, I believe we already have too much, but we will only have ourselves to blame if it does come.

There are already Senate sub-committees looking into fees and charges, and nearly every day there are articles in the media about fees and charges. How do we respond? With limp-wristed comments comparing our industry with the size of overseas counterparts. We say our fee rate has come down marginally, but forget to mention that funds under management has doubled, which means revenue has doubled, but I don’t think expenses have. Nor have we said expenses are higher than they should be because we are inefficient and haven’t embraced technology.

It is possible that the government will try and regulate fees and charges, especially commissions. We all know there are plenty of ways around such regulation. It seems much of the focus is on overt fees, but there are many hidden charges in the industry. Some are hidden in the unit price, some in the crediting rate. There’s no consensus on what can be directly charged to the fund.

The government could argue that SG money is only being outsourced to the industry to manage and therefore they have every right, even an obligation to ensure that it is managed efficiently and prudently.

The industry can either get its act together and act efficiently and prudently or wait for the draconian hand of regulation.

There is no reason why the industry cannot get its act together on this. It has on many other matters and especially on trying to get the government to lower taxes on superannuation and increase the SG. The industry may gain a lot more credibility if it puts its own house in order first before it starts running what could be regarded as self-serving campaigns.