Many industry matters still concern me post-Financial Services Reform (FSR)
Act. With 25 years’ industry experience, it is time I gave commentary on these matters, along with some suggestions for fixing them.
The industry
The vast majority of the retail financial planning industry currently thrives by charging fees in the range of 2 per cent to 3 per cent a year on
superannuation assets. Excessive fees are a drain on people’s retirement accumulation.
This same majority of the industry clips the ticket at every opportunity – owning the investment platform, supplying the administration and licence under which their distributors advise (read: “sell”) – and will not give up this comfortable oligopoly lightly.
The industry is also awash with greed, mainly as a result of over-the-top fees and product commissions and an obsessive focus on zero tax payment.
Suggestions
The solution is both independence and feebased, but the progress to conflict-free advice and to advisers abandoning commissions is painfully slow.
Legislative reform should separate “product” from “advice”. A product manufacturer should not be “in charge” of, nor able to influence, tied
distributors, who cannot avoid the human condition of conflicts of interest, no matter how great the “disclosure”.
Commissions originating from superannuation should be ceased by law, with an implementation date chosen that allows firms enough time to restructure. This will boost retirement savings.
Commissions on new non-superannuation investments should be banned immediately. This would markedly reduce the number and incidence of debacles like Westpoint. Salespeople will be affected, but professional advisers will not.
Retirement incomes policy
With 80 per cent of the working population now on a 30 per cent or lower marginal tax rate, the gap between personal tax rates and contributions tax has narrowed.
A zero tax policy for pension funds is overly generous.
Transitional pensions from age 55 are a great idea, but this has encouraged commissioned advisers to switch people from low-fee industry super funds in order to access the zero-tax environment.
Suggestions
The contributions tax should be reduced progressively from 15 per cent to 10 per
cent. This move would restore a 1:3 contributions-tax to average-marginal income-
tax-rate ratio – a greater incentive to save for retirement.
Superannuation fund tax should also be reduced to 10 per cent, and a “pension fund” tax, also of 10 per cent, should be introduced.
Noting the ageing of the population and the availability of superannuation-
based pensions for persons over 55 years, this could be a revenueneutral
move for Treasury, and a fairer system for all stakeholders.
The superanuation advice process
Four out of five people do not need more than a modicum of assistance
most of the time. Four out of five people are best placed in an industry
superannuation fund. Yet choice of super encourages advisers to switch clients
to higher fee/commission-paying products.
Disclosure has failed because key aspects of fund operation (including charges and fees) are often buried, and the general public has no standardised “schedule of fees” for comparison.
(Radical) suggestions
There should be established a national default super fund, put out to tender, and its assets handled by a wide range of fund managers.
Prescriptive legislation needs to be brought in to restrict Product Disclosure
Statements (PDSs) to no more than six pages.
Insurance policies, cash bonuses and overseas sales conferences
In the 110 per cent upfront, 10 per cent ongoing commission world of the life insurance policy, where policies don’t proceed, the planner often receives nothing. But those that do proceed, where the health of the insured is substandard, result in more commission to the adviser.
Customers are largely unaware that they are locked in to a premium some 25 per cent to 30 per cent higher than necessary for the life of the policy.
The Financial Planning Association of Australia (FPA) recently confirmed that cash bonuses and overseas sales conferences “meet remuneration codes”.
So, sending hundreds of topselling planners on overseas junkets receives an official stamp as “professional” behaviour. No wonder Messrs Kohler and Weaven, not to mention consumer groups, are so cynical about this industry.
Concluding suggestions
While the FPA is moving in the right direction, the pace towards a true financial planning profession remains glacial.
A standard fee schedule could be devised by the FPA. Promoting the fee schedule and requiring its prominent disclosure in adviser documentation would help remove the excesses, and overcharging too.
The FPA could establish a fee only non-aligned “CFP Independent” category. This would make it easier to ascertain there is a difference. Over time, advisers will choose where they sit, developing a two-tiered CFP group and distinguishing the salespeople from advisers.
To speed the process along, prescriptive legislative reform will be required.
