Where would the financial planning industry be without the compulsory superannuation system that came into being in the early 1990s? I’d hazard a guess that it would be nowhere near as large, nor as lucrative (for its practitioners), if not for the guaranteed flow of billions of dollars every year into retirement saving products, and the torrents of commissions that result.
Now ask yourself where the industry could end up if the superannuation commission tap were turned off, or if the flow slowed to a trickle. For many businesses, clearly it would be a disaster. But one way or another, that is exactly what is going to happen, and it may be no more than five years away. We cannot say that we haven’t been warned.
But for those who may still have harboured doubts, the Minister for Superannuation and Corporate Law, Senator Nick Sherry, spelled it out clearly at a meeting of the Fee For Service Group (FFSG)* in Sydney in early July. Sherry told the meeting that:
• According to Treasury, the average cost of a superannuation fund in Australia is 125 basis points a year. (Research conducted independently of government has put the cost in the same ballpark.)
• This is too high, and costs for “typical” funds must be cut to less than 100 basis points. • Fund costs can be split into three broad categories: administration, funds management and advice (the cost of advice includes commission).
• The industry must cut costs. And if it cannot find a workable solution in a reasonable time frame, the Government will find one for it.
Administration is a low-margin, high-volume business, and there’s little room to move on costs there. There may be a bit more wriggle room on funds management costs, but not much. Clearly, where there’s greatest scope to cut costs is in the area of advice. Sherry sees the removal of commissions from the process as having the added benefit of removing conflicts of interest. It’s difficult to argue with that view. If the advice cost component of a typical super fund is cut dramatically, planning practices that rely on commission income face either a precipitous drop in income, or oblivion.
A shift to fee-for-service is a viable alternative revenue model. In Sherry’s brave new world, it may be the only viable alternative. Sherry would prefer not to legislate to make it illegal to receive commissions (on compulsory superannuation contributions, at least). But he will not hesitate to act if the industry drags its feet on what he considers non-negotiable reforms. At Professional Planner we believe that a shift by the broad planning industry onto a fee-for-service footing is not only an effective way to raise standards and improve the standing of the industry in the eyes of consumers, but also an economic necessity for forward-thinking practices.
Indeed, the whole aim of this publication is to support planners who want to move away from commissions, to provide coverage of the issues they’re likely to face as they make the move, to report on how firms have made the move successfully, and to tap into industry-leading thinking from practitioners, consultants and institutions on how best to handle the move and attendant issues. To date, sections of the planning industry have been happy to dismiss our views as the ravings of idealists, or of idiots who really have no idea what it takes to run a planning business (or who just want to sell a few copies of a magazine).
But Sherry could not have made it clearer that there will be a revamp of the relationship between financial planners and product providers, starting with compulsory super. I acknowledge that remuneration is only one aspect of that relationship, and of professionalism in a broader sense. However, if the relationship between clients, planners and manufacturers isn’t right, then the industry is built on dodgy foundations indeed. Sherry talks about the impending revamp of superannuation as “renovating the house”. That surely has to include making sure the foundations are solid, before any other building work takes place.
Indeed, Sherry has made it crystal clear that if the conflicts he sees cannot be resolved, there will be no support from the Government for higher compulsory contributions or greater incentives. As Kristen Paech reports on page 16, if the industry cannot or will not get its act together, the Government will legislate and potentially cap planners’ income. One need only ask a medical general practitioner what impact the introduction of governmentmandated fees had on their practice (via the Medicare schedule of fees and bulk-billing) – not to mention stress levels and working hours – to recognise that this is a situation that must be avoided at all costs in financial planning.
I often hear it said by individual planners that they would like to move away from commissions, but they don’t know where to start; that clients won’t pay a fee for the advice they receive, or that the planner doesn’t have the support of their dealer group. The first issue is understandable. When you’ve done business a certain way for many years, it can be a daunting proposition to switch to a new way of doing things. But there are techniques and programs that can be deployed to assist, and this is an issue that Professional Planner will continue to cover in future.
The second issue is a bit more difficult to understand. If a client really thinks they’re not paying for advice already then they fundamentally misunderstand the commission system (or it has been, let’s say, “inadequately” explained to them). The final issue is a bit more perplexing. A dealer group that is not already actively supporting and encouraging its member firms to explore alternative remuneration models is not only defending something other than the best interests of its planners’ clients, it’s potentially signing a death warrant for its own planning practices. If your dealer group isn’t being pro-active and hasn’t already started to talk to you about how you can exploit non-commission revenue streams, you really ought to be asking why. {mos_fb_discuss:19}
