The remuneration debate has jumped the fence. No longer is it just contained within the financial services industry – it’s running loose in the broader community.
Recent appearances on prime-time television by the former governor of the Reserve Bank of Australia, Bernie Fraser, and the chair of Industry Funds Management, Garry Weaven, have seen to that. Weaven and Fraser have planted in the minds of the general public the idea that commission payments are holding back their retirement savings.
It’s transcended being a throw-away line in an industry fund’s advertising. Fraser spent about three minutes outlining this issue, among others, during the three major commercial television channels’ prime-time news bulletins on October 14. And Weaven fronted the ABC’s The 7.30 Report the same evening, and was even more forthright:
7.30 Report host KERRY O’BRIEN: You’re critical of retail super funds for paying $2.4 billion in sales commissions to financial advisers last year. Those retail funds would say you’re just talking up the industry funds at their expense. Now why is that such a bad thing, that level of commission taking?
GARRY WEAVEN: Well, I’m not actually critical of the retail funds for paying that, I’m saying that we’ve got a systemic problem with our superannuation industry where the advice industry, that is planners and accountants, are so hooked on commission payments that they consistently recommend funds which, as a class, are underperforming. And the prudential regulator, APRA [the Australian Prudential Regulation Authority], has made this point, that there is a clear differential between the not-for-profit sector – the industry funds, and public sector funds and some corporate funds – in terms of performance, net performance, from the retail funds. But it is the retail funds that are getting all the money directed to them because they control the commission payments. So – and it’s not the commissions themselves – it’s the underperformance of the sector that they’re recommending that is a real cost to ordinary working people and a real cost to the nation’s total savings pool.
KO’B: So what’s the reform that you’re arguing for?
GW: Well, we’ve been saying this for some considerable time, we think now the evidence is just so overwhelming…that the Government really now has to look at what it does about removing these conflicts around commissions. That means either getting rid of commission selling from the compulsory superannuation system or, as a very minimum, it means requiring licensed advisers to act only in the best interests of their clients.
“He would, wouldn’t he?” you’re thinking – and yes, I agree: What else would we expect Weaven to say?
But here’s an extract from an APRA report, published in October: “We find significantly lower average net returns relative to the benchmark for balanced and growth retail default investment options compared to other fund types [industry, public sector and corporate funds], which implies that higher expenses and taxes, explicit and embedded, are the main component of average net return differences in balanced and growth investment options across fund types.”
It adds: “The evidence indicates that part of the net retail under-performance is due to embedded fees that are already incorporated by the investment vehicles used by these funds at the gross return level, rather than poor investment manager skill. Retail fund expenses, explicit and embedded, lower the net earnings of the retail sector relative to the not-for-profit sector.”
(The full APRA report can be found in the Research Library on Professional Planner’s website.) The groundwork has now been done. The Minister for Superannuation and Corporate Law, Senator Nick Sherry, has warned the funds management industry to cut costs on superannuation funds; APRA has confirmed that retail funds are underperforming because of higher embedded expenses (including commissions); and just about every superannuation fund member in the country is looking at their fund’s most recent statement and wondering where all their money has gone.
An independent report linking A to B, and a groundswell of public opinion in favour – politicians have enacted far more radical policy on far flimsier pretexts than that before now. (And if you’d like to gain an insight into how life under the “Sherry Reforms” could look, I recommend you read Robert MC Brown’s article: “A blueprint from Sherry’s reforms”.)
We are pleased to announce that Jo-Anne Bloch, chief executive of the Financial Planning Association (FPA), has joined Professional Planner’s roster of columnists. Jo-Anne will give readers an insight into the issues facing financial planning as it moves towards true professionalism, and her first column appears in the November issue.