The pre-eminent body for the retail and wholesale superannuation, funds management and life insurance industries has lent its critical mass of 145 members managing $1.1 trillion to the growing move to reform financial planner remuneration.
The Investment and Financial Services Association (IFSA) today released what it calls a Superannuation Charter to “create a fairer and more competitive superannuation system for all Australians”.
Under the charter, IFSA makes “three commitments to super fund members – informed choice, fairness and competition”.
The charter “entails a new approach to the payment for financial advice in super and a range of other reforms”.
It provides that product commissions – upfront and trailing – in superannuation products be abolished and replaced instead with either a “Member Advice Fee (MAF)” or “Plan Service Fee (PSF)”.
Under either scenario, product commission will be replaced with a fee agreed directly between client and financial planner, and paid directly by the client to the planner.
In this respect, the IFSA charter mirrors a proposal contained in the Financial Planning Association of Australia (FPA) consultation paper, Financial Planner Remuneration, released in May.
The charter covers four key issues: Fees, performance reporting, truth in advertising, and adoping a partnership approach with regulators and government.
The chief executive of IFSA, Richard Gilbert, says work on the charter stated about seven months ago.
While it has been produced to make sure IFSA and its members remain in control of the process of removing commissions from super fund product structures, “more importantly we want to improve [consumer] confidence at a time when confidence is down”.
Gilbert says the underlying philosophy os to link the level of fees paid by members of super funds to the value of the advice they receive.
“The benefits are twofold,” Gilbert says. “[Consumers] will agree to the fees. They will not be dictated fees for advice. Gone are the days of saying you will pat 50 basis points, or you will pay 5 per cent, or whatever.”
Under the MAF structure, any fee paid by a consumer must be explicitly agreed to, and paid from the member’s account to the adviser. The consumer therefore has the right and the ability to turn off the fee if they believe the level of service they’re receiving does not justify it.
The PSF structure is designed to accommodate default funds, where fees are automatically deducted from a member’s account. While the detail has yet to be finalised, it seems likely members will be given an opportunity after a period of time to opt out of paying fees.
If they choose to pay no fees, they will not have access to advice. But if they choose to seek financial advice, it will be paid for under a MAF.
Gilbert says the new fee arrangements will be enshrined in IFSA’s standards and the reputational risk to its members of not complying with standards will ensure members adhere to them. There will be uniform disclosure of how the MAR and PSF work in all IFSA members’ product disclosure statements.
Gilbert says the IFSA charter, together with other moves to reform planner remuneration, are “good news for good advisers”.
“The good advisers will exploit this,” Gilbert says. “There will be more confidence in the system.”
Gilbert says there is a substantial proportion of the population who currently will not seek financial advice because of the conflicts of interest they perceive are produced by product commissions.
“Say half of them are converted and say they will go and see a planner,” Gilbert says.
“The good planners are gong to be sitting pretty.”
The IFSA Charter
Fees
Effect when ratified and introduced:To determine how, when and why fees are to be paid to financial advisers for super advice. Fees for financial advice in super will only be charged via either a Member Advice Fee (MAF) or Plan Service Fee (PSF): The MAF will allow super fund members to agree to, and opt in to, fees for personal advice The PSF will offer members an opt-out fee for general advice about superannuation
Performance reporting
Effect when ratified and introduced:Uniform, industry-wide, standards will govern the reporting of investment performance, allowing true ‘like with like’ comparisons
Truth in advertising
Effect when ratified and introduced:New rules to limit advertising and promotion of superannuation investment and projections
Partnership approach with regulators and government
Effect when ratified and introduced: Regulation to enable open, fair and transparent competition in superannuation
Responses to the IFSA Charter:
Chief executive of the Financial Planning Association of Australia, Jo-Anne Bloch: FPA members will be pleased to see that superannuation product providers will be able to deliver products that enable financial planners to recommend them without commissions.
IFSA’s recommendation supports the FPA’s proposals that fees should be agreed between the financial planner and client, that they should be switched off if no advice is provided, and they are paid for by the client.
The FPA also notes that the IFSA Super Charter promotes improved disclosure across all superannuation sectors so financial planners and clients can compare fund performance of investment options and not just products.
We further support IFSA’s calls for regulatory consistency in the supervision of superannuation funds to ensure a level playing field. This is most starkly evident in terms of an unlevel playing field in the areas of advice.
We will work closely with IFSA to ensure terminology, practices and disclosure is consistent with efficient implementation.
Chief executive of the Association of Financial Advisers (AFA), Richard Klipin: The Charter has many far-reaching implications for all participants in the superannuation industry and will go a long way towards creating a level playing field within superannuation.
The Charter is a timely document given the Government’s superannuation review. Australia has one of the largest and most envied superannuation systems in the world and in order to ensure a competitive market that delivers to consumers, the Government has a core responsibility to build, nurture and set the right policy environment.
The AFA supports the following principles in the Charter relating to the consumer: “Full value, choice, transparency, comparability and competition” and “members access to competitively priced funds where they only pay for the level of service they receive and clearly understand what they are paying for”.
AFA supports, and has always supported, a consumer-focussed offer. Part of the AFA’s policy position is that if it is good for the consumer, it will be good for the adviser.
A fundamental concern for AFA members, and indeed, for all financial advisers is how to ensure that consumers receive “appropriate advice” each and every time. Is running a fee-based business really the silver bullet or are there other parts to this broad puzzle? The AFA is not convinced that simply being fee-based will ensure consumers receive good and appropriate outcomes every time or that advisers will build better businesses.
President of the AFA, Jim Taggart: While the AFA supports the consumer principles contained in the Charter and well understands the impact high profile collapses such as Storm, Opes Prime, and Westpoint have had on market perception, the issue of adviser remuneration is about identifying and managing conflicts.
There are many conflicts of interest that confront us daily in our professional and personal lives. Recognising and managing them appropriately is something that AFA members have done, and will continue to do, for many years. It is enshrined in our Code of Ethics.
Chief executive of MLC, Steve Tucker: The introduction of IFSA’s Super Charter, together with the FPA’s consultation paper on adviser remuneration, means the industry now has a united front to address some of the issues that have been plaguing the reputation of financial advisers.
Superannuation remains the best way for Australians to save for their retirement and maintaining confidence in the system is critical.
For too long the value of financial advice has been overshadowed by the perception of conflicts of interest generated by the commission based remuneration system.
By taking these steps, the industry is proactively moving away from commissions to a fee based model.
This effectively removes the perception of conflicts and enables the great work that financial advisers do for their clients to be recognised more broadly in the community.
Enabling super members to stop paying the advice fee is also critical – one of the best ways to ensure we have trust in the system is for clients to feel in control of what they are paying and to whom.
Chief executive of the Association of Superannuation funds of Australia, Pauline Vamos: There has never been greater need for advice.
It’s essential that fund members have access to information and advice so that they can make educated choices about the money they contribute to super. While advice usually will need to be paid for it is important that its costs be unbundled from the sale of financial products and that consumers are able to make informed choices about the advice they purchase
Decisions such as how much to contribute, which investment options to take up and what level of insurance have become essential in getting the most out of superannuation.
But these decisions can be complex and require informed advice where the member’s interests are placed first.
The superannuation industry already provides services where the cost relates to the advice and not the product. The announcement by IFSA today of proposed new arrangements for payment for advice is likely to encourage more financial planning firms to establish advice services specifically geared to superannuation members.
The global financial crisis and losses accrued across the Australian economy have meant that super fund members have become acutely aware of their exposure to the ebb and flow of share markets and other investments. Nevertheless, superannuation funds have outperformed most other sectors.
Advice is critical in choosing investments that are right for the individual concerned. However, super fund investors should be able to clearly see what advice they are paying for. Unbundling advice costs from overall superannuation fees is crucial in achieving this.
Chief executive of Aequis, Steve Harvey: We welcome the initiative of the Association but in our view the fee-for-advice reforms do not go far enough with the call for the removal of asset-based fees as ‘economic stupidity’, not being in the best interests of clients.
True fee-for-advice fees should not be linked to asset-based fees as this still links the advice outcomes to a product or investment outcome. This does not necessarily link to what is a valuable outcome to clients.
Clients are demanding true fee for advice and the industry must recognise this and continue to move forward with fee reforms.
Removal of commissions removes any incentive to recommend particular products, ensuring the advice is appropriate. The value of the advice can be assessed against the fee and the client is able to make an informed decision.
It is simple, independent and transparent and puts financial advice on a similar fee-for-service basis to that provided by accountants and lawyers.
Along with the family home, superannuation is perhaps the most important investment Australians have and now more than ever there is a need for consumers to obtain quality advice.
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