BOWEN: What we’ve announced in the last two weeks, the reform process, is not small, and so there is a lot of work to be done in terms of getting through the Parliament. And there’s a couple of issues that we need to think about.
Firstly in relation to, for want of a better word, the Ripoll reforms, the response to Ripoll and the reforms announced [on April 26]. There are a number of elements that I said that there was to be further consultation on.
I tried to minimise those, but it was appropriate that there are some that there was further consultation [on], and perhaps most clearly they are the treatment of risk insurance, and the operation of the annual renewal notice and when that should kick in. There’s the separate process of the review of the statutory compensation scheme, which I’ve asked Richard St John to do.
And there’s the general drafting of the legislation and consultation on the final detail. Now, the legislation has not yet begun to be drafted, and there’ll be quite a consultation process, which I’ll be saying more about in the not too distant future. But there’ll be a Treasury website just devoted to this consultation process; there’ll be a series of discussion papers on the various elements; and then we’ll need to get the legislation through.
In relation to the superannuation guarantee [SG], and the other reforms announced on [May 2], there’s a similar story there. They are part of a broader package, of course, and they are tied to the revenue coming from the Resource Super Profits Tax. And again, the Opposition have indicated that they oppose 12 per cent [super contributions].
They haven’t been quite so explicit on the other measures we announced in relation to superannuation, and clearly they’ll oppose the Super Profits Tax. I think that’s the most likely outcome.
So there’s still a deal of work to do, to convince the Parliament that these are worthwhile reforms, particularly going to 12 [per cent SG contributions]. Perhaps the most complex part of the legislative reforms we announced would be, in terms of super, the $500,000 threshold on the over-50s cap. That has a degree of complexity about it, which I need to do some consulting with the industry on, in relation to how to make that work.
We did that with our eyes wide open, and [knew] that …we’d need to talk to industry about how it would work, and there’s going to need to be some changes in the way the Government does business in relation to tracking multiple funds, et cetera.
I think that’s probably a good thing, in terms of a wider process of tracking down lost money as well. But there’s a degree of conversation that needs to go on about that.
WEAVEN: The Government announcements on [the Henry tax review], together with Chris Bowen’s earlier announcements [on financial advice], clearly are the most significant event for superannuation, and the system of superannuation, in 20 years.
I think it’s a well-thought-out package. I think particularly the Bowen announcements are the result of very careful thought. Not everyone will like them, but – and as you know, I don’t give praise very easily – the set of measures did give to me the appearance that these matters had been thought about very, very carefully, and some of the obvious huge loopholes closed off, at least conceptually, in advance, so that the reforms might actually work.
On the SG front, it’s much bolder than I believed that any government would do, because it can be portrayed as a hit to employers, and the small business lobby in particular has always been rabidly opposed to any SG – at least, their organisations have.
It is obviously phased, which is clever. It’s exactly what Paul Keating did. It’s the appropriate way to do it, as well.
The only other thing I would say is that to some degree, because of the way in which this has been done, and the package nature of it, and the fact that it’s all now related to the continuation of government, so to that extent, it seems to me that a large part of the superannuation industry, at least, are now conscripts in the war with the mining industry.
So it is unfortunate, from my point of view, that that circumstance arises. We have no desire, from my perspective, to be at war with the mining industry. We’re major investors, very major investors, in particular in the more stable end of the mining industry, and the major Australian companies. So we don’t relish being conscripts and at war. And hopefully, ultimately the more sensible voices and more mature elements of that industry will conduct the debate.
COLE: I agree that 12 per cent is appropriate. I originally supported going to 15 per cent but when I look at the replacement incomes that people get, that the lower-income people get, relative to what they get while they’re still working, the very bottom end of the market are working poor; and taking 6 per cent of their remuneration into super rather than 3 per cent just takes it a bit too far. I think to get adequacy, a bit of encouragement is also a good thing. And we’ve got that, for additional voluntary contributions, even if they are capped. So I think that’s a reasonable position, 12 per cent, and something we should all applaud.
TUCKER: We’ve always thought [we need] that [increase in the SG], coupled with a system which people can trust to go and get advice from, and get advice in the form that they want to get it, whether it be simple intra-fund, or sophisticated or complex. The packages together means not only will contributions now create a solution to some of the adequacy issues, but the confi- dence in advice – and we want Australians to get advice much, much more than they do – will also have a big impact on adequacy over time. You’ve got to look at these things together. A trusted system, quality advice, in the way they want to access it, in a transparent way, linked to contributions going to 12 [per cent], we’re going to get much better outcomes.
TATE: Jim – if I can bring you in – your group is still lobbying quite publicly, I think, the Association of Financial Advisers for – along with Tony Abbott – to not abolish commissions. Would you like to make a few comments?
TAGGART: Obviously we’ve never wavered from the point of view that it’s one of choice. And it’s predicated, Steve, on what you’ve said, based on transparency and trust. So philosophically and in a practical sense, we don’t deviate away from that. So it’s not a question that we’re lobbying for commissions. It’s a question of it’s a hybrid. And I think you need to understand what our role is in the advice market. The difficulty I have is that I’m speaking on behalf of over 1500 members, but also [as an individual]. So while there’s a nexus, there is also [a need] to look at the new breed of advisers coming through, and different things. And quite clearly, those in university, and GenX, and so on, are different, in the sense of remuneration models and so on.
I guess I get taken aback by the view that, personally, I’m tarnished as being a grub, as being someone that rips someone off. And I take that personally as being insulting. And I have to put that on the table. I do not deny that there’s been situations where things have happened.
So, the point that I want to make is that while I agree with regards to some of the com- ments being made, I think it really is about being a trusted adviser.
HOYLE: Minister, you said that one of the elements that was going to require further consultation was exactly the issue of commissions in risk products, and whether they should be subject to the same bans. And we’ve heard arguments for, and we know the arguments against. Do you have any inclination one way or the other?
BOWEN: Well, rather than inclination, perhaps some of the issues that were on my mind. And as I said, when we put this package together, I tried to land as much as I could, and I tried to keep further consultation to a minimum, not because I’m against consultation, but because I thought the industry needed as much certainty as possible, and there’d already been a long process of discussion and basically, frankly, I knew where everybody stood on everything, and there was very little to gain from further discussion about most things.
But on risk insurance, a couple of issues. Firstly, obviously the same principles apply to risk insurance as other financial products. You should try and minimise conflicts, and arguably that principle needs to apply to risk insurance. Against that, I always try when dealing with regulatory reform, to be very clear about the mischief I’m fixing. What’s the problem that I’m trying to fix? I’ve got enough problems without going and finding new ones. Is there a problem here that I’m trying to fix? And I’m not sure of the answer to that. I think that’s the sort of issue that needs to be on the table.
Likewise with risk insurance, there are unintended consequences both ways. One of the things that worries me about Australia generally is under-insurance. I think it’s more an issue in terms of some other parts of insurance, rather than life and risk, but it’s nevertheless an issue. And also, is this, if you don’t touch risk insurance at all, are you opening a loophole for people to put commissions on other types of financial advice by stealth? In other words, yeah, sure, we won’t have commissions on any financial products, but geez, we’re going to have a huge commission on the risk insurance part of our product. And really just get commissions through that process.
Now, I thought about those issues deeply, and thought at the end of the day as the time is coming to announce this package, I just simply couldn’t look myself in the mirror and say, ‘I’ve got this bit right, I’ve got the balance exactly right in this bit.’ And so that was the one bit I carved out for further consultation. So I genuinely don’t have a final landing place.
But I do accept it’s not a simple matter, and there are potential unintended consequences whichever way you go on that particular one.
HELMICH: We’re in a similar position to MLC. We saw the reviews that were going on as a great opportunity to increase the public confidence in financial planning, and that, I think, is to everyone’s advantage, that if we can have more people out there getting advice, we know the outcomes of that. Our position around commission in the investment and superannuation area was pretty clear. We thought it was much better for the planner to negotiate the advice level and the service level required with the client directly, and set a fee based around that, rather than have a product manufacturer determining what the fee should be. And that’s why we’ve moved that way, and are moving ahead of others in that space.
A lot of our planners were operating that way already, so to tell you the truth, with some of them it’s not a journey at all. Others we’ve worked with and will be ready to go on 1 July as we suggested. Risk is hard, and I’m not sure, to tell you the truth, to answer the question now, where it should be on risk. I think there does need to be some consultation. There’s arguments for and against, and you can mount very good arguments both ways. What you tend not to see in the risk area, I find, is the amount a planner does when a claim’s in process – which you don’t get paid for. So whether it might be insurance companies then put in place some sort of payment for that, as opposed to – you know, if commissions were to go. Planners do often walk clients through that, and I think it’d be very hard to go up to a grieving widow or someone on dis- ability and say,“I now need you to pay me this to process your claim.” That would be an interesting aspect of it. I think we do need to do something about it, and come to a position. I agree with the Minister on that. I’m not sure where it is at the moment.
TATE: Minister, at a recent MLC roadshow, Greg Medcraft, ASIC commissioner, was posed with the question,“I’m a National Australia Bank financial planner. What you’ve just said, Commissioner, suggests that if I know that down the road in Westpac is a better product, my fidu- ciary duty requires me to tell someone,‘Well, you shouldleavemybranchnowandgodownthe road and buy the Westpac product’.” There seems to be some very complex distinctions around fiduciary duty. Can you articulate a little?
BOWEN: Well, again, I think the majority of people accept the need for a fiduciary duty. It’s how you frame it. And we did look at various options. One of the concerns that was raised at one point in the development of our thinking was, well, if you put a fiduciary duty on to act in the best interest of clients, that means that the adviser then has a fiduciary duty to assess all of the16,000productsavailableinAustraliafor every single client. And clearly, nobody thinks that’s workable. And that’s the reason for the “reasonable steps” defence; that you will need to show that you took reasonable steps. And the courts will interpret what “reasonable steps” is. But it’s a fairly well established and understood term in jurisprudence. Yes, it does mean that firms will either need to expand their approved product list, or, from time to time, say,“I can’t help you”. I don’t think it means saying, “You need to go and see Westpac” in particular. But it may mean the adviser’s fiduciary duty is to say, “Look, for your needs, I don’t have a product in my approved product list which I think is in your best interest, and you need to see another adviser, or make your own arrangements.” I think advisers will be reluctant to do that, so they will be trying to improve what they’ve got.
TATE: If I went to an Industry Fund Services financial planner now, would they ever recom- mend anything other than an industry fund?
WEAVEN: Well, they do, but on rare occasions. Just like the banks. You know, in fairness, they will be affected at the margin by these laws. We’ve always acknowledged that. We’ve always said that’s appropriate.
BAILEY: So round the new rules, Anne-Marie or Ian would be expecting more referrals from outside [Industry Funds Financial Planning], or the service you’re using, to the personal sections of your funds?
CORBOY: I think you need to look at our membership base. I mean, we’ve been running intra-fund advice at our fund for four years. And it’s a free service to our members and it’s been very successful. And the thing is that not every member needs advice every day; it’s not like they’re all going to ring up on one day and all want comprehensive advice.
There’s only a small group of our members that really need that really comprehensive advice. You know, we’re thinking of people on average weekly earnings. I think a lot of people, when we talk about advice, it is really centred on the top end, you know, and those people do need comprehensive advice, and it should be provided, and all of that. But we’ve got a big group of the population that don’t need to spend thousands of dollars on a piece of advice. They just need certain things at given points, you know, in their life cycle, and that can be delivered.
JAMES: I’ve been six years out of Australian financial services, and in the last six months we’ve been doing some global work on looking at all the financial services industries around the world. First thing I want to say is that Australia is number one. We look at the US and we look at Australia, [and] as far as transparency and the involvement of the regulator, we are miles in front of what’s happening globally. We’ve looked at all the other countries where we want to be, and there’s probably a handful of countries, but we’re certainly ranking Australia number one.
One of the things we saw in Australia is the open architecture [of ] platforms [which] is certainly one way that fiduciary standards can fit in; we’re not seeing that globally. We’re seeing very closed structures, high commissions, a lot of rebates. I’m probably making a comment more coming from the US, that Australia is a long way in front of everyone else.
CODINA: That’s a perfect segue to what I want to say, which was I think there’s a bit of a [misconception], that an adviser sitting in an MLC business is effectively providing automatic referrals to MLC products. That’s just not the case. If you look at any one of the platforms, the number of products that are available, where the flows go, I think you’ll find the house actually loses rather than gains, in terms of the majority of those flows. So I think it’s an important point to make, and open architecture is exactly how we described it, and how, every time we’re overseas, people describe that system.
SANDERS: John makes a really vital point that frankly is so often lost in our dialogue in terms of government reform and regulation: that…we are absolutely the most advanced financial planning profession in the world, the envy of regulators in every other country, the envy of the marketplace in every other country. And that’s part of the debate that we do need to encourage here. Delivering on the promise of fiduciary is where that challenge exists, that there are complex analyses. We have a common law West- minster history of law that does make it slightly different to the US. But making that work to suit different clients in different environments for different needs is truly challenging. That will require some masterful legislative drafting that we look forward to having a say in, because it’s frankly, I think, very exciting but truly challeng- ing.
What we’d certainly like to see, too, is delivering on the other side of that promise; that is a challenge that’s obviously in the hands of Government, that there was a promise in the release a fortnight ago about reviewing the barriers to accessible, affordable advice. We recognise that in intra-fund [advice] for a defined class of individuals. We need to see that broken out to the benefit of more Australians, so they can access professional advice, because they frankly do all need it. What they don’t need is to pay lots of money for it. And I think that’s the great challenge – how do we balance those capacities, to make sure they are getting access to good advice? That’s the real challenge for the legislative program.
REYNOLDS: I think the most important thing is we make sure that we get the 12 per cent and that we don’t let the Opposition and the small business lobby shut down the debate.
How serious do you think that the Opposi- tion is about not supporting that?
BOWEN: I think they’re deadly serious. I think they’re deadly serious, for two reasons. One, I don’t want to be political here, but we could say the sky is blue and they’d find a reason to say it’s a plot. And secondly, I think, in all seriousness, Tony Abbott has an ideological objection to superannuation. Have to read [Abbott’s book] Battle Lines to find it. He says all tax con- cessions for superannuation should be abolished. And he is a man who will not step away from that easily. So I think they will oppose it down to the last vote in the Parliament, and they will run a campaign in the small business community to oppose it, and they will make it one of their key planks. I think it is deadly serious.
TATE: Andrea, you also were pretty happy, I would imagine, with your member outcomes, in terms of the policies announced, although I believe art and exotic assets have been excluded, which now [means] wealthy people can’t hold art, but large super funds still can.
SLATTERY: I will go to exotic and I might come back to advice in a second, because I’d like to talk about professionalism. But the exotic assets are actually something that are 0.1 of a per cent of the investments of the self-managed super fund market. And the majority of them are held appropriately and they are actually part of a diversification [strategy]. And Jeremy Cooper said that they weren’t going to intervene to actu- ally stop the opportunity of investment. And I think at that point there’s a lot of complexity that will have to come in, a lot of transitional issues that will have to come in.
But if I come back to professionalism, I must applaud what the FPA and the AFA and others have done, in relation to try and bring professionalism into [the] financial planning sector; and by bringing in the fiduciary duty requirement, I think that’s actually something that has to go hand in hand with any profes- sional industry sector. And I think the concept that the Cooper Review has come out with is that superannuation will become a specialist professional business proposition for business. And that will sit alongside financial planning as well. And so I think if you don’t have that level of complex advice that’s given by somebody that has the right level of competency – and we’d love to see the level of competency for super raised so that it’s on a level playing field with other professions such as accounting and financial planning, et cetera. And if you have that level of professionalism and you have intra-fund advice, as the lower-level part of advice, I think it’s very important that that intra-fund advice doesn’t end up with complex issues in there and it is really a genuinely baseline advice capacity. And Deen is quite right in relation to the cost that will actually be applied to that area.
But as a profession, you really need an under-graduate equivalent and level of knowledge, have a level playing field across all other professionals, whether medical or legal or other professionals; and so we would love to see that the super and financial planning sectors actually look and feel like professions. And as John said, we are the leaders in the world, we’re recognised by the World Bank in 2002 as being the leaders in super, in particular. And so it would be very good to align our professionalism with that, and have it look and feel appropriate as well.
BOWERMAN: Minister, the fiduciary standard from Vanguard’s point of view, could in the long term actually be probably the single biggest reform that comes through, in the way it actually changes the way [the industry is] structured. I suspect that one of the impacts coming out of it will be quite a generational change.
At Vanguard we’ve seen, as Steve was saying, that the industry has been moving this way – some faster than others – but for the last two or three years, at Vanguard we’ve seen moves towards low-cost and transparent products like index funds. But I think what your reforms do is absolutely draw a line in the sand to clarify and make the perception of conflict actually disappear. You get this tiered piece, where the intra-fund advice, which is what most people need, and then the complex, more expensive stuff at the top end, will hopefully come together and work.
I know in the US, Vanguard have seen a lot of people need advice, and we provide it; but we provide advice on an incidental life stage product, where if something happens and they need advice at that point in time, they don’t need comprehensive advice on an ongoing basis.
BOWEN: Sure. I think there’s some truth to that. Firstly, I think there’s going to be structural change in financial planning anyway, regardless of these reforms. The exact figure escapes me at the moment, but the average age of a financial planner I think is 58. So I think it’s ageing slightly more quickly than general society, and there are going to be changes there.
But I do think, sure, changes we’ve announced will lead to more structural change, in terms of some people saying, “I’m used to working this way, I’ve worked this way for 30 years, and I don’t want to work under other arrangements, and I’ll leave”. And I accept that. Also, I’ve got to say I’ve been a little surprised – I wouldn’t overstate it – but I received a few emails after the reform saying, “I was thinking of becoming a financial planner and I didn’t want to because there was too much conflict and too much perception of conflict, but now I think I’ll have a good look at it”. So I think it will be a more attractive industry for some people who want to be in a profession, to be seen as a profession, and will come into it in that sense.
You touched on – and it’s been touched on before – the possible distinction between sales people and advisers. And I did think very carefully about that. And at one stage I was attracted to putting in a formal distinction and saying it can be one or another, and I actually went to Britain and talked to Lord Turner about it. And they’ve gone more down that road in the United Kingdom. I came to the view, after thinking about it, well, why do that? Why not just professionalise the whole industry? Why have one part of the industry which has high standards, and another part which has a different nomenclature and different standards? Why not just get it right for everybody, was the view I came to. And frankly I think that’s a better outcome.
TATE: Minister, my understanding also is that you’ll be abolishing, legislating to abolish, all forms of volume rebates and platform fees, shelf space fees and the like?
BOWEN: If they are linked to volume. So if there is any incentive in the pay which incentivises the sale of a particular product. So in some instances – and there needs to be some consultation about the finer details of how we frame this in the legislation – but if there are flat payments which don’t in any way incentivise a product, then they would potentially pass the test. But if there is anything which in any way says it’s volume-based on rebate et cetera, then that would not pass the test.
It applies across the supply chain, so at any stage if it encourages sales, it would not pass the test.
Again, there needs to be a little bit more work about the finer details, but the principle that I’m applying is that if it incentivises sales, then it would not be allowed.
RUSSELL: What about individuals working within a company where the incentive is not related to any product, it’s really just a reward for being energetic? It’s a reward for not being slothful. What’s the thinking behind that? Because a lot of businesses – the act of providing advice, where you actually have to go out and find clients, it does require an energy, so a lot of businesses are based around rewarding energy, in that sense. But the best indicator of energy is just the number of new clients. And as long as that isn’t skewed to any particular product, it’s just the more clients, the bigger your return. What’s the thinking about that?
BOWEN: Again, that was a tricky area in terms of just how to deal with that. You couldn’t have a situation where you ban commissions to non-employees, but allow volume-based bonuses for in-house employees. You couldn’t allow that. So it does apply to in-house employees.
In terms of other payments, that’s something which I think comes into the realm of the professional advisory committee. That would deal with soft dollars. So soft dollars – I’ve expressed the continuum of soft dollars as a pen with your product written on it, which you give to advisers, ranging to a conference in the Bahamas at the end of the year. Now, they’re the range of soft dollar activities, which the professional advisory committee will need to work with ASIC in just determining what’s in and what’s out. And in terms of remuneration of in-house employees, I think there’s a good bit of work to be done there, just in terms of seeing that right balance.
TUCKER: It’s a very complex area when you’re looking at volume rebates, shelf-space fees, internal incentives. We’ve always had the view that as long as – and you will have employees that are better at generating revenue than others, and they should be able to be rewarded for being better performers. The question is to try and separate that from success being measured by how much product they sell. And reward them for revenue which is generated from a proper fee model, which is generated from the client agreeing to pay a fee for the advice they get. And we believe that by separating those two things, two financial planners sitting next to each other, one happens to be very good at their job, gets a lot of clients that buy their advice and pay for it – they should get paid more than somebody who doesn’t.
TATE: Could I ask, Steve, how do you sell advice and at the same time sell product in the same organisation?
TUCKER: There are different types of networks inside our organisation, and many advisers tend to choose the network based on how they want to give advice and how they want to relate to their clients.
But if you take the conversation that centres around the bank financial planner, the bank financial planner’s job is to give advice in the interest of the client, which takes into account all of the consequences of that advice, all the different aspects of that advice.
Now, what we’ve got to do is make sure that the implementation at the end of it, for a fiduciary obligation, is into a reasonable product. It’s not an outlier in terms of cost or functionality or any of those sorts of things, and competitive forces will force that anyway.
But most importantly, 90 per cent of the process is the advice – they’re not overgearing them, they’re understanding their risk profile, they’ve got their cashflow management understood, their insurance needs are met, and that’s really the professional advice process that we want to run.
Now, I believe Garry’s right, that some of the obligations will need to be met by opening things up. But don’t make the mistake today of assuming that every time a client walks into a NAB adviser’s office, they tell them to take their money out of an industry fund. That’s not the case. In many cases, they will choose not to necessarily do much more to that client but to say, “You haven’t got enough money to need what I do; stay in the industry fund, pay off your mortgage. See you later. And when you do want to, come back and have a chat”. So there’s a lot of myth around how these things actually play out that we need to be careful about. Is it appropriate to move somebody with a lot of money into an industry fund if they’re happy with an MLC product, because it’s cheaper? Don’t know. Is that best advice? I don’t know. You’ve got to take all those things into account.
WEAVEN: I think this is a really important issue. Let’s assume all of these changes are made, and after full consultation about the detail. Of course at the end of the day there will remain some grey areas, and of course part of the answer will be in the degree of enforcement – obviously a lot of things now could be cleaned up by enforcement rather than law – so that is true; that none of these things are ever absolute. You never get an absolute solution in any case. But extreme care needs to be taken to get this as clean as it can be, first time. And that’s more than just about public interest in the way you may be thinking about it.
When this set of proposals become law, it will, I believe, most likely represent the end of the reform campaign for a large section of the industry. It will be a new model that is being proclaimed, after full debate, as the way it’s going to be. That means that industry funds – they’ll make their own minds up, but this is what I’m seeing as a potential outcome – and public sector funds which [together] could be, say, 40 per cent of the industry, are very likely, it seems to me, to move to that new model, whatever it is, because it will be proclaimed as the new commission-free, best interest of the public, best interest for the member, best-interest advice model. What- ever weaknesses are in it may well be picked up by the 40 per cent of the industry. You need to get it right.
For example, if it is the common thing that to have professional best-interest advisers recommend your product only if you pay a fee to someone to get on the shelf, industry funds will have to look very hard at paying that fee. So the cost per member will go up. So just keep that in mind, because this is a once-in-a-lifetime chance to get this right. And everyone’s going to say,“Well, that’s the rules. They’re the rules, and we’re going to compete by the rules”.
CODINA: I think we need to be careful about not assuming there’s only one model that will ever exist or that should ever exist. I’m not sure why – the rules provide a platform for the industry and for the sectors to go and compete, and as with the advice discussion we’ve had over here, sometimes we’ll see the solution as intra-fund advice, and others will see it as outsourcing to a third party provider, and so on. So I think we set the platform, and we have to be very careful about what that platform is; but competition will arrive at what the landscape will look like.
RUSSELL: There’s one tricky issue which we haven’t really focused on, and it’s that [within] the advice stage, there’s the accumulation phase and then there’s the retirement phase. And [at] the retirement phase there’s an overwhelming case that people need advice, and it’s not just advice necessarily about products. There’s 70 to 80 per cent of the population [who] will still have a relationship with Centrelink, and there’s clearly people [who] need advice to make sure that how they structure their retirement income arrange- ments does have to be done in the context of Centrelink, and most people need advice on that.
CORBOY: Remember that a great number of them, Don, won’t have the account balance to need it too. In a mature system, that’s true, but there’s millions of Australians who retire now, take a very small lump sum, and have …
RUSSELL: For people who have a lump up to about $200,000, they’re going to qualify for the full pension, and so in that sense, the Government doesn’t really need to be concerned about annuities or whatever, because these people are going to get the full pension. But there’s another group from about $200,000 up to about $500,000, and that’s our members. And these are people that come out of the system with a lump between $200,000 and $500,000. This is a group of people, the private sector is not that interested in them, but it’s very important that they actually get advice and it’s very important that they get advice in the context of how they structure their arrangements with Centrelink, because most of our members will be in receipt of pension.
And we’ve put the system now on track to give intra-fund advice as a major way to do this. And the area which we haven’t really tidied up is in that context of intra-fund advice and the retirement phase; there are going to be a lot of funds which will want to do this, and the advice they’ll give to their members is, “The advice we give to you is that you should put your money back into the fund itself. So we have a very fine allocated pension, and that’s where you should put your money”. And I think we’ve got to think through, at that stage, is it appropriate for the answer to always be, “It goes back into the fund where it’s come from”, or do we need to think of an arrangement where – in most cases it probably will go back into the fund where it came from – but should that be contestable in some form or other?
REYNOLDS: The intra-fund advice laws are changing to take into consideration Centrelink so that the fund – like for a lot of not-for-profit funds, most people are just going to retire with a small amount, and they’re going to be getting their aged pension; and that was a real gap, I think, that you couldn’t talk to people about the relationship between Centrelink and what you have in your super and how that was going to work. So I think that’s a significant step in the right direction for lots and lots of workers.
HELMICH: I think Don was saying, though, it’s got to be affordable.
RUSSELL: It’s certainly got to be afford- able. The model that we have, and this is at State Super Financial Services, is that our members, or anyone – because we have relationships with other funds – we provide four levels of meeting before that which is free; so it’s not a question of us sizing them up to see whether they’re capable of paying fees to us. It’s actually useful … advice to them. And then, when they finally invest, then there’s an asset-based fee, which carries them through. And that model works very well. The members value it, and it’s affordable because they don’t actually pay anything up front at all. And they value the advice and they value the whole-of-life relationship. And with the new arrangements, they will have to actually sign off on the advice component and they’ll have to renew it every year, but our members actually value the advice and we’re confident that they will actually do that.
BOWERMAN: Well, the remuneration model within the financial planning industry as it was, actually [did] the financial planners no favours at all, because it actually disguised the value of advice. People perceived the advice was the free bit, and the products were the valuables. I think the reforms the Minister put up – the idea of separating the idea of anything that can skew the decision towards a product, versus what the advice piece is – is actually the really fundamental piece. And if you get that right, then people should value the advice and be prepared to pay for it. That’s the really critical piece.
Advisers need to get to a position where they charge for the advice and it’s valued by the end client.
I think Garry’s point is absolutely valid, though, that this is a very creative and competitive industry, and if there’s the slightest opportu- nity for fees or different payment structures to be developed, it will be developed. The platform piece is really critical, and that’s where people need to understand. It needs to be very, very clear about what it is you’re paying for.
COLE: You just said it’s a competitive market, and where there’s something that needs to be developed, it’ll be developed. We haven’t made much progress on the annuities issue. It might be coming but it’s taking a long, long time.
WEAVEN: Well, the Government abolished the system. We had a system and the previous government abolished it, only relatively recently.
CORBOY: You still need to look at what the average account balance is, Tony. Annuities are not on the radar for the majority in the immediate future.
COLE: That’s fair enough. But if you take a country like the UK, where they don’t have compulsory accumulation, there’s no compulsory super in the UK; but at the end, if you are in a retirement scheme you must buy an annuity when you retire. So, whereas we have compulsory at the earlier stage, we don’t compel people to buy an income stream at the end. Now, I take your point, the system is not mature and people haven’t got enough and so on, but there are a band of people who have got enough.
TATE: Ian, in the world that Garry’s predicting, do you expect to see AustralianSuper on the Asgard platform, or the Colonial First State platform?
SILK: It’s a good point. It depends on the growth ambitions of the fund. If the fund sees itself attracting members through external plan- ners, the only way that will be able to occur is to pay money to get on platforms.
SANDERS: Our vision as a profession for financial planning is that the professional actually has a very different role to play in the context of product-institutional relationships, that we need to find ways of encouraging culturally; that the planner in fact sits in front of the client and protects the client, as well as supports the client, from, frankly, all of you guys.
You know, my members’ job is to not be swayed by you people, but in fact to act on behalf of their client. I don’t care where you’re coming from. That’s part of the challenge in this environment, be they MLC employees, be they, frankly, industry fund financial planners who are qualified and certified according to our professional expectations. But we continue to see this debate as though it is institutional, as though it is structural and product-driven. That’s a great challenge. We need to find a way to support the culture of the profession, not just ways to deliver institutional models.
GRAUS: I’d have thought that it’s difficult with shelf space, if a platform doesn’t have everyone available on it, how can a planner turn to that platform and say, “I know these other investment products which are pretty good aren’t there. How am I fulfilling my fiduciary duty using this platform?” Isn’t that just a conflict?
BOWEN: Well, that’s where the “reasonable steps” defence comes in, and it’s also a case, as I say, that we then, it may be an obligation for an adviser to say, “Go and see somebody else”.
SLATTERY: But I think if we actually look at the consumer, we often forget in all that we talk about, the consumer goes to somebody for advice and expects that …the adviser will provide them value, and the adviser will put them into an investment or into a product or into an area that is most appropriate for them. And that nexus between the consumer’s interest and the advice is actually something that needs to be separate within every organisation.
If there’s going to be a genuine attempt to have a profession in these areas of super and financial planning, then that has to come from within the organisations, no matter which organisations they are.
And this will generate a new industry, a new professional industry of advice, that might be outside of organisations, because organisations have to make a call on whether that conflict is too great to have everybody in their organisation, or whether they actually outsource the complex advice, and only keep the internal advice as well. So they’re all issues that need to be addressed.
HELMICH: I look at what financial planners do and I think what my financial planner does for me, and it’s about structure, it’s about strategy, it’s about discipline, it’s around that approach. The product selection – and it is an AMP financial planner I use, I put that on record – the product selection is almost inconsequential. The platform’s almost inconsequential. And I agree with you. I agree, Garry, the costs should be between the planner and the client. There is at the moment, in all the aspects, whether it be industry funds or whatever, cross-subsidisation occurs. That’s why industry funds can give free advice, that’s why things happen. So where that cross-subsidisation goes, is going to be interesting in the debate, because I’m like Steve, I’m not a fan of shelf space. We get hardly any of it at AMP because we don’t support that approach. But what’s going to happen, if the customer pays more because the cross-subsidisation goes, it’ll be an interesting debate. Because it could actually push more people away from advice.
And I think the point you were making is advice needs to stretch right across the spectrum. We need to get people interested in middle Australia because they need advice, just as much as people at the top end do. And it needs to be scaled advice and affordable, and scoped advice to suit their needs.
TAGGART: We need to be very clear [about] the difference between information and advice. That’s really critical to the whole debate. And I say that not just from an academic point of view but from [a] very practical point of view.
I just say this to you, for all you learned people. Trauma insurance, while it’s not the debate or part of super: which one pays when you get MS, straight away? Which one pays seven years later? But [knowing that is] not important, is it?
So the point I’m trying to make is, I’m in the advice market. And I treasure that. And I think I reflect the growing tendency of all members of our associations in increasing their qualifications. I’m just looking at self-managed super funds, and I’ve just finished a doctorate, I’ve got two Master’s degrees, and I’m doing another Master’s, in tax. How much more study do you want me to do at nearly 56? I’m being really honest, because I take that as being responsible.
HOYLE: What is the Government’s vision for what financial planning should look like after these changes have come into effect and are bedded down and are operating?
BOWEN: Well, perhaps I could answer it this way. Two announcements in the last week were linked in this regard: I don’t think I could have convinced my colleagues, and I don’t think I could convince the Australian people, that putting more money into superannuation is a good thing unless it was much more transparent and professional. And I think the idea of the financial planning industry, as we’ve all said, and I think we’re all on the same page on this – we might have different nuances to the view – but we want it to be professional and trusted, and that means it needs to be not only free of conflicts of interest but be perceived to be free of conflicts of interest. And there’ll be differing views around this table as to the degree of conflicts of interest.
And in some respects we’re similar. I’ve been in politics in some form or another for 20 years or so. And I have never seen once a political donation to either side of politics having impact on public policy. Never. Never seen it. And I’ve been at relatively senior levels at local, State and Federal, and I’ve seen people of both political persuasions, both close up.
That’s not the perception in the community, and as a result, we’re going through a whole process of cleaning up perceptions, political donations, that will end with a much different system of funding politics and political campaigns as we do today. Now, I’ve no doubt that there have been some donations which have swayed public policy, but I’ve never personally seen it, I have to say, close up. And that means that we’ve taken the decision to clean up the perception of politics.
Similarly in financial planning, there have been some very clear instances of very poor advice being given because of very clearly conflicted remuneration structures. There’s no question about that. And they have done two things: firstly they’ve caused the financial ruination for a not small number of people. A not insignificant number of people have had their life savings wiped out. Secondly, it’s given everybody else a bad name.
So how do I see financial planning and the financial advice industry working? It’s quite simple. It works on a basis that the advice is given with no view to the remuneration of the financial planner, and it can’t be perceived to have any view to the remuneration of the financial planner. That might sound like it’s a generality, but it’s what it all boils down to at the end of the day.
TATE: I’d like to thank Vanguard for taking part and for agreeing to sponsor today. I approached Vanguard in launching Professional Planner three years ago, when we wanted to take a position on cleaning up conflicts of interest in the financial services industry. I went off to meet with Jack Bogle, the founder of Vanguard. That organisation has never paid a commission in its life, and I wanted to ask him why that was, and how we could create a world free of commissions in the financial services industry.
Vanguard has always had a transparent low-cost model and it believes in industry debate, governance, education and transparency. It’s been in Australia for about 13 years.
I think they’re an appropriate partner today as we review the three reviews with the Minister: the Cooper Review, which is all about how do we reduce the cost of superan- nuation to Australians; the Henry review of the Australian tax system; and of course, prior to all that we had the Ripoll review, into the collapse of Storm and other financial service organisations.