Bill Buttler looks at whether industry superannuation funds are justified in subsidising the cost of providing advice to fund members.
At a recent encounter between the Financial Planning Association (FPA) and Financial Services Minister Bill Shorten, several planners tackled the Minister on the issue of industry superannuation funds providing “free” financial advice, paid for out of the administration fees charged to all members.
On the one hand, a concern was expressed that fee-for-service planners would find it hard to compete; and on the other hand, some planners contended that this arrangement is exactly the same as having trail commissions bundled into administration fees – something that industry funds have been so critical of in the past. To what extent should planners be worried about competition from industry funds? And is the funds’ position vis-à-vis trail commissions a defensible one?
The history of intra-fund advice
As with most such questions, the answers are not as black-and-white as both sides would like to paint them. To understand what the industry funds are doing now, we need to go back in time to the origin of the Superannuation Guarantee (SG) contributions in the late 1980s.
The first industry funds were founded as vehicles for accepting what was then a 3 per cent “productivity” contribution, based on an agreement between trade unions and the Hawke Labor Government to accept superannuation contributions in lieu of a 4 per cent pay rise. This was a successful circuit breaker on wage inflation.
This was the first time that many workers had access to superannuation and participation grew from about 40 per cent to more than 80 per cent within a few years. As a consequence, most account balances were small and the funds focused on keeping costs low and offering a simple, standardised product. There was little need for advice, since there was no investment choice, few insurance options and hardly any interest in making additional contributions.
As the contribution rate built up to 9 per cent of wages, and investment choice was introduced, a small demand for financial advice started to grow – but generally only amongst those members with substantial account balances, perhaps already accumulated in another fund and later moved to an industry fund to take advantage of the low-fee environment.
Fund trustees generally regarded advice as something that should be provided on a fee-for-service basis by a separate group of professionals to which members would be referred when they sought advice. The specialist firm of Industry Funds Financial Planning (IFFP) was set up specifically to address this need. Most fund trustees regarded advice as too specialist and too risky to deliver in any other way – such that great care was taken to ensure that telephone call centre operators would refer callers to a professional planner at the merest hint of a question that could involve even general advice.
A series of legislative changes early in the new millennium changed the whole demand pattern – now that those of modest means needed advice, albeit of a different kind to the traditional “full (holistic) financial plan” model. The first major impact came from the introduction of the Government co-contribution scheme in 2003. Industry fund call centres were flooded with questions about the process for making an eligible contribution, from members wanting to understand the rules and the potential benefits. Call centres dutifully referred members to licensed planners for a response, but the process was less than satisfactory for both parties. Planners found they were spending hours providing general advice and education to members who were clearly not prepared to enter into a full financial planning process, let alone pay a reasonable fee for it; and members felt they were being pushed into an expensive arrangement when all they wanted were answers to a few simple questions.
Hard on the heels of the co-contribution came the new post-retirement tax arrangements that introduced potentially valuable transition-to-retirement products even for those with relatively small account balances. The existing planner networks became stretched to their limits, and industry fund management teams started to look around for alternative solutions.
Assisted by ASIC’s introduction of the concept of intra-fund advice, trustees at last embraced the idea of providing advice from within the fund, at the point where the demand originated (the call centres). The impact of volatile investment markets, competition from self-managed funds, and new flexible insurance options have only served to escalate the demand.
More recently, industry funds have begun to issue their own account-based pensions. There is a need to provide advice to pre-retirees on their own circumstances – and the funds want to retain the member within the pension division of the fund. Hence, they have needed to engage with advisers.
This trend will continue as funds seek to stop the leakage of members to the self-managed super fund (SMSF) segment.
The impact of advice on costs
The graph above summarises the three major components of total superannuation expenses, expressed as a percentage of fund assets, across a range of different fund types. Note, these are the average expenses incurred, and there is significant variation within each segment. We have excluded advice paid for by individual members on a fee-for-service basis.
In this chart, the “retail employer” segment consists of retail master trusts that deliver employer-based superannuation services. It excludes retail personal super and retirement income products (which together make up nearly two-thirds of the APRA “retail” classification), for which the advice component is significantly higher.
The chart indicates that all fund types deliver advice to members on a basis that is charged across the entire membership. The retail employer category currently includes significant amounts of trail commission, some of which will disappear under the “opt-in” commission rule. The industry fund segment is in its infancy, and we expect that the provision of advice will increase as funds mature and more members approach retirement.
