The Productivity Commission has called out investment firms for hiding trailing fees and margins within superannuation products and thrown its weight behind a full and immediate ban on grandfathered commissions in its final report into the superannuation system, released today.
The report, penned by deputy chair, Karen Chester, who’s since been appointed ASIC’s deputy chair and will assume that role later this month, put advisers and product providers on notice for gouging superannuants with unnecessary fees.
The commission surveyed superannuation funds as part of its investigation and found that about 30 per cent of those surveyed have members paying adviser trailing commissions. The inquiry – which will be used as a basis for policymakers to overhaul and modernise the superannuation system – was unable to discern what percentage of total members are paying trailing commissions to financial advisers.
The lack of restrictions on administration fees in so-called choice superannuation products also allows funds to include costs and margins in administration fees that do not directly relate to the administration of the fund, the PC report stated.
The report highlighted that some products are charging trailing commissions as a component of their administration fees and, further, that there are instances where trustees appear to have avoided closing legacy products, or avoided moving members to products that would leave them better off, because it would mean removing commissions flowing to a related-party business.
New rules around fee disclosures released this week are expected to address some of the issues around fee gouging the Productivity Commission raised.
Time for transition over
Misconduct aside, the report noted that the payment of trailing commissions does not represent value for money for members of super funds.
The PC report noted that, while the likes of the Financial Planning Association and the Association of Financial Advisers have called for the retention and phasing out of trailing commissions to minimise the impact on practitioners and businesses, “extending transitional grandfathered trailing commissions could be in the interests of anyone other than the advisers receiving them”.
“Trailing commissions have been banned for new products and members since 2013,” the report stated. “The time for transition is over. The commission supports a full ban of all commissions on superannuation products, which will likely have the effect of reducing the fees currently paid by members of some retail products.”
Indeed, as part of its recommendations to government, the report has suggested that a ban on trailing financial adviser commissions in superannuation take effect as soon as practicable.
Link to asset-based fees
The report also took a swipe at asset-based fees in superannuation and linked the charging of such fees to advised clients in retail funds.
The report found that retail funds rely more on percentage-based fees than do not-for-profit funds; about 27 per cent of retail products rely only on a percentage-based fee, compared with 5 per cent of not-for-profit products, the report noted. It also added that retail funds generally charge higher fees, whether they be percentage-based or fixed dollar amounts.
“While the practice of percentage-based administration fees may be widespread, the commission considers that there is no obvious basis for variable administration fees levied as a proportion of a member’s assets, and that funds should be required to justify percentage-based administration fees to the regulator. Further, where funds do charge percentage-based administration fees, they should be required to have in place a fee cap that reflects the fund’s operating costs per member account,” the report stated.
The PC found that the presence of trailing commissions may explain in part the reliance on percentage-based administration fees in the APRA system and that funds may also use percentage-based administration fees to fund additional member services – which members may or may not value.
Advice on notice
On the issue of advice in superannuation more broadly, the Productivity Commission concluded that a lot more needs to be done to help superannuants access advice that is impartial, affordable and meets their needs.
The PC report noted that a body of evidence has emerged through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and work by ASIC, that shows conflicted and unsuitable advice pervades the super system and must be fixed.
Treasurer Josh Frydenberg has commented since the release of the PC’s report on Thursday that he will wait until the release of the final recommendations from the royal commission before finalising Treasury’s response to the superannuation report. The PC’s report suggests also putting on hold plans to increase the superannuation guarantee until the broader system’s deep flaws relating to conflicts of interests are addressed.
“Stronger regulatory oversight of financial advice is overdue,” the PC report highlighted. It pointed to the work the commission has done in its parallel inquiry on Competition in the Australian Financial System, relating to disclosure of products on approved product lists as part of this effort.
More broadly, the Productivity Commission made the case for a clearer distinction between financial advice that takes account of members’ individual circumstances and “information” that can help them make their own decisions in the superannuation context.
“All advice in relation to super is arguably personal, and the term ‘advice’ should not be used where members are only being provided with product information or marketing material,” it noted. “Impartial advice will be especially important for many members in the retirement phase, where diverse needs, preferences and non-super assets mean one size can never fit all.
“There are real risks in nudging many members into risk-pooled products that may not suit their needs and are costly to get out of. Trustees do not always want to offer these products, and forcing them to do so may conflict with their obligations to act in members’ best interests.”
