Superannuation funds can successfully manage conflicts of interest and governance issues that stem from owning advice and providing services to members via businesses they may own through their portfolio holdings if they are “alive” to these situations, First State Super’s CEO Deanne Stewart has said.
In a wide ranging interview recorded as part of Conexus Financial’s Market Narrative series, the CEO of the country’s largest fund since the finalisation of its merger with VicSuper spoke directly to the issue of managing conflicts associated with owning StatePlus, a business it invested in which also provides advice to its fund’s members.
“What we need to do with our advice channel is we are breaking even quite frankly, and that’s what the law asks of you [to do]. The cost of personal or comprehensive advice is equally charged to the member. That’s what guides us and that’s what makes the conflict harder than you might imagine to manage,” Stewart described in the interview which can be listened to here.
Stewart’s comments in relation to managing the cost of the service to members addressed a question about whether super funds can practically own as well as seek to derive returns and diversification from an investment that at the same time provides services to members.
First State Super paid more than $1 billion to acquire SAS Trustee Corporation Australia’s financial planning and retirement advice business StatePlus in mid-2016 with the intention of providing financial advice and guidance to its members.
The acquisition was funded with a promissory note, debt funding which now sits as an investment in the fund’s portfolio holdings. The funding arrangement allowed the not-for-profit fund to make the acquisition in lieu of having a balance sheet for such acquisitions.
While the use of members’ retirement funds to acquire or invest in businesses which are for the provision of services to members may not breach the members best interests test, Tony Lally, former SunSuper CEO and current chair of Equity Trustees Superannuation’s board recently noted it may be questionable under good governance.
“When the members are both the owners and customers of a service an obvious conflict arises,” Lalley pointed out.
Accepting cross subsidisation
Aside from the specific issue of whether super funds should provide service to members in businesses they have a portfolio holding in, First State Super’s Stewart discussed the management of conflicts of interest generally within superannuation funds where services are cross subsidised by the broader membership base.
“I do think you have to be alive to the conflict of interest of an advice business and a super fund and I’d be foolish to sit here and say that there isn’t a potential conflict of interest in an organisation that is vertically integrated.
“Making sure the way you set up financial advice and financial advisers is very much with best interest with members in mind, that there is not adding incentives to do the wrong thing. I think you have seen that play out in other organisation where there is extra money for your own products, it’s those sorts of conflicts you’ve got to stamp out,” Stewart said.
Through its advice business, First State Super provides intra-fund and comprehensive advice as well as speciality advice specifically relating to aged care and estate planning, she described.
On the topic of cross subsidisation and conflicts superannuation funds must manage more broadly outside of their approach to getting advice to their members, Stewart pointed to group insurance as an area management of conflicts need to be managed for the greater good.
“Unless you believed every single member was going to claim, you are… accepting a product that the way you are able to reduce fees and ensure a good premium that’s not too much for members is that everyone shares that burden to some degree.
“I think the premise of insurance in some shape or form accepting subsidisation otherwise it wouldn’t exist or it would be super expensive for many of our members. You need to get rid of what I’d say is egregious cross subsidisation, but to some degree by group insurance you are accepting the premise of that,” Stewart described.
Specifically as it relates to managing conflicts of interest in advice, Stewart said funds need to be clear and have a clear policy around what degree of cross subsidisation they are willing to take on, particularly as it relates to a service that’s offered for free, “being really clear about how much is it ok for all members to wear versus when individual members pay.”
“The moment it becomes personal advice you very much do need to have a ‘pay for that service’ mindset because ultimately you have a much smaller group of members who want that, it takes a huge amount of work and costs significantly more. That’s the way we have divided it in our mind and legally as well,” she said.