After a bizarre series of magazine and newspaper reports, Colonial First State has been outed for providing secret advice to financial planners on how to combat advertising from industry super funds.

A report in Money Management magazine of September 25, which did not name Colonial, about a series of closed-door sessions organised by a “big retail funds manager”, at which the benefits of commercial mastertrusts versus industry funds were detailed, prompted a response by David Whiteley, executive manager of Industry Super Network. He described the actions, if true, as “disappointing” and showing “lack of respect” for the financial advice industry. The Money Management report said that the manager’s name was known to the magazine. The Australian Financial Review then published Whiteley’s statement and named Colonial as the manager which had organised sessions with planners over the past six months.

Money Management’s daily online news service followed with a report on Whiteley’s statement, but again did not name Colonial.

I&T News has obtained a copy of a paper by Colonial on which the briefing sessions with planners were based. The paper dates back to September 2005, although it has been updated since. It was originally marked “For internal use by Colonial First State Investments Limited staff only”.

The paper is divided into seven sections of comparisons between industry funds and commercial mastertrusts, mainly using Colonial’s First Choice as an example. They are: fees, administration efficiency, distribution of investment earnings, insurance, estate planning, product features and business-to-business effectiveness. There is no section on investment returns. On fees, the paper admits that industry funds will tend to be cheaper for blended options but says there can be a quite varied range of fees charged, and that prior to the fee disclosure regime from July 2005, not all fees were disclosed. The paper says industry funds generally do not offer the same level of administration capabilities as a retail mastertrust. First Choice, for instance, has daily unit pricing and the ability to settle a transaction within one day. Industry funds cannot offer this level of service and investors may be substantially disadvantaged by being out of the market due to delays, the paper says. Similarly, the use of crediting rates by some industry funds can cause a misallocation of earnings and timing issues may lead to inequitable treatment.

(The smoothing and cost benefits of crediting rates versus unit pricing are not discussed in the paper.)

The paper says industry funds have generally not developed the business infrastructure that optimises efficiencies in the advice process. Retail and corporate mastertrusts such as First Choice offer extensive support structures. On insurance, the paper admits that industry fund premiums tend to be cheaper for blue collar workers, but there are large cross subsidies which disadvantage women, white collar workers and non-smokers. Automatic cover for industry funds tends to be lower than some mastertrusts, such as First Choice. The paper says that industry funds generally do not offer the same range of product features that mastertrusts do. The broader range from mastertrusts includes: wider investment choice, auto-rebalancing, online adviser trading access, model portfolios, refund of contributions tax via S279D for death benefits, facilitation of adviser payments, insurance pre-assessment, online insurance tracking and payments of pensions to child beneficiaries.

Paul Barrett, Colonial’s head of distribution, delivered a presentation on the subject to a closed session at the largest dealer group’s conference, the PIS conference, in Las Vegas in March.

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