It’s been a long time coming – many would say far too long – but finally there is widespread acknowledgment that sales commissions on super products create an inappropriate conflict of interest. Long regarded by the not-for-profit super sector as a scourge on our industry, commissions paid to financial advisers are now under fire from the very industry bodies that have spent years staunchly defending their role in the sale of superannuation products. Earlier this year, the Financial Planning Association, urged its members to abandon commissions and adopt a fee-based model by 2012.
This was followed by the Investment and Financial Services Association’s (IFSA) announcement last month of a draft charter to roll back commissions in favour of a fee-for-service model for the sale of super products. Industry estimates are that commission paid to financial advisers cost consumers an estimated $2.5 billion last year, $863 million of which was on compulsory super contributions. Commissions not only hide the cost of advice to the consumer, they drive bad behaviour. Many investors of retail super funds have spent years either paying for advice they never received or, worse, paying for compromised advice.
IFSA’s draft charter proposes that the current upfront and ongoing trailing commissions planners receive for recommending retail super funds be replaced by a member advice fee. This fee will be agreed upfront by the planner and the investor and paid either inside or outside the super account. Getting rid of trailing commissions is certainly a welcome move. But the draft charter falls well short of addressing the wider conflict of interests embedded in the financial advisory industry.
Commissions are only half the problem. If we just simply replace a commission with a fee, without removing the inherent conflicts of interest that are built into the relationships between many financial institutions and the financial planners they employ, then little will be achieved. No one can serve two masters. Unless we stop payment between financial advisers and financial institutions or at the very least make that payment more transparent consumers cannot be assured of getting impartial advice.
The draft charter also falls short when it comes to members of corporate master trusts. Under the new regime, advice fees applying to corporate super arrangements are agreed between the employer and the corporate plan advisers. Members can only “opt out” of the fees after the initial payment period. But there is no detail on how long this “initial” period may be and the question remains whether there is any justification for paying the “initial” fee in the first place. And what of the millions of existing investors in retail funds? As there is no intention to apply the charter retrospectively, many retail fund members will continue to pay trailing commissions for many more years to come, even if they no longer derive benefit from the advisor receiving the commission.