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.

Equally concerning is the lim­ited nature of the
draft charter, which doesn’t apply to all financial products. If there is
widespread acknowledgment that commissions are an unnecessary evil, then why
limit their removal to super products?  The
move by both IFSA and the FPA to put commissions under scrutiny follows intense
pressure from the not-for-profit superannuation sector, in particular Industry
Super Funds. Over more than a decade IFS and, in more recent times, Industry
Super Network have waged a very public campaign through the
enormously-successful Compare-The-Pair advertisements and other media
campaigns.

More recently, the collapse of Storm Financial as well as several
managed investments schemes that paid generous commis­sions to financial
advisers, has seen consumer groups like Choice join the opposition to this
insidious practice. The Government also has commis­sions in its sights, having
made no secret of its desire to reduce costs for super fund members. The
outgoing Minister for Superannuation and Corporate Law, Senator Nick Sherry,
has long been a key proponent for reform and he leaves the industry having
instigated several important reviews and inquiries in this area.  

It is widely hoped among those in the
not-for-profit sector that the Coo­per Review, in particular, will deliver on
its promise to “ruffle feathers” and recommend sweeping regulatory – and
possibly legislative changes – affecting the commissions paid on retail super
funds. For when it comes to sales commis­sions, feathers will need to fly.
While IFSA’s draft charter is a welcome step in the right direction, it is
unlikely to bring about significant change without robust regulatory backing
and a govern­ment that is willing to push both the retail fund industry and the
financial planners that serve it a lot further along the reform path than they
are currently prepared to travel.  

Only
then will members of retail super funds be confident that any finan­cial advice
they receive truly serves their best interests.  ON ANOTHER NOTE AIST
would like to acknowledge the work of Senator Nick Sherry. In the time he was
responsible for superannuation he instigated a number of important reviews and
reforms in the superannuation industry. Senator Sherry has been promoted to
Assistant Treasurer and will not be lost to the superannuation industry, as he takes
charge of the Henry Review which has wide-ranging implications for the
superannuation industry. We wish him well in his new role and look forward to a
continued relationship with him and his office.

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