Australia’s second-largest wealth manager, IOOF, counted on disengaged super members with low balances and clients with financial advisers on trail commissions not moving to a lower-fee product introduced this year, the Hayne royal commission has heard.
Almost half the members of IOOF’s Super Choice Fund would be better off on the new fee regime but were considered a low “arbitrage risk” to migrate by themselves, IOOF distribution manager Mark Oliver told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Super Choice would have suffered an $8 million-a-year hit to revenue if all members migrated to the new regime, which was expected to benefit more than 29,000 existing members, 20,000 of whom have a grandfathered commissions with advisers, documents lodged with the court revealed.
Papers from a board meeting in February this year highlighted a conflict of interest for the board, regarding putting obligations to members over the interests of the fund.
While IOOF’s board voted to inform existing members of new prices in May this year, it stopped short of automatically shifting them to the lower-fee regime; however the board was not informed by IOOF’s senior executive team how many members were on grandfathered commissions, the royal commission heard.
Friday’s testimony echoed revelations by National Australia Bank’s wealth manager MLC earlier this week that the company chose to continue paying commissions to advisers rather bring new super fund products in line with the spirit of 2013 Future of Financial Advice (FoFA) reforms aimed at removing conflicts of interest.
Adviser commissions for super products were banned from January 1, 2013, under FoFA, but commissions in place before that date can continue under “grandfathering” arrangements.
Counsel assisting Michael Hodge said to Oliver: “Advisers who are receiving a grandfathered trail are unlikely to move their members, notwithstanding that they’ll be better off, to the new pricing where they won’t receive a grandfathered trail.”
Oliver responded: “In our experience, those products take longer to move to a new price point.”
He said that had all members moved to lower fees, the new price regime would have been higher and probably unsustainable.
The commission had advised IOOF that Oliver, who joined the company in 2016, was not the best witness for the inquiry. It summonsed managing director Chris Kelaher, who gave confident responses to Hodge about the firm’s repeated sparring with the Australian Prudential Regulation Authority on governance concerns.
Kelaher said IOOF had recently moved to change its superannuation structure, which involved subsidiaries paying money to IOOF as a related entity, not because APRA was right but to keep the regulator off its back.
Since 2013, APRA has been insisting that IOOF Investment Management split its dual-regulated model, which classifies it as a responsible entity and a registrable superannuation entity.
Hodge asked: “You don’t share the view of APRA that there are legitimate concerns about these structures; it’s just, ultimately, as a matter of practicality, easier to make the changes rather than keep having to deal with the complaints?”
“Um, yes,” Kelaher responded.