Pam Roberts
News

The Battle Lines Get Drawn: IFSA, FPA, AFA and the Government on fees, commissions and advice

By Pam Roberts

A year ago the (then) Minister for Superannuation, Nick Sherry, put the superannuation and financial services industry on notice to come up with proposals for the reform of fees and charges on super. The implication was that if the industry did not come up with its own reform agenda, the Government would step in and do it for them. Over the past couple of months, industry peak bodies have been drawing their lines in the sand, in anticipation of the Cooper Review into reform of the super system.

For those of you in the industry getting confused about who is saying what, we have included here a summary of the positions taken by the various organizations.

IFSA – “Draft Super Charter: A New Commitment to Super Members” – released 17 June 2009

Proposed to commence 1/7/2010 with a two year transition
Full implementation 1 July 2012

1. Adviser remuneration limited to:

1. Member Advice Fee

  • Applies to: (1) new personal super/pension accounts; (2) new corporate super plans; and (3) members transferring from existing corporate plans into personal super.
    - Does not apply to existing super accounts or new life cover to an individual or group.
  • Member must agree to the amount paid for advice. It can be an agreed upfront fee or ongoing amount or percentage of assets, either deducted from the super account or paid direct. Clients can choose to switch it off.
  • The Government must amend the law to make advice fees tax neutral and acceptable under superannuation law.

2. Plan Service Fee – Employer and Corporate super

  • Applies to new employer/corporate plans only, and only where the adviser service fee is taken from member accounts.
    - Does not apply to existing employer/corporate plans (including any new members).
  • Annual statements to include value of Plan Service Fee and members may opt out of the fee after an initial amount of time agreed with the employer.

What this means:

  • Adviser service fees will apply to new personal super and pension products – whether this fee is by dollar or % of assets. No new trail commission arrangements from 2012.
  • Existing trail commission arrangements can continue. Although the value of planning practices will be impacted by removing trails for new accounts from 2012, the grandfathering provisions may also mean that existing books will be highly sought after.
  • Platform providers will be looking to rationalise their product ranges from 2010 for new business. Deferred entry fee products, bundled fee structures may be a thing of the past.
  • The Government will have to agree to implement tax deductibility for adviser service fees.

Comment

IOOF released the Pursuit Select range more than two years ago which provides for separation of the product fee and the adviser service fee. So far, our experience with fee transparency has been very positive. Feedback from advisers has been encouraging – many like the simplicity and clarity of the adviser service fee model and the value it puts on the advice a client receives.

2. Investment Options

Super providers to publish accurate standardised performance tables on a monthly basis on websites:

  • Medium to longer term data – 3, 5, 7 years.
  • Net of maximum non-discretionary dollar and percentage based fees.
  • To be available to regulators, members and research houses.
  • Full disclosure of (1) redemption policies and pricing, (2) asset allocation (including listed and unlisted assets, with valuation methodology) and (3) liquid and illiquid assets.

Comment

Fund managers roll-up your sleeves. This will be a huge job for super fund providers to implement. However, it will make it easier for financial planners to assist clients with performance data and data provided should improve in consistency and accuracy.

3. Rules for advertising

  • Past performance must be based on actual investment option performance – not averages.
  • Using past performance to forecast future returns and future fee forecasts should be banned.

Comment

This will need Government action as it is largely aimed at industry fund advertising campaigns that IFSA believes can be misleading. Industry funds are not ordinarily members of IFSA.

Summary

Change is in order. The IFSA position is aligned with the FPA’s position (below) and will almost certainly be implemented (assuming it is adopted by the IFSA Board). IFSA would be hoping this will be enough to satisfy the Government’s reform agenda, and more difficult areas such as vertical integration of financial services and advice (i.e. product providers owning distribution) will be left alone. Importantly, IFSA has taken care to ensure that the policy does not have retrospective application, as the current fee arrangements for existing accounts are grandfathered. This recognises that current commission arrangements may involve contractual rights that should not be interfered with.

FPA – “Financial Planner Remuneration Consultation Paper”

Released April 2009.
Proposed commencement 1 July 2012.

This came out before IFSA’s paper, and there are clear synergies between the two proposals.

1. Clients should understand fees they are paying.

  • This means simple and consistent disclosure of fees. Clients should clearly understand the cost and value of the advice they receive.
  • FPA to simplify SOA fee disclosure.

2. Clients should be able to compare fees and charging models.

  • Clients should be able to choose the charging model – fee for service, and/or commission.

3. Fee structure should be true to label.

  • New standards for marketing and promotion. Clarification of “independence”.
  • Disclosure should include the consequences of a particular charging model, particularly if the adviser uses a commission based charging model. For example, the differences between upfront and ongoing commission and the potential influences on advice.

4. Fees for product and advice should be separately disclosed.

5. Fees should be agreed with the client and can be switched off if no advice provided.

6. Remuneration should be paid from client’s account and not from the product provider. That is, a move away from a commission based structure to fee based remuneration.

Comment

The FPA are rather vague on whether existing remuneration arrangements (commission & licensee rebates) should continue. However, this is probably outside the FPA’s jurisdiction and a matter for IFSA.

AFA

- media release 7/4/09

The AFA have contended:

  • It doesn’t matter if remuneration is commission based or fee for service, as long as the client is aware of how much they are paying.
  • Without commissions many clients would not receive advice.
  • The term “adviser” should only be used by a licensee.
From the Government

The Cooper Review
- due to report back 30 June 2010

Jeremy Cooper (ASIC Deputy head) to head up a review of the “Governance, Efficiency, Structure and Operation” of Australia’s Super System.


  • “Best interests of the member” to be the key principle.
  • To cover improved regulation and reduced costs.
  • Review all sectors – including SMSFs.
  • A look at international practice.
  • Will not consider tax concessions and super contributions covered by Henry Tax Review; or clearing houses and lost accounts.

Comment

This review was initiated by Senator Nick Sherry who is no longer in charge of super. It is not clear whether the new Minister – Chris Bowen has the same passion for reforming super that his predecessor had. We can only wait and see.

ASIC – Advice to Super Members RG 200

Issued 9 July 2009

Super Funds (not SMSFs) can provide personal advice to members about their interest in the super fund without having to meet the requirements of s. 945A of the Corporations Act. Relief is provided on the following conditions:

  • The trustee must hold an AFS license to provide personal advice.
  • Advice must relate to the member’s interest in the fund - such as contributions and insurance.
  • Advice does no relate to issuing a new interest, transferring to pension phase, interests outside the fund (such as rolling over from another fund); an investment strategy which requires a PDS (i.e. most investment options provided by platforms).
  • The client must be informed in writing about the relief, the limited nature of the advice, any increase in fees/costs and any remuneration arising (in dollars). An SOA is still required, although from the examples given, providing an SOA is not likely to be onerous.

Comment

The ASIC relief has come in for some heavy criticism by the planning industry who have raised concerns about the competency of trustees to provide personal advice and the risk of mis-selling. The super providers on the other hand have welcomed the relief.

Other Developments

UK announces the end of commissions

From 1 January 2013, commission based remuneration for financial advisers will be abolished. Clients will be advised up front of the cost of advice and given a choice of paying as a separate fee or deducted from premiums.

Accountants to Review Advice Remuneration

The Accounting Professional Ethical Standards Board will conduct a review of “APS 12 Statement of Financial Service Standards”, the code of conduct for governing financial advice. Key areas that will be looked at will be fees and remuneration, particularly soft dollar and alternative remuneration. CPA Australia has indicated that as long as the remuneration is disclosed and agreed with the client and is directly linked to the advice provided, how it is paid (fee for service or commission) should be secondary.

U.S. Securities and Exchange Commission (SEC) to have powers to ban commissions

The Obama Administration has introduced legislation to provide the SEC with enhanced powers to examine and ban investment intermediary compensation (i.e. adviser remuneration) that encourages investors into products that are not in their best interest. Further all investment advisers, including broker-dealers, will have a fiduciary duty to act in the best interests of the member.