TWO of the foundation platforms of our retirement planning system – financial advice and superannuation – are about to embark on a two-year journey in search of lower fees and greater transparency.
The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, used this week’s Anzac Day public holiday to propose a range of regulatory changes that will dramatically overhaul the way financial planners can charge for providing financial advice.
Bowen has taken a tougher stance on commission payments than that recommended late last year by the parliamentary joint committee inquiry into financial products and services, chaired by Bernie Ripoll. The ban on all commission payments from any financial services business to advisers is aimed at removing the structural conflicts that allow product providers to influence adviser recommendations.
The wide-ranging clamp down on any form of commission including volume or sales targets will cause financial planning businesses to alter not just their charging structures but their basic business model. That will be disruptive but because the changes do not take affect until July 1, 2012, the industry has adequate time to get itself into shape.
The move to outlaw commissions and volume-based sales bonuses and rebates is a dramatic change to the revenue models for many major financial planning businesses. But it can hardly be described as a surprise. The industry has been heading in this direction for several years now but what Bowen’s proposals do is give the industry – subject to parliamentary approval - a hard deadline for implementation. The only people genuinely surprised by these moves will be the financial planners who had their heads buried firmly in the sand hoping the shift to fee for service would pass them by.
While the ban on commissions has been where most of the headlines have been focussed the second major proposed change – the setting of a fiduciary responsibility for advisers to act in the best interests of clients may well have the bigger long-term impact.
This means many advisers, dealer groups and administration platforms will have to review and look at a range of practices through a different lens.
No longer can a product be recommended to a client simply on the basis of it being reasonable to do so. From July 2012 the clients’ interests must take precedence above any commercial preference/interest that the advisory group has.
This is a fundamental reform that will go a long way to raising financial planning to the ranks of professionals.
The second leg of the reform agenda is the way our default superannuation funds operate.
The government review into the governance, efficiency, structure and operation of Australia’s superannuation system that is being chaired by Jeremy Cooper has released a preliminary report into how it believes superannuation can be optimised.
Cooper and his review team are clearly on a mission to cut costs out of the super system both through administrative efficiencies in the back office and streamlining the default options of super funds.
The review is proposing to rename the “universal” or default fund as MySuper. This is both a pragmatic and practical approach when you consider that 80% of superannuation guarantee dollars flow into the default option. In other words most people do not actively exercise choice about the investment strategy for their super – they leave it to the trustees to manage it.
The MySuper structure should fit comfortably within most default options today so in that regard is hardly radical reform. But it sharpens the focus and responsibility on trustees to provide a single, diversified investment strategy at the lowest cost possible.
The Cooper Review goal is for super funds to provide a “value for money, simple and effective product for members”. What they are concerned about is as our super funds gain scale there has been a trend to add “bells and whistles” and in turn complexity to super funds that the majority of members probably don’t need, much less want to pay for.
So the MySuper fund would be separate in an accounting sense so its members, for example, would not have to carry the cost burden for services they either don’t want or do not even know about. Cross-subsidy of costs would be carefully scrutinised under the proposed changes.
As part of its review work the Cooper Review also commissioned a research paper into fund costs by consulting firm Deloitte. It underlines the cost benefits that should flow from greater scale within the MySuper proposal. It splits the costs between investment and operating costs.
The onus on trustees under the MySuper proposal is to deliver the best net investment return and the Deloitte report highlights the cost difference between a passive or index approach to investment strategy versus an active management approach. For example Deloitte’s forecast the investments costs to manage a balanced portfolio for a $2 billion fund operating under the MySuper proposal using an index approach would be around 10 basis points (or 0.10%). That compares to 44 basis points (or 0.44bps) for an actively managed balanced portfolio.
The Cooper Review stopped short of recommending a cap on fees but makes the strong point it has a dual aim: optimising the net investment return and reducing the overall cost to members.
Costs and asset allocation decisions are the two big drivers of how much members get to spend in retirement. So where trustees opt for a higher cost investment strategy they will need to be able to justify it in terms of higher net return to members.
The Bowen reforms around financial planner payments when combined with the Cooper recommendations arguably will put Australia at the forefront of the financial services industry globally in terms of transparency around adviser charges and focus on low costs.
That has to be good news for investors.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.
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