Super better be ready for a big shake-up

The Age

Saturday June 20, 2009

Ruth Williams

ON THURSDAY, the head of the coming review of Australia's $1 trillion super system gave the industry one simple message: nothing is sacred.Jeremy Cooper, who will shortly leave his deputy chairman role at the corporate regulator to lead the review, was referring in his speech to the wide spectrum of fees and charges levied on Australia's 11 million super fund members. As Cooper pointed out, they are so complex most people would need a detailed diagram to comprehend them.In what may have been a heart-stopping moment for the crowd - the host was the Association of Super Funds of Australia - Cooper named his "No. 1" priority as the abolition of all fees in super. He was joking.It may have been a somewhat unwelcome bout of mirth for the super fund sector, already shaken by mounting negative investment returns, multiple government and parliamentary inquiries and a growing investor outcry over fees and commissions.Change is looming - not just in super but in all facets of how Australians are advised about their money, how they think about it and how they invest it. The implosion of Storm Financial, the collapse of managed investment scheme operators Timbercorp and Great Southern, the debacle over toll-road funder BrisConnections - they have all affected retail investors and have added momentum to a major reform process that should ensure lasting change.This was a key week in that process. The retail super fund sector unveiled its biggest attempt at self-reform in its history, Commonwealth Bank apologised for its role in the Storm mess and Cooper's speech made his determination to "renovate" the super industry.The common theme in all of these issues and events is financial advice - how much it should cost, how it should be paid for, how those payments should be disclosed and who should be allowed to dispense it.Storm Financial has become exhibit A in the argument for lasting change.Storm's technique involved clients leveraging their assets - including, in some cases, the family home - to borrow as much money as possible, often using margin loans provided by Commonwealth Bank and Bank of Queensland, to invest in shares.Storm's business model involved charging clients for financial advice - advice that clients should buy Storm investment products, for which they would again be charged.The more leveraged Storm's clients, the more products they bought, the more money Storm made. It was an extreme illustration of the inherent conflict created by commission-based payments - payments that, in Storm's case, appear to have motivated financial advisers to sell the products that made them the most money, not those that were in their client's best interests.It is clear that, when Australia emerges from the fallout of the global economic crisis, the system that enabled Storm to flourish and then crash will have changed. It must change. The advice industry has started to realise this.This week, the Investment and Financial Services Association - which represents most retail super funds in Australia - unveiled a 15-page document that it described as its "super charter", much of which will form IFSA's submission to the Cooper review.It was wide-ranging, calling for various changes in how super is taxed and marketed and how super fund performance is measured and ranked.But the curtain-raiser related to fees and commissions. On behalf of its members, IFSA pledged to phase out commissions on super products paid to financial advisers and to un-bundle other fees and charges to make it clear how much customers were paying.Under the plan, commissions will be replaced by a "member advice fee", paid for by the client, of an amount agreed on by the client and adviser. Crucially, the client will be able to turn off the fee if they stop using their financial adviser - a big change to the trail commission system where advisers reap rewards from product providers years after selling the products to clients."This will boost consumer confidence in superannuation at a time when it is most needed," IFSA's chief executive, Richard Gilbert, said.Investor confidence is crucial for any system of investmentand confidence in super has been devastated by substantial losses in the wake of the global financial crisis. Years of double-digit returns during the boom years created inflated expectations; the come-down has resulted in super members questioning the entire system of super, as well as the fees and commissions they paid to those who "lost" their money.Jo-Anne Bloch, the chief executive of the Financial Planning Association, this week described IFSA's move as significant - and inevitable.IFSA's move followed a similar measure announced in May by the FPA, which is working to rebuild the profession's reputation after the Storm and Westpoint disasters. The FPA wants its members to stop taking commissions from 2012, a move it hopes will help dispel accusations of conflicts of interest and secure a future for the much-criticised financial planning industry.Bloch's concern is that commissions - and perceptions of conflicts of interest - will act as a disincentive for people to use financial planners. "We want a viable profession, and we want to attract new clients," she said.Bloch's argument is that if the industry does not reform itself, the Government will do the reforming.Of course, the debate around financial advice is broader than the merits, or otherwise, of commissions.Affordability is important. The people who need financial advice most are arguably those least able to afford it - young people and those with modest incomes that must be carefully managed. Some have argued that banning commissions on super - thereby requiring clients to pay for the full cost of advice received - will affect affordability. But Gilbert "absolutely" rejects this. As he points out, clients eventually pay for commissions anyway - they are simply built into the cost of the product. "By doing this we are increasing the integrity of advice," he says.Cooper made it clear this week that the super review would go beyond commissions, looking at the host of other fees levied on super fund members. His stance is that revising the labyrinth system of fees and commissions charged in super is a crucial part of restoring investor confidence in super.