MP slams industry funds

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In a speech to the HR Nicholls Society yesterday, Paul Fletcher MP, Federal Member for Bradfield, heavily criticised the governance and operation of Australian industry funds.

Fletcher accused the current model for industry and public sector funds, of “advancing Union power and influence”.

A main concern for the MP, was the failure of funds to meet the sole purpose test, due to the representation of Union members on the fund boards.

Under the so-called ‘equal representation’ model, mandated by the Superannuation Industry Supervision Act, up to half of the directors of an industry fund are typically appointed by a union.

Fletcher said that he analysed 74 funds’ annual reports, and that of 551 directors, 171 (31%) were appointed by unions. Of the 10 biggest funds, Fletcher said there were 112 directors in total, “of which eight were independent, and 48 union appointed directors”.

“Very few of them make any effort to appoint people with expertise in superannuation; or to appoint a representative selection of members of the superannuation fund – as opposed to members of the union.”

A conflict of interest then arises between a director’s duty to members of the super fund, and their interest in advancing the position of their union, said Fletcher, citing examples of CBUS, TWUSuper and the Health Services Union. He said that there was a systemic risk of super funds being “crossinfected” by the corruption at a union.

“This is precisely the sort of risk, I would suggest, that the governance reforms recommended by the Cooper Review would help to address. Unfortunately, as I have mentioned, Bill Shorten ignored the recommendations. He did offer the comment, following the Fair Work Australia report into the HSU scandal, that he was ‘appalled’.”

The Review concluded that the equal representation system “no longer seems to achieve its original stated objective”, and that the system leaves significant groups unrepresented, including those who are retired and receiving benefits payments from the fund.

“I think it is very problematic indeed that we have a system under which employees are forced, by law, to take a portion of their remuneration in the form of superannuation contributions, and yet we have not taken steps to derisk the governance of the vehicles into which that money is put,” said Fletcher.

The speech came on the same day as the Coalition released its Policy to Boost Productivity and Reduce Regulation. The policy announces amendments to FoFA, including:

  • Complete removal of Opt-in
  • Simplifying and streamlining the annual FDS requirements
  • Improving the Best Interest Duty
  • Providing certainty around the provision and availability of scaled advice
  • Refining the ban of commissions on risk insurance inside super

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Sydney adviser receives permanent ban

Five former Trio directors admit failure

Greater disclosure expected from platforms

  • Pat on 26/08/2013 9:58:32 AM

    To dreg up an old story, I was looking to see if "Really" ever answered the question of the benefits existing members received (none) from their funds being used to promote to new members. Obviously, he/she had not.

  • James Smith on 12/07/2013 10:52:38 AM

    Really for an adviser to recommend a client move out of an industry fund they need to demonstrate a reasonable basis to do so. This is a compliance requirement. The concern being raised is that intra fund advice or limited scope advice may be used by salaried advisers of both industry funds and retail funds to bypass this reasonable basis requirement. The purpose of these responses is to raise awareness of some key concerns with the FOFA legislation and the unlevel playing field it creates. Fully understand that you don't have answers for some of the concerns raised Really. The main message is that we know what you know which puts into perspective the self righteous claims of the industry fund movement which are doing untold damage to consumer confidence. Us mere advisers don't have the deep pockets you have to persist with the advertising propaganda. If you want to engage with advisers a good start would be to present the case of industry funds fairly and with transparency.

  • Really... on 11/07/2013 5:18:24 PM

    I've got work to do :) There are industry funds with share options! But if a person specifically wanted functionality not availability in the industry fund (to include personal property for instance), yes, the adviser would say they're better off where they are or recommend another strategy. The IF planners certainly look at the product the person is in and if not in his/her interests to quit/consolidate, they won't recommend to do so. The concern of industry funds is that members go along to some external planners and they are advised to get out of the industry fund to go to a more expensive product with more expensive insurance and invest in a similar option or options. Or even an SMSF when that is not necessary for most people. However, happy to acknowledge those planners who do not take people out of IFs for the sake of it too.

  • Pat on 11/07/2013 2:54:53 PM

    @Really - what benefit do members receive by paying for advertising? I am happy to stand corrected, but looking at Australian Super, as an example, it appears their fees have remained static over the last 5 years despite growth in FUM and member numbers. If I was a member of a fund where all benefits go back to members, I would be annoyed that I am paying for the promotion to new members if I am not benefitting from that. If I am incorrect and fees have come down, then that is good.

  • Pat on 11/07/2013 2:46:30 PM

    @Really - you haven't answered the question: will an industry fund adviser ever recommend a member switch out of an industry fund into an SMSF because they want to undertake an equity buy/write strategy? Fair to say it is a rhetorical question as the adviser will talk them out of it and get them to remain in the industry fund.

  • Really... on 11/07/2013 2:44:34 PM

    Crikey.... we could be going for ages! Well, in my view, profits to members means profits after operating expenses and promotion and getting the message out there is one of them and a legitimate business expense, along with administration, audit, etc, etc. The MERs include manager fees and this is clearly disclosed. Same for retail. But industry funds are run to benefit members, not benefit a parent company. To the extent that industry funds invest in banks, insurance companies and other listed companies, then profit is a good thing.

    There are industry funds that want to be more planner friendly and will provide all the information you want. More than happy to go through the process of being rated by the agencies if there is a point to that and FPs will genuinely consider IFs. I think this will improve now that FOFA, etc has come in. There are no real secrets. Industry funds disclose their manager line-ups on their websites. As for administration, standards are good and don't get me started on funds trying to thwart rollovers. There are some retail players that are expert at that. The issue there can also be the compliance around that. Anyway, we are all on an even playing field now that rollovers have to occur within 3 days once the necessary informatin is received. Finally, not all industry funds have just a flat fee. Many have a hybrid fee as that is more equitable. That said, I have to zip!

  • the X-man on 11/07/2013 2:32:39 PM

    I am loving this debate why isn't it taking place in the media?

  • James Smith on 11/07/2013 2:28:03 PM

    It is the content of the advertising that is the problem ( comparing returns is misleading when one side does not include all the admin fees in their 'after fee' returns and compares them to retail funds where all admin fees are included and fee rebates are not added back ) and also that adviser costs and advertising costs and management salaries reduce member account balances whether they use the adviser or agree with the relentless advertising campaigns to attract new members ). How do these costs benefit existing members ? Why aren't they disclosed ?If the performance and service offered by the funds is so attractive why is there a need to spend so much money advertising ? Given past performance is no indication of future performance why are these comparisons allowed in advertising ? Why was such advertising banned prior to a union backed government taking over ?

  • SS on 11/07/2013 1:57:17 PM

    It's not advertising that's the problem per se- its the misleading premise that "all profits go to members" or even worse is "the fund is run only to benefit members" (John Wood's words ring in my ears as I type). Most people are led to believe every dollar of fee is spent generating a return for them. Like all funds, I.F.'s use external fund managers and Insurance Providers who all in business to make a profit and apply a profit margin into their MER (or premiums)- that's one thing and not a biggie if you know and understand the industry... but money spent on advertising and sports sponsorships is revenue used NOT for the benefit of members it's for the benefit of the fund. Should I.F.'s really be able to make those claims??? I would also concur with previous comments regarding due diligence on industry funds- the "know your product rules" and black box mentality at most I.F's will simply not enable a FP to consider let alone recommend an industry fund. Diabolical administration would not encourage me either. Not to mention the deliberate thwarting or delaying of withdrawals. (Most industry funds deliberately refuse to accept an FP to certify ID docs even though an Auth. Rep of an AFSL for > 5 years is specifically included in regulated list of authorised professions.) Also, given the low average balance of most industry fund accounts (less than $20k) and the fixed member fees that generally apply, I would argue that I.F.'s can be some of the most expensive funds available for low-balance clients. Finally, anyone who tries to argue that the relentless I.F. advertising campaign has not for years been specifically designed to trash the reputation of the advice industry as a whole need to join the Rudd spin team. Hard to get over all that

  • Really... on 11/07/2013 12:35:03 PM

    Why should only one side of the industry advertize? All funds are in the business of retaining and growing their memberships via different forms of communication but I agree that spending needs to be prudent and within the budget matched against revenue. Scale plays a part here. Think you'll find that the industry fund spend is a lot less than that of the retail sector.
    Pat - industry funds offer more than limited advice on a fee for service basis, which might be something James should consider.

  • SS on 11/07/2013 12:14:18 PM

    I wonder how sponsorship of sporting teams such as the Melbourne Storm fits in with the mantra "all profits go to members". Is there even any "profit" left after all those advertising and marketing expenses?

  • James Smith on 10/07/2013 3:25:19 PM

    Further to Pat's point Really can you confirm that if customers contact you directly after your advertising campaigns that your salaried advisers can help them move their super to your fund on the basis of limited 'advice' and if so on what basis can they make the claim that this was in the clients best interest ? Please also confirm who pays for the salaries of your advisers and your prime time advertising and how that is reconciled with the $1 per week admin costs often reported in member statements ?? Is it time to come clean now that Mr Rudd is in charge ?

  • Pat on 10/07/2013 2:20:55 PM

    So, "Really", will industry fund "advisers" ever recommend a client switch out of an industry fund to, say, a SMSF or other public offer fund? Didn't think so.

  • James Smith on 10/07/2013 2:03:59 PM

    That's good to hear Really. Please understand that if I recommend your industry fund I will be held liable if you or a fund a fund manager you engage causes financial loss to a client. Therefore to act in the best interest of myself and my client, I need assurances around the governance of the fund. This includes an understanding of who selects the fund managers, what is their experience and knowledge and what is the process to review the managers and hold them accountable. I will also require access to the mandates for each manager and timely updates on the performance of the fund. Please note that these performance updates need to include attribution analysis of the source of the returns ( because as you know past performance is no indication of future performance ) be net of all all fees (including admin fees ) so that the performance can be compared with unitised funds which by definition are net of all fees. It is concerning that you seem reluctant to apply unitised pricing and also be held accountable for the governance of your fund and advertise past performance as a guide to future preformance- particularly when you are rightly concerned about the best interest of the client. And finally, to act in the best interest of the client I need to get to know them and keep in regular contact with them as any decision needs to take into account their personal circumstances, past experiences, health, risk aversion, understanding of markets, income needs etc etc It also concerns me that you believe in limited advice because that too appears to contradict your concern for the best interest of the client. Oh and yes we need to be paid for looking after the client. You do not pay us a salary and we have office and staff costs that we simply cannot turn on and off when a client has a question or new legislation is introduced or markets turn south. Please also ask your call centres to be a bit more cooperative. Particularly when a member decides to leave you as the delays you create are at odds with the best interests of the client.

  • Really... on 10/07/2013 10:28:30 AM

    Any by the way, industry funds are supportive of people obtaining advice. It's crucial, as long as it, too, is in the client's interest.

  • Really... on 10/07/2013 10:26:06 AM

    Agree! Profit is not a dirty word. It's great and should be encouraged. But some people take a very one sided view to all this. For all players in this industry there is much greater disclosure and higher levels of governance. The constant assertion that somehow industry funds are run FOR the unions is not accurate.

  • James Smith on 10/07/2013 10:15:41 AM

    Profit is not a dirty bird . It creates jobs and provides resources for service,professional education etc and is the backbone of economic growth required to pay for services to the less priviledged,health,education etc. How about you disclose your name REALLY. Or should we refer to you as FACELESS MAN/WOMAN ?

  • Really... on 10/07/2013 10:01:59 AM

    Under trust law, all super fund directors, regardless of their background, MUST act in the interests of the beneficiaries of the Trust. In fact, Directors must leave any other interests at the door when they attend a Board meeting. Industry funds use external, independent asset consultants to advise them on investments. Their model has demonstrated better net outcomes for their members. How about the fact that with retail funds which are run as profit centres of banks and insurance companies, their Trustee and Responsible Entity Boards include Executive Directors who are also employees and managers of those institutions? Do you not think they may also have conflicts of interest?

  • James Smith on 10/07/2013 9:42:20 AM

    Here here GAB.
    It is curious that concerns are expressed over advisers charging % retainer fees yet there is silence on the fund manager fees who all charge % fees, often underperform and/or do little to protect downside risk, provide poor service, 'disclose' fees across pages and pages of a PDS that is unclear, send out untimely and confusing communication to clients and walk away from responsibility when it suits them (ie excess NCC super contributions they accepted). And some of them are leading the argument that advisers should charge differently while nothing changes in their offering ?

  • GAB on 10/07/2013 9:24:38 AM

    Hi Pat, I think we need to remember that pre GFC it was happy days...gearing was not only acceptable but listed companies were punished by shareholders and analysts for not gearing enough for growth.

    I also think that most if not all the commission based investments are now gone. The industry was already on a path to improvement after advisers shouldered most the blame for investor losses (somewhat unfairly).

    I think we've had enough of extra regulation and parties of vested and bent intention intent on telling us what we should and shouldn't's time industry super funds and some dealer groups and instos made some changes to their own disclosures and codes of conduct.

    So far it's been all about advisers, well it's time they laid off and started looking higher up the food chain again.

  • SS on 9/07/2013 3:08:32 PM

    The covert union push into non-union positions of power and influence has been inversely proportional to declining union membership rates across the nation. Anyone who thinks this is an accident is kidding themselves. the unions are really a victim of their own success. With our country's wage levels and working conditions amongst the highest in the world, unions in the traditional sense are becoming increasingly irrelevant... To survive they must now engineer a society that offers a range of lucrative career paths for ex-union officials. Having little or no real experience, qualification or understanding for these new roles certainly isn't a barrier. Wasn't Bernie Ripoll an electrician in the public service? Our industry is being dictated to by less than impartial union figures from all angles. It's about time the spotlight was turned onto them I think.

  • Pat on 9/07/2013 2:38:28 PM

    James, this is not the first time someone has made a comment along your lines: "The assumption that clients cannot determine good service and advice for themselves is insulting."

    We have to remember that clients flocked to:

    1. Storm
    2. Planners flogging Trio/Astarra on the back of conflicted remuneration;
    3. Planners and accountants selling agribusiness products;
    4. Planners selling property development backed debentures;
    5. Crook CBA planners;
    6. Etcetera

    Unfortunately, the consuming public is not savvy as we would like them to be, at least in financial terms.

  • James Smith on 9/07/2013 1:48:45 PM

    The union manipulation of the super legislation is plain to see. It is more scary to see advisers within our industry agreeing with them and allowing the bad apples to define us ! The adviser colleagues that I associate with have been transparent regarding fees and clear around their CVP for decades. The assumption that clients cannot determine good service and advice for themselves is insulting. The bad apples are being weeded out and jailed. The good advisers are flourishing. The unions want power and influence via super. The retail super funds are trying to protect themselves. FOFA is ill conceived and should be abandoned. It is madness to continue with these half baked measures at enormous cost and distraction to our industry.

  • the X-man on 9/07/2013 12:49:15 PM

    playing politics with super is insanity. Unions are politicized and now manipulate law with their political arm (labor). I had to laugh when shorten claimed that super should not be used for political scoring 'hypocrite and liar'. Scary thought that he may one day lead the country.

  • OTF on 9/07/2013 10:25:13 AM

    Most politicians do not (or do not want to) understand the implications of these issues so good on Paul Fletcher and Mathias Cormann for taking the time to understand the issues. However, why is it that financial journalists who keep writing articles in the media about financial planning costs (and not benefits of good advice) do not bring these issues to the attention of the public?

  • birdhouse on 9/07/2013 10:13:54 AM

    The unions have had from day 1 too much board representation in industry funds with very little acrumen in the financial services industry or superannuation. I agree with 'Concerned', the financial planning profession is a victim of it's own circumstances. Especially when you hear of a planner's idea of a client review being that 'the client has my phone number and they know they can call me'. Or dealing with old super funds (from a major FI) that have a 'nil' upfront but exit fees of 5% (reducing) and ICR's of over 3%. And under FOFA they will allow to grandfather these commissions? That is a joke! FOFA does not go far enough if we want to clean up our profession (and I'm one of the older planner's).

  • James Smith on 9/07/2013 10:07:56 AM

    The linking of the age or experience of financial advisers with their fee structure is a tired argument. The debate would be better placed focusing on the service needs of clients and the breadth of offering, what it realistically costs for adviser business to offer this service 24/7 and the value of this service. To make inferences that the value of this service cannot be justified without understanding the service offered is unwise.Rather than taking ignorant pot shots at eachother it would be more prudent to reflect on our own value as advisers and the cost/value of our expertise/experience/service.

  • James Smith on 9/07/2013 9:54:38 AM

    How refreshing for the industry funds vested interests to be acknowledged and the reduction in FOFA red tape prioritised. If the union powerbrokers have their way they will destroy this industry. We will end up with low cost funds, poor service and conflicted investment decisions that jeopordise retirement outcomes. Service industries such as ours should be the highest priority for job creation. Productivity gains and cutting red tape will help maximise after cost returns to investors not channelling funds to the big industry and retail super funds whose track record in customer service speaks volumes.

  • Concerned on 9/07/2013 9:49:09 AM

    If members of industry fund only knew the full details of the funds? I'm certain most would be leaving? Who operates these and for what interest, to many questions no answers - disclosure?

    To the other part, the pendulum has swung way to far right, there needs to be some balance back into the discussion in the direction financial planning industry heads. The older planners have had it too good for too long for trails and commissions and those charging 1-1.5% AUM Fee are in the past, especialy when that first FDS hits the table showing what you have provided for that fee!

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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