Commission paid to financial advisers

Dear Mr. Tan,
First UK, then Australia is next to cut commission. When will Singapore follow?

By Elizabeth Fry
Published: June 28 2009 17:32 | Last updated: June 28 2009 17:32

The large funds running Australia’s $A1,000bn (£490bn, €573bn, $800bn) superannuation industry have finally bowed to public and political pressure and moved to scrap commissions charged by financial advisers in favour of transparent upfront fees.

The charter has been developed by the Investment and Financial Services Association and has to some extent pre-empted new government regulations that are likely to be introduced following the federal government’s first ever review of the world’s fourth largest pension market.

As of early next year, the commission system will cease altogether. This is likely to be well received by investors who are deeply distrustful of the way “super” funds bundle their fees and administration charges together to hide the cost of each service. They are equally distrustful of financial planners who demand upfront or trail (annual) commissions for selling particular financial products.

Once the charter is approved by regulators, super funds and advisers will be forced to differentiate between real advice and general plan service. For the first time superannuation investors will have the choice to opt in or opt out of advice payments depending on their circumstances.

Investors will be charged with instructing financial planners on how much advice they want and are prepared to pay for. Thus, they will be able to see what they are paying for and can match that payment with the value they get for advice.

Richard Gilbert, chief executive of the IFSA, says: “The charter makes a major statement to the industry. The commissions were the focus of a debate that raged for seven years. We were distressed by the tenor of the debate and the only way to fix it was to deliver a result.”

In his view this puts Australia firmly in the lead in terms of disclosure and investor friendliness.

 “Commissions aren’t often disclosed in Asia, there is not a lot of transparency around commissions and brokerage for the US 401k plans and in the UK the commission figures are high,” says Mr Gilbert.

The charter, which applies only to the IFSA’s members, who make up the lion’s share of Australia’s retail and wholesale superannuation, fund management and life insurance industries, has not stopped at restructuring fees and abolishing commissions.

Under the new code, funds will be accountable for misleading advertising and it is specific about what can and cannot be said.

All promotional and advertising material must provide actual past performance figures so that super members can be confident that the information they see relates to an actual investment option.

And while it is currently common practice for some in the industry to use performance data based on averages to promote or advertise products, the use of average or aggregated performance and fee data has been banned following funds’ poor performance in the wake of the global financial crisis.

“Advertising is a very big deal,” says Mr Gilbert. “We were forecasting future returns for 40 years based on past performance when 16 of those years saw a bull market,” he says.

“Using past performance and fee information as the basis of projecting future investment outcome is misleading. The returns over the last 18 months have especially highlighted the risks of making long-term projections.”

Other significant measures contained in the charter include making performance reporting an industry-wide standard so consumers can compare “apples with apples”.

In addition to better disclosure, better reporting and stringent marketing rules Mr Gilbert expects the charter to foster competition. He wants to see the rules around default super funds changed.
“The retail funds in Australia have been locked out of the mandatory super scheme for default funds and there are monopolies and oligopolies developing and for which rent is being charged. We want to be in that competitive race,” he says.

He is referring to last year’s decision by the Australian Industrial Relations Commission, which returned many key industry funds to default fund status.

This decision effectively resulted in a return to the “closed” system of 1992, designed to benefit industry funds that the AIRC was historically linked to at the expense of competitors that could offer more features.

Industry funds, which account for about half the workforce, claim competition for default funds will only become a reality when the retail funds perform as well as the industry funds do. The new code may go some way to help achieve that.