End of the trail for big fees and commissions

The decision will be declared as one of the most significant in the recent history of the Investment and Financial Services Association, which represents most of the retail super fund managers in Australia, as it publishes a "super charter" outlining its plans for a post-commission industry.

At present financial advisers are paid commissions by super fund managers including "trail" commissions that are paid out over years whenever they sell clients into specific funds or super products.

Retail super funds have previously argued that these commissions incorporate the cost of advice into the product and so gave investors better value because they did not have to pay an upfront fee for that financial advice.

But critics, including the rival industry super funds, have argued that this creates a conflict of interest by encouraging financial advisers to sell clients the products that pay the best commissions, rather than what is best for the client.

Figures from the Australian Prudential Regulation Authority show that $297 billion was held in retail funds at December 31, and $181 billion in industry funds, out of a total super pool of $1.05 trillion.

It is understood that the Investment and Financial Services Association plans to phase out the old remuneration model and the move is designed to increase transparency and battle perceptions of conflicts of interest.

The plan involves offering a range of cost payment methods that are likely to include an up-front fee for service arrangement, so giving the choice of payment to the consumer.

The Financial Planning Association moved to phase out commissions earlier this year, asking its members to consider a range of other payment models including upfront fees. It dubbed this a client-directed approach, saying it put negotiations over fees into the hands of planners and clients, rather than product providers.

It is believed that the Investment and Financial Services Association will take a similar route. The new arrangements will become part of its standards, which members adhere to.

The move is expected to cost association members millions of dollars in logistical costs, mainly to re-engineer IT systems.

Fees and commissions paid by the sellers of investment products to financial advisers have come under unprecedented scrutiny recently, especially since the collapse of the financial planning firm Storm Financial.

A parliamentary inquiry into financial products and services is under way, and superannuation is being examined as part of the Henry Tax Review and the upcoming Cooper review of superannuation.

The former superannuation minister Nick Sherry, whom Chris Bowen replaced this month, had been outspoken on fees and commissions, especially those charged on superannuation.

Last week Mr Bowen told the ABC that he agreed there was a "real problem in terms of perception" of commissions.

"Where you have that perceived conflict of interest, it's going to keep coming up again and again. And I think the industry has accepted that, and certainly industry peak bodies are moving in that direction to say, 'Yes, we recognise there is a perception problem'."