Nice little earner

Revelations that financial planners collected $2.4 billion in commissions from superannuation accounts last year has focused attention on whether such largesse is justified.

Two weeks ago, research house Rainmaker released a report showing almost $6 billion has been paid to financial advisers during the past three calendar years.

At the very least, it underlines the importance of making sure financial advice is worth the money.

The Rainmaker report was paid for by the Industry Super Network, the umbrella organisation of the industry funds sector. These are non-profit funds that do not pay commissions to financial planners.

The problem with a continuing commission is that it is paid year in and year out, regardless of whether the financial adviser offers any service at all.

That is the beauty of the commission system for the financial institutions that own the financial planning firms and a potentially big problem for consumers who do not actively take charge of their super.

Of the $2.4 billion in commissions paid to planners last year, the Rainmaker report says $862 million was commission from compulsory super. The remainder came from voluntary contributions.

Total contributions to super in 2007 were 40 per cent higher than the previous year because of new super rules, which made it the best investment going.

The spike in voluntary contributions last year came from people nearing retirement who took full advantage of the more generous super rules.

Many probably received valuable financial advice about their retirement planning and were probably happy to have the commissions paid from their super accounts.

But people with only compulsory contributions going into their accounts are probably less likely to be getting value, if any, in return for the commissions going to planners.

David Whiteley, the executive manager of Industry Super Network, says commissions paid on compulsory super are a particular concern because most people are likely to have inadequate super savings when they retire.

Whiteley's argument is that, in many instances, these commissions are really sales commissions and not payments for advice.

Nevertheless, they are paid to advisers by super providers out of their members' accounts and contributions as a way of rewarding advisers for the business.

He describes the $862 million in commissions on compulsory super as "indefensible". And it has the potential to skew advice.

Financial planners are unlikely to recommend a fund that does not pay commission, such as an industry super fund. That's despite the big industry funds having low costs and strong performances.

Whiteley says commissions and "soft dollar" payments have created an inefficient system, "all of which is adding costs and much of that cost comes from compulsory super contributions".

"My view, and that of industry funds, is that the super system should be doing its level best to keep the costs down and to maximise net performance so when someone retires we give them as much as we possibly can," he says.

The Rainmaker report says commissions make up about one-eighth of all super fund fees and charges.

They are variously called upfront, entry or initial contributions commissions; when applied, they average 2 per cent of the contribution. Trailing commissions, where these are applied, average 0.5 per cent a year, the report says.

Commissions must, by law, be disclosed and most workers can choose who manages their super, including funds that do not pay commissions.

Whiteley says the trouble is that to work properly the marketplace would have to be efficient and rational but it isn't.

He says most people do not understand what is being disclosed - how a commission, presented as a small-sounding percentage, can erode their retirement savings over a working lifetime.

Few people actively choose their fund. Whiteley says most join the one offered by their employer.

He believes it is bad public policy to have a compulsory super system that includes commissions on contributions because such a system erodes retirement savings and creates a conflict of interest. He would like the Government to ban commissions on compulsory super.

Senator Nick Sherry, the Minister for Superannuation and Corporate Law, recently flagged a wide-ranging review of the system, including fees and costs.

Talking on ABC radio about the Rainmaker report, he said: "There's no doubt there's a correlation. If someone is paid a commission, there is a temptation to ensure the money flows to the provider paying the commission. It does warp advice."

When asked whether commissions should be banned, he said: "Well, now we're in government we're going to effect changes that will make a meaningful difference to fee structures and reduce costs. That's what we're going to do."

In 2003, Sherry told the ABC's Four Corners program he wanted commissions banned on compulsory super.

Deen Sanders, deputy chief executive of the Financial Planning Association, says the remuneration debate for too long has been distracted by "misinformed, often vested interests that seem intent on scaring Australians away from . the professional advice that is so desperately needed".

He says the association has in place a professional framework to ensure its members meet high standards, including the separation of fees for advice and fees for products in disclosure documents.

The association has a remuneration committee that is looking into definitions, payments and benefits, and that will be brought to Sherry's review.

"Financial planners have for too long been blamed for all the failures and troubles in financial services and this has got to stop," Sanders says.