Super goes back to basics

Summary: Super fund fees should never have been used to cross-subsidise personal financial advice, Commissioner Kenneth Hayne argues.

Key take-out: This marks the end of an era for superannuation. Investors may find it hard to believe that some of these practices still go.

Superannuation is going back to basics. Commissioner Kenneth Hayne wants to deliver a pure, cut-the-crap, ‘unplugged’ version of how great superannuation should be.

It should be run by a posse of ‘Super White Knights’ (replacing some who really should be eating porridge in a dungeon) with an infallible true-north reading for members' best interests.

He wants to take away the hype, the glamour, the glitzy sales pitches. Then slash the fees, cut the commissions and remove the palm greasing.

Sure, the headlines that have come out of the Royal Commission's final report this week have been more slanted to mortgage brokers, financial advisers and remuneration structures. But what Commissioner Hayne has recommended for superannuation is earthquake stuff, for super members and the entire industry that has developed around the provision of financial advice and retirement savings.

In many cases, Commissioner Hayne's recommendations regarding super aren't really recommendations. They are simply: "The laws already exist. Just start enforcing them."

Commissioner Hayne wants to see an end to the common practice that fees covering a wide array of advice are paid for from a client's super fund. In many adviser-fee models, clients pay for services via a fee from their superannuation fund. They might receive advice around several areas, including savings plans, expense reduction, super contributions and investments, but they are all paid for via super funds.

"If ongoing advice fees are to be permitted, they should be tightly controlled in at least two ways. First … the advice in respect of which fees may be charged is limited to advice about particular superannuation investments. Because this is what the law already requires, no change is necessary," Commissioner Hayne said.

"I consider that using superannuation money to pay for such broad financial advice is not consistent with the sole purpose test.”

In short, the current super laws say that the ‘sole purpose’ of superannuation is to provide retirement benefits for members. If they are using super fund monies to pay for personal advice now, or super fund monies are being used to cross-subsidise personal advice now, then there is already a breach of the law, in his opinion. Just enforce the current law, he says.

"It is not consistent with the sole purpose test for a trustee to apply funds held by the trustee in paying fees charged by an adviser to consider, or re-consider, how best the member may order his or her financial affairs generally or may best make provision for post-retirement income.

"And second … any such ongoing advice arrangements should require annual renewal. Two years without confirmation that the member wishes the arrangement to continue is too long."

The Government has committed to switching from two years to one year. Under the current rules, known as ‘opt-in’ in financial circles, advisers must get permission for fees to continue at least every two years, or cut the fees off. If they don't, monster penalties may apply.

The Government has said it will advance this proposal of one-year confirmations for fees, linked in with other proposals of the same nature. It will also require financial advisers to get all of their fees agreed in writing once a year, along with publishing to clients the services they will be provided.

Commissioner Hayne also recommended a total ban on any fees being paid out of MySuper accounts (Recommendation 3.2) except for intra-fund advice, which the Government accepted.

Essentially, Commissioner Hayne wants to see an end to the era of fees being drawn from super funds to pay for overall financial advice. He says the current laws don't allow it. So just use the current laws to stop it.

Commissioner Hayne was also highly critical on the role of trustees of large super funds, both industry and for-profit funds.

Trustees are too often caught up in conflicts of interest, from trying to serve two masters. Commissioner Hayne wants trustees to be barred from holding other positions.

Trustees need to comply with a ‘best interests’ duty to the members of the fund, Where conflicts exist, simply admitting they exist is not enough, Hayne says. It's particularly difficult when the superannuation trustee entity also has to deal with investment fund issues (for example, AMP investment funds on an AMP super platform).

Some other recommendations were a little more obvious.

"No hawking" and "one default account" were two of them.

Separate recommendations about these two were made by Commissioner Hayne, who said that super funds shouldn't be blatantly ‘sold’, particularly to people walking into branch offices who were actually seeking advice on other financial products, such as bank accounts or loans, who ended up being pushed into super products that were not in their best interests.

Special mentions here went to ANZ and CBA.

And when it comes to ‘one default account’, this was furthering a recommendation from the Productivity Commission where employees should only be defaulted into a super fund once. Commissioner Hayne wants to see the ‘stapling’ of a person to a single default account.

This will probably come via the ATO, who the Government is charging with the responsibility of consolidating low-value accounts and capping fees for those accounts.

It confounds belief that it still exists, but Commissioner Hayne recommends that super funds shouldn't be offering bribes (lunches, dinners, sporting tickets, for example) to employers, to make their fund the default fund of choice for the employer. Really?

It would be nice to end on some unequivocal good news, about which no readers of this column will probably complain.

There was nothing, not a cracker, in the way of recommendations for self-managed super funds (SMSF).

A search of ‘SMSF’ in the final report tallied four hits. Two of them were in the glossary and abbreviations sections at the front. They took up more space than the other two mentions, which were but mere passing references.

Never has so big a document about investment and superannuation had so little to say about self-managed superannuation funds.

If you're a SMSF trustee or member, you are welcome to now breathe a sigh of relief.

*****

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.