Legislating to ban commissions on superannuation


For many years various pressure groups around the country have been trying to have legislation brought in to ban the payment of commissions from superannuation accounts. Pressure has mounted even further as links are drawn between commissions generated and the recent failures of MIS scheme operators Great Southern and Timbercorp, as well as the demise of Storm financial.

It is my opinion that the bulk of these calls are ideological or based on commercial interest.

Unfortunately, the reporting that i have seen in the public arena has been at such a superficial level that very little genuine thought appears to be occurring. To this end, i have decided to be a tad more outspoken in trying to point this out. Not a good time of year to be devoting time to such activities but if this discussion-without-due-thought is allowed to follow its course then knee-jerk legislation will be put in place – with the inevitable result that the outcome will be quite different to that intended by the legislators or the lobby groups.

i have set out below the text of a note sent to the online newsletter Crikey. Crikey is an independent public forum that has a record of addressing issues from more perspectives than just those of the entrenched power bases surrounding it. A small start but hopefully some fo the ideas will eventually filter into the areas that count…

The article i was responding to was written by Bernard Keane, an insightful and thought provoking correspondent. In this particular case though, it was my opinion that the content was a little on the superficial side.


Subject: Item 10. “Superannuation, not quite scrapping commissions”i wonder if Bernard Keane has ever attempted to build a business, passing over short term gain in an attempt to offer a service that is in demand with the idea that if you do well then you will be rewarded with a higher business value?


My guess is that he has not. If you have Bernard then i apologise unreservedly for suggesting otherwise but also, if you have then i would have to ask just where the ideological drive is behind this call to legislate commissions out of superannuation?
i am a financial planner and a partner the firm Wealth & Security Planners. We offer those who deal with us a choice of the manner in which they receive and pay for our advice. A part of our business involves being noted as “advisors” on a large number of superannuation accounts which may or may not be SGC related (it is not something that we measure). Individuals can deal with us on an hourly rate, by an agreed upon percentage or by dollar amounts.
If you legislate right now to ban commissions, what on earth do you expect to happen? Do you expect that millions of super fund members are suddenly going to be better placed? How exactly do you see that occurring?
Here are some issues that are being ignored in any populist (because that is all it really is) calls for this type of black/white reaction:
1. Move to an hourly rate. Just look up recent news articles on the legal profession and hourly rates. It is seen as a system that allows for overcharging and at the highest level there are discussions about changing the basis of charging away from hourly rates.
2. Businesses like ours have invested on the basis of our primary asset – which is the goodwill associated with our clients and the ongoing revenue stream that is generated through fees – whether commissions, brokerages or whatever. If there is a business loan in place and your wish is granted (commissions being banned), are you going to dance a jig on the grave of all those businesses that are put into liquidation by banks when they realise that their security (that ongoing income stream) is worthless? Are you saying that you’d be happy to see a business ruined without knowing anything at all about that business?
3. Industry Funds. The least understood and most heavily protected business group in Australia. Take a moment to look at how those funds provide advice to members, how it is costed, and the level of bias expected/provided, and then consider the overall cost. It is NOT a black and white argument. It is an ideologically driven argument that, if taken to its logical conclusion, would result in a single, Australia-wide default category along the lines of the future fund. From there even industry funds would have to argue a position for improvement to have super accounts transferred to their funds. But that will not happen, as the industry funds bias and power bases are as entrenched as those in the retail super field.
4. Businesses have a cost to simply open their doors. That cost is either met through an increased hourly rate or through a minimum basic charge. If you want to see this in operation, simply look online at the internet based investment wholesalers who promise “no commissions”. They charge a basic minimum fee that is so large that it is only worthwhile for large account balances. And that is a business that has no office front, and specifically does NOT provide advice, it gives you some idea of where super fees will be under your “no commissions” regime.
5. In a previous life, i performed many calculations for a major life insurance company, comparing various superannuation product offerings. As a result of consumer pressure against very poor sales tactics the old “up front fees” super were abandoned in favour of “smaller ongoing fees”. The result was that almost every Australian in a retail fund has paid more for their super than would have been the case under the previous system. I can easily sit down over a bottle of red and prove that to anyone able to add one plus one. There needs to be less talking, more thinking and more modelling take place before legislation is put in place.
6. Ditto this “Disclosure” rubbish. Disclosure to an uniformed member of the public achieves nothing without appropriate benchmarks. What if i told you that you could achieve a 1% expense cost in a retail fund with superior options and services to those on offer in most industry or employer funds – and with an advisor receiving commissions?
There should be widely available, public lists of funds, in categories – even industry funds. Anyone (financial advisor, employer fund, industry fund) should have to cover the full range of available products and spell out clearly why and how that particular recommendation is suited to that individual. Even people in the superannuation industry show an apalling lack of understanding of benchmarks.
7. “Independent advice”. There is no such thing. Take a moment to look through my website www.michaelsmusings.com.au, where such things are covered in more detail. The issue of independent advice has almost nothing to do with financial advisors – it is an inevitable outcome of the mix of commercial self-interest and well-meaning but poorly thought out legislation as it refers to “Dealer Groups”.
You could ban commissions entirely and you would not do a single thing to influence the independence of advice provided in Australia today. If you doubt me, take a moment to review the “Approved Product List” for any independent group you choose to mention. There will be a bias towards platforms (which provide large fee rebates and an increased multiple on the sale value of a financial planning dealership), general fund rebates and other forms of soft dollar remuneration.
At this time of the financial year i do not have the time to spend covering all of the pitfalls in Bernard Keane’s superficial argument but i am submitting this with the hope of seeing a more informed approach to this area of discussion, which i have yet to see in any public arena whatsoever. Crikey should be the place where such discussion starts.

There were many issues not covered in this note, and those that were covered, were only mentioned briefly in the interests of keeping to a smaller comment space.

However, for those who are interested, a place to look for the “Direct” costings that i refer to in point (4) is the Investsmart website. This is a business that offers to rebate up front commissions (which are usually paid to advisors). The site can do this because they will be the “advisors” noted on the account with the relevant fund manager or whatever. They will therefore be entitled to “trailing commissions” from which they derive income to allow them to operate their business.

If you look through the website, you will note that you can join a section which will rebate part of this “trailing commission” to you. However, you will note that the system (broadly, and check it yourself before agreeing with me) involves a minimum payment of ~$400 a year to their business. After that amount, they will rebate 50% of any additional trailing commission that they receive.

The $400 is equivalent to the “trailing commission” that would usually be earned on a standard retail account with $80,000 in it.

Can you see how neat this business model is? Your minimum client under this system is equivalent to an $80,000 account. That is the average product developer’s dream as it allows you to build a far more robust service delivery model. Except the service delivery in this case does not involve any ADVICE.. Neat, huh?

Interestingly, i did not see any mention of fund manager or platform rebates (not to say that there aren’t disclaimers and disclosures on the site – i just couldn’t quickly find them).

The point here being that we have a business which does not have to pay advisors because it does not provide advice. It simply provides products that you look at and select from. As there is no advice, there is a massively reduced business liability (the liability under the law of advice in extremely broad), which means that the business does not need to earn the same “risk premium” for the work that it does. As there is no advice, all a person is paying for is the upkeep of the website.

What is interesting when you delve into such areas is that you begin to realise that the bulk of the money expended by such businesses is actually in marketing costs. That is, the need to advertise a service and to get enough bulk activity to meet basic business costs and begin to make a profit.

This is something that public providers of investment and superannuation and insurance accounts realised a long time ago. That there is a very high marketing cost and a very high “customer service” cost. The customer service cost can be debilitating to a business in a downturn. This occurs because the number of calls and enquiries lifts as people worry about their money, while at the same time the business is earning less income to provide those services.

The result was for companies to hire agents/advisors/authorised representatives. The difficulty is that if you hire all of those highly trained people then your costs simply rise. The answer was to put them on commission. In this way, the costs to the business could be set down as a percentage of income. The agent became the contact point, reducing the need for as much knowledge in the customer service areas and reducing the fixed costs of the businesses. This provided a strong income level and protection in a “down” market. Clever, huh?

The additional advantage was that these advisors could be directed to only deal with a particular companies products, increasing new business income and reducing the marketing and advertising costs required.

If you doubt me on this one, have a look at the combined advertising budget expenditure of the Industry funds versus the retail funds in the recent past. Even with a legislatively protected income source (a lof of awards are quite specific about which fund can take the 9% employer SGC amounts) these funds feel a need to advertise heavily. If their offering is so good then there is no need to advertise, as their members already receive the benefits. Using advertising (remembering that this is members’ money in this case) to encourage new members is an interesting conundrum for those who like to think in their spare time – but i will leave that until later. The key point here is that agents and advisors have key roles for providers of financial products. They provide a “distribution channel” which is cost effective and scalable, while also providing a low cost customer interface.

These are the reasons agents exist. The commissions built into the products are there to provide an income to those agents so that they can provide the services.

All well and good, you say… But what about the UK – where legislation has just been passed to ban commissions from 2012? I’d keep exactly along my line of thinking here because i doubt that their implementation will be any better than ours is likely to be, and the pressure groups that asked for this change are likely to be working along the same lines as those in Australia.

So, where are we up to?

We have looked at the cost of providing even a basic service – in this case an internet system that provides a distribution channel for product providers and which obtains its income from trailing commissions. Yet you will still need to contact the relevant provider (Colonial, AMP or whoever) to deal with your product, so what is the trailing commission paying for? It is paying for the establishment of a service that helps to locate and offer you a listing of available products. That doesn’t even touch the basics of the role of a financial planner, so i am using that as an example of where costings will move when commissions are legislated out of the system.

There is one other point that seems to be missed in amongst all this… If the cost of advice is taken from a superannuation account, the member receives the equivalent of a deduction for their costs. If they approach an advisor direct and the advisor charges then there is generally no deduction available to the individual as the advice relates to a non-income producting investment (super). In other words, there is a financial incentive to the member to have advice costs taken from their super account balance.

The other point that i will only touch on is to suggest that the cost of personal advice is so high under Australian legislation that it has a material impact on the willingness of members to seek advice. There is a chasm in the system of advice as it relates to “limited advice”. If you approach a large super fund for help then they can only do so much before they need to provide you with a fully compliant advice statement. This is prohibitively expensive and is something that groups such as Industry Funds are trying to have altered. The intersting aspect of this is that the pressure groups want the legislation to apply to the product providers but not to advisors. In other words, advisors will still need to meet the more expensive compliance systems while the distinctly biased limited advice of a product provider will not need the same level of depth. I seriously hope that this type of legislation does not come into force, as it will distort the Australian market even more than it already is.

Now let’s look at this in a more holistic manner…

If the intent was to clear out the market distortions then these are the kind of issues that should be addressed:

1. Clients should be informed of the full extent of bias that exists within the business that they are dealing with.

2. Clients should be provided with a meaningful benchmark against which commission/fee/cost disclosures can be judged by an uninformed member of the public.

3. Dealer groups should not be able to receive fund manager / platform etc rebates or if they do then these should be fully (as in total $’s paid) disclosed. Not at a client level but on a whole business level. In other words, knowing that your advisor’s dealer receives $10million for submitting a lot of business to one company will help provide a bit of perspective for that client on where a bias may or may not exist. This would also work for the bank type advisors, as the internal cross subsidy that is hidden in that system would become a bit more obvious.

4. The role of platforms should be exposed, disclosed and set out in far clearer detail. Even groups who purport to be “independent” seem to have no problems dealing solely with one or two platform providers – working on the argument that this is nothing more than an administration service, and has no bearing whatsoever on the advice provided. Yeh, and i am sure that it doesn’t… ooops, slipped into a bit of inappropriate terminology there. Sorry for the outburst  – but i really get annoyed at that particular little sleight of hand.

5. Dealer groups that provide a “buyer of last resort” purchase of a retiring or exiting advisor’s business should be forced to offer that as a public offer. This would quickly reduce the terms fo the offer, thereby reducing the bias and distortion that such a buyout guarantee provides.

6. An advisor should have to disclose all commissions in basic common sense to a client. This is theoretically the case now but it isn’t really very clear. The difference that i would like to see, is that all product providers then confirm DIRECT TO THE CLIENT they money that has been paid out to the relevant dealer group. It is then up to the client to see if the amount disclosed by the advisor tallies with the amount disclosed by the provider. If they don’t agree then there should be remedies available to the client with an absolute minimum of fuss to obtain.

Anyway, that is my quick rant. As you probably have worked out by now, my typing speed is pretty good, so this particular thought isn’t much more than taking time for a relaxing cuppa from my point of view… But at this time of the year, that is an awful lot of my available time!

Feel free to argue or annotate or agree or whatever.


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