Broken pledge would dent super savings

Sydney Morning Herald

Monday February 28, 2011

STUART WASHINGTON

It's starting to look like the federal government can be pushed around by just about anyone with a big chequebook.As reported in BusinessDay today, the Assistant Treasurer, Bill Shorten, is thinking about welshing on two policy commitments.Any backdown is likely to be to the overall detriment of people's superannuation savings.A slick marketing campaign is being run by the large vested interests that have benefited richly from lax superannuation and financial advice settings.But it wasn't enough for these players to grow fat on commissions. It is now generally accepted these payments were distortionary and acted against the clients' best interests when they sought financial advice.Now the peak bodies for the financial planners and the big retail fund managers are whingeing that the full implementation of the reforms will hurt the industry.The big retail fund managers want to continue some form of volume-based payments to investment platforms. The planners' complaints centre on moves to give customers an annual "opt in", or a choice about whether to continue paying their financial adviser.In classically Orwellian doublethink, the industry groups have chosen to overlook that both issues were addressed when the federal government announced its Future of Financial Advice package last April.The peak bodies are using the Newspeak of "detail" and "implementation" to argue the policy has not been decided.The frustrating thing about Newspeak is that it appeals to politicians, for whom it is something of a mother tongue.And it has succeeded to the extent that Shorten has put some form of volume-based payments between fund managers and platforms back on the negotiating table. Shorten is also open to extending the opt-in period.The reappearance of some form of distortionary payments in the debate about the future of the retail investment and superannuation industry beggars belief. Ditto regarding any possible extension to the opt-in period.As a refresher for Shorten and the industry, this is what the government announced last April about volume-based payments:"A prospective ban on conflicted remuneration structures including commissions and volume-based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans."And this is what the government announced about annual opt-in:"The investor will be able to opt in to the advice in response to a compulsory, annual renewal notice."Both these statements seem clear about government policy.But in the Newspeak doing the rounds, not all volume-based payments are created equal.The Financial Services Council representing the big retail fund managers will have you, and an apparently credulous Shorten, believe that fund managers can make volume-based payments to investment platforms without making their products cheaper or more attractive to financial advice firms.(As an aside: if these payments had absolutely no effect then you wonder why fund managers would want to pay them.)The Financial Planning Association is not to be outdone in its own Newspeak.It has launched a "meet your local member" information pack on its website, with form letters to send to local MPs and case studies of how financial planners have helped their clients.In the bumph it includes arguments against imposing a system of annual opt-in fees.It says the move "could put at risk planners' ability to provide a critical response during crisis situations"; that it could negate the terms of engagement with clients, and planners may not be able to help clients "because the client has forgotten to opt-in".The truth is there is no such thing as a conflict-free volume-based payment system.The industry has profited from the complexity of a payment that very few retail investors fully understand. But you can understand the intent of the fees when you remember that they used to be called shelf-space fees.To elaborate on this, many financial advice firms use investment platforms provided by the big banks to place their clients into certain investment options.In the past, if someone paid shelf-space fees, they got a place on the platform.Fund managers who rely on their wits and strong performance to get customers through the door have long been ropeable about the bias such payments create.On the annual opt-in front, a campaign that argues customers shouldn't be given an annual choice about fees is almost farcical.Jenni Mack, the chairwoman of Choice, addressed an Australian Securities and Investments Commission conference in Sydney last week about volume-based payments:"This is a critical, essential step. Volume payments are particularly insidious because they are incredibly large, very opaque and they are pretty impossible to disclose ... We just can't see any volume-based payments that aren't conflicted remuneration."And this is what she said about the move to annual opt-in arrangements:"It is an explicit policy response to deal with very significant consumer detriment: the passive income problem, where consumers have been paying good money for nothing. It's to deal with the money-for-jam, advisers selling their books [of trailing commissions], playing on the golf course while money from consumers' accounts flows into advisers' accounts."These battles were fought and won under Bowen.I'm staggered they have to be fought again under Shorten. And it's the eventual size of your superannuation savings that hangs in the balance.

© 2011 Sydney Morning Herald

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