The latest IUS/Super Review Super Outlook survey conducted in the closing months of last year revealed that most respondents believed that financial planning now needed to become an integral part of the superannuation industry.
It was not the first time the IUS/Super Review survey had asked a question dealing with the relationship between financial planning and superannuation, but it was the first time the survey had elicited such an unequivocal response.
However, it is significant that when the surveying company, Classical Economic Analysis, drilled down on the results it discovered that respondents from industry and corporate funds were less enthusiastic about financial planning than the retail side of the industry.
Super Review came across another piece of important data when assessing the importance of financial planning and superannuation. Data gathered in the process of compiling the Super Funds handbook revealed that financial planning was increasingly becoming an integral product offering.
But while financial planning may now be regarded as an integral offering, there remains a substantial divide on how it is provided.
While retail funds continue to offer financial planning with payment for service being based on commissions, industry funds are tending towards providing in-house salaried planners or providing access to independent planning firms on a fee-for-service basis.
The industry funds approach is probably best exemplified by Industry Fund Financial Planning (IFFP), a division of Industry Fund Services (IFS).
IFFP is a full service financial planning operation with representatives in all states and territories, which IFS promotes as providing “high quality, low cost financial advice to members of participating industry funds and their families”.
IFS ensures members of industry funds clearly understand the difference between its financial planners and those employed by retail funds. “Our financial planners do not accept commissions, either upfront or ongoing, which means more of your money is available to work for you.”
It was no surprise that when the industry funds launched their advertising campaign as part of the new choice of superannuation fund regime, they did so on the basis of highlighting their low fee structures and by emphasising that people who joined industry funds would not end up having their retirement savings eroded by paying trailing commissions to high-priced financial planners.
There was always a belief within the industry funds that financial planners represented one of the greatest dangers in the new choice of fund regime because they believed planners would encourage clients to join funds paying lucrative commissions rather than industry funds that paid no commission at all.
It was this notion that planners might not give appropriate advice that led the Australian Securities and Investments Commission (ASIC) to undertaking a shadow shopping exercise with respect to super switching.
The bottom line of the ASIC exercise is that while a number of financial planners have been prosecuted the problem does not appear to have been as deep-rooted as everyone first feared.
However, ASIC’s earliest report resulting from its shadow shopping exercise, released in August last year and dealing with a period from late 2004 until the middle of last year, painted a less than glowing picture of the performance of financial advisers with respect to superannuation switching.
It said its review had looked at recommendations to switch superannuation funds from a diverse range of advisers, including advice to move into self-managed superannuation funds.
In particular, the review had focused on the two main switching advice obligations relating to:
* Conduct: An adviser who gives a switching recommendation must have a reasonable basis for their advice; and
* Disclosure: An adviser must disclose the costs of the switch, any loss of benefits and other significant consequences of making a switch.
It said that it had found that a lot of the advice reviewed disclosed little or no consideration of the client’s current fund.
ASIC also found that there was a strong tendency to recommend a client switch to a superannuation fund related to the licensee.
“This creates the potential for conflicts of interest that need to be carefully managed to avoid the risk of inappropriate advice,” the report said.
The Financial Planning Association (FPA) responded to the ASIC report by pointing to the fact that it related to a period well before the new choice regime and well before the FPA had implemented an education regime for its members.
The FPA’s defence tended to be borne out by the relatively low number of planners actually prosecuted by the regulator with respect to super switching.
However, a number of ASIC prosecutions relating to super switching are on foot and the most important of those, relating to Sydney financial planning firm First Capital Financial Planning Pty Ltd, was due to return to the NSW Supreme Court in late February.
First Capital is facing charges that between December 2004 and September last year it advised more than 180 teachers to switch from their state government superannuation to a superannuation fund recommended by First Capital.
It is also alleged that the Statement of Advice provided to the teachers did not properly explain the differences in fees between the state government fund and the recommended fund or provide a comparison of the fees to be paid.
