If the royal commission recommends the separation of product and advice when it reports later this year, super funds providing intra-fund advice to members will be caught between contradictory regulatory pushes.
Industry Fund Services chief executive officer Cath Bowtell says separating product manufacturing from licensing financial planners would be an obvious response by the royal commission to the issues presented by vertical integration but would be at odds with the Productivity Commission’s recent review of the superannuation industry.
Bowtell says the PC recommends best-of-breed super funds provide intra-fund advice – and that is clearly a situation in which the product manufacturer also provides advice.
“So you’ve got two reviews at the moment that are pushing in different directions, and I think that’s going to be the most interesting thing that we’re going to have to navigate over the next 18 months,” she says.
Bowtell says vertical integration can be good for consumers if the incentives build into the structure are right.
“But I don’t think that’s what we’ve seen over time,” she says, and responses to date by vertically integrated institutions do not adequately address the conflicts.
“If you look at the proposed restructuring of the CBA, the bank will no longer have those conflicts, but insurance, wealth management and financial advice are all going to go across into one entity,” she says.
“You’re still going to have product manufacturers and advisers in the same structure.”
The industry funds’ advice challenge
• The Productivity Commission review of superannuation wants super funds to offer intra-fund advice, but the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is tipped to recommend separation of product and advice.
• Intra-fund advice is narrow in scope and does not adequately address the advice needs of typical super fund members as they reach retirement. But comprehensive advice is too costly for most.
• Advice is not a core competence for all super funds, and fund trustees have finite capacity to deal with rapid change on the advice and the superannuation fronts simultaneously.
• IFS’s perceived competitive advantage of non-conflicted advice is under threat if regulatory reviews push all advice providers towards a similar structure.
Defining intra-fund advice
Bowtell says even if vertical integration can be effectively addressed, the definition of intra-fund advice still needs attention. She says clients seeking advice on superannuation typically also need advice on age pension eligibility, and often are accompanied by their spouse.
“It doesn’t fall within the intra-fund rules, because it’s looking an interest outside the fund, which is the age pension, and it’s looking at the interest of the household, not just of the member,” she says.
When the cost of the advice can’t be met by the fund it has to be paid for by the member.
“If you’re looking at people coming in with $150,000 in their retirement savings, and not much else, and having to charge them $2500 to $3000, which is what you have to charge them to cover your costs, it’s very difficult for ordinary Australians to see that that’s a good way to spend their money,” she says.
Bowtell says permitting funds to provide a new category of “intra-fund-plus, or scaled-comprehensive advice – a hybrid of comprehensive and intra-fund advice” under the sole purpose test would make advice far cheaper and accessible to more people.
A peculiar set of challenges
Bowtell says that IFS faces the same challenges as all licensees, including “being more efficient, using technology more to assist our planners and make their lives easier, and de-risking the business – all of that is a given”. But it also operates in a sector that has its own peculiar set of challenges.
“Our funds are going to see change over the next little while, with the Productivity Commission review and the legislation that’s in the parliament at the moment around small inactive accounts and other things,” she says.
“Advice is not a core business for a lot of our funds so having the bandwidth within the trustees to focus on the changes in the advice environment when they’re also focusing on everything else that they need to focus on is going to be a challenge for us.”
Even so, Bowtell says IFS is well placed to capitalise on opportunities that may arise from the current reviews and inquiries.
“I do think the recognition of the need for more Australians to see a planner to get advice and get good advice around which fund to be in and at retirement goes to the key points that have come through the Productivity Commission and provide us with some opportunities,” she says.
“And I think there are some funds – again, with the royal commission and the focus on vertical integration – that are self-licensed that may wish to bring some tension into their licensing arrangement and move away from that model. So there are opportunities for us that we need to be ready to step in and exploit.”
Facing greater competition
IFS is owned by 27 industry superannuation funds, via Industry Fund Holdings and a distinguishing feature of its advice model since inception around 20 years ago is an aversion to in-built conflicts, and a focus on advice as a service.
It’s been a competitive advantage to date, but if it becomes something that’s offered right across the sector IFS will face greater competition, Bowtell says.
“Our funds will have more choice, so then we’re going to have to distinguish ourselves on our service quality and all those things – which we say we do, but demonstrating that back to the funds, if they have a greater suite of potential licensees who are now offering an aligned model, something they could happily choose from, is both a terrific thing but it’s a threat for IFS,” she says.
“That’s something we think about as well. Everyone will look like us.”