(03) 9020 2905PORTFOLIO POINT: Certainly no earthquake, but a positive tremor for super consumers. Here’s how the Government’s new financial advice reforms will impact your super.
Opt-in is confirmed. Working in a client’s “best interests” is too. And the ban on soft-dollar benefits is not just in, but is going to be made tougher.
Assistant treasurer Bill Shorten seems determined to leave his mark on superannuation in Australia. And, largely, he’s going to achieve that with his Future of Financial Advice reforms announced on Monday.
His reforms are reasonably significant and largely positive. More than that, they weren’t dictatorial (like Kevin Rudd’s unpopular cuts to contribution limits). He stated his preference, listened to the industry’s concerns and made sensible adjustments to his position.
Shorten’s super changes won’t be the “YAHOO!” kind that Peter Costello managed to introduce with his decision to make superannuation a tax-free vehicle for the over 60s back in 2007.
They will come at a cost to the financial planning community. They will come at an increased cost to consumers who seek financial advice, while reducing fees to those who don’t want advice.
How much is still being argued. There’s quite a bit of moaning going on from the advice industry, so presumably the industry is going to take a bit of a hit. (Not necessarily a bad thing from a consumer’s standpoint.)
The changes will, or should, impact how you manage your superannuation. Some of the changes don’t come in effect until mid 2012, while others won’t come into force until 2013.
In a nutshell, this is an evolutionary step towards making advice fee for service. It’s not totally there, but it’s a significant step in that direction.
But be warned: The changes are going to cause huge distortions in the market for financial advice in the short term. Sections of the industry will work overtime between now and June 30, 2012, and then for different reasons in the year to June 30, 2013, to sneak in under various grandfathering arrangements. More on this later.
Insurance commissions and super
Two weeks ago, I went into detail on a likely backdown by Shorten on his proposal to ban commissions for all insurance inside superannuation (click here, August 17, 2011).
I was pretty close to the money. If anything, he’s been even more sensible than I had predicted would be the case.
Insurance that has been “advised” will continue to be able to charge a commission. That is, if you have received advice and have agreed to pay an adviser commission for the insurance advice, then a commission can be paid inside super.
Interestingly, subsequent to the earlier column, innovative advisers were already planning their way around this new rule. They would write the initial insurance policy outside of super where they could be paid a commission. When the policy is completed and they have been paid their commission, transfer ownership of the policy into superannuation, where commission would be stripped from the cost of the policy, thus satisfying the government requirement. (The loser in this case would be the insurance companies themselves, who would then have a much longer breakeven point and to a lesser extent advisers, who would not have been able to receive ongoing insurance commissions.)
Moot point now, as commissions won’t be stripped from policies inside super.
But as stated on August 17, that doesn’t mean that you, as a SMSF trustee, can’t work with an adviser on a fee-for-service arrangement for your insurance needs now.
The worst part of Shorten’s April announcement was the creation of conflicts of interest for financial advisers, to the potential detriment of clients. However, Shorten’s new solution has showed surprising common sense.
Commissions are going to be banned on group risk products. These are the commission paid on super premiums inside, largely, retail corporate super funds that have been organised upfront as a “service” by a financial adviser to an employer’s staff.
There will be millions of Australians who have some of these super policies. These conditions will be grandfathered – advisers will still continue to receive commissions for insurance for policies written prior to June 30, 2012. It will be up to the members to seek advice and, if appropriate, update their super and insurance policies so that they are captured under the new rules.
The way around paying commission on insurance for basic super policies will be to go with a MySuper product. Under MySuper, you will have to either organise it yourself (no advice) or pay fee-for-service to an adviser.
Another sensible proposal from Shorten regards insurance policy churn, which arguably adds to the cost of all insurance policies. Shorten has recommended that “level” commissions – which usually run at about 30-35% of premiums – could be introduced for replacement policies, which would significantly cut down on churn. I’m not quite sure how they’re going to police this one, and I can see difficulties with it, but the concept is nice.
Opt-in
The changes here are interesting also. Labor has gone with a two-year opt in. This is less frequently than their initial proposal (which was one year), but less than industry sought, which was three to five years.
But he has left far more flexibility for advisers on getting “signatures” to comply with opt-in. Signatures can be phone calls or returned emails. The great fear of the advice industry is the cost of chasing clients up.
Some sort of “signature” will be required. But it will be left to the adviser to then turn off the fee flow. “What adviser would do that?” I hear you ask. Ones that want to avoid a $50,000 fine for individuals and $250,000 for corporate authorities. Big stick, less carrot.
Stockbroker reforms
Brokers have won an exemption in regards to “stamping fees” for capital raisings. However, they won’t be exempted from “best interests” provisions.
Restricting use of the term “financial planner”
They are opening this up for discussion, but this is a welcome initiative. The government is asking for submissions.
Short-term market distortions
The grandfathering provisions contained in Shorten’s FoFA reforms will create market distortions in the short term. Advisers, but even more so licensees, will be keen to jam as many clients in under the current, more generous, arrangements as possible.
The “grandfathering” of certain provisions, including marketing (or volume) bonuses, will see a rush toward increasing FUM (funds under management) that will continue to receive “override payments” or “marketing allowances”. Predicting this recommendation, the larger players starting hiring like crazy a few months ago in a bid to increase assets that would continue under grandfathering provisions.
What should super members or SMSF trustees do?
Should you delay getting advice on your super (or other investments and insurance) until after the new laws are bedded down, to avoid being caught up in the urgency?
No, for several reasons:
- If you need advice, get it now. Spending two years sitting on the sidelines could cost you far more.
- Increased regulation tends to push up the cost of advice, rather than decrease it. The cost of advice will probably be more (somewhat) expensive following implementation of the reforms for those who want it. The cost of super will likely be less for those who want to do it themselves.
- The cost of volume bonuses generally does not come out of your pocket (although it adds to the cost of advice generally in the community, which is shared by most).
- You can always renegotiate your agreement with your adviser after the new rules come in.
Shorten’s reforms are a big step down the path towards fee-for-service. But make no mistake, it will cost more for advice, if you want it, under this system.
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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 advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.