Any adviser unclear about the extent to which super choice will raise the bar on their duty of care to ensure clients choose the right fund need only look at the recent experience of their colleagues in the UK.
An estimated £11.25 billion in restitution has so far been paid to fund members who were sold inappropriate products by advisers since the launch of a choice-equivalent regulatory regime in the UK.
Some of the key issues an adviser should consider when helping clients choose a fund include:
Real choice
In order to give clients the best advice under super choice, planners are likely to have to acquaint themselves with a much larger array of funds.
Jeff Bresnahan, the managing director of super fund research group SuperRatings, says advisers’ knowledge of some segments of the superannuation industry, particularly not-for-profit funds, is not as strong as it could be.
Bresnahan says one of the key criteria for planners in “discharging their duty of care under choice will be to ensure they acquaint themselves with the not-for-profit funds in Australia”.
“They’re going to come across these people all the time under choice and they’re going to expose themselves legally to mis-selling if they aren’t able to give appropriate advice on this sector.”
Bresnahan says his “understanding is that financial planners have quite a good knowledge of the commercial funds but not a lot of information on the not-for-profit sector”.
“The reality, however, is that not-for-profit funds hold a very significant proportion of Australia’s funds membership, as distinct from the assets of funds.”
However, Bresnahan says mis-selling is not expected to occur in Australia to the same extent as in the UK, partly because of fewer defined benefit schemes.
“A lot of the affected fund members in the UK pulled their funds out of defined benefit schemes on the advice of planners, and put these into accumulation funds, which cost them significantly”.
The duty of care involved in choosing a new fund for a client requires the planner to “holistically assess the features of the client’s existing fund and not solely the potential new funds”, Bresnahan says.
Comparing funds adequately will require planners to get to know the available funds and the fund sectors “pretty much inside out”, he says.
“Unfortunately, a lot of the relevant information will probably be in excess of what is listed on the Product Disclosure Statement (PDS) and will also not be in general circulation.”
Fees and charges
The different fees and charges levied by super funds (see table) have the potential to significantly impact on the savings of individuals once they reach retirement. It is no surprise then that comparing fee and charges will be a key part of the assessment criteria for advisers when evaluating different funds.
Bresnahan says planners will have to be “conscious of the fact that just because fees are listed in a PDS doesn’t mean this is the sum total of all the client fees”.
“They cannot use a PDS as a sole measure of comparing fees within funds, as there’s also a lot of implicit pricing within the industry not reflected on a PDS.”
Institute of Superannuation Trustees (IST) chief executive Susan Ryan says advisers would not be able to make a “true comparison between funds if they don’t look at the totality of fees and insurance inclusions”.
“Advisers sometimes just look at administration fees, or perhaps at investment fees and administration fees, while overlooking the fact that there may be exit and entry fees and also fees for such features as having spouse accounts,” she says.
Ryan says the importance of fees as a measure of comparison was illustrated by recent Australian Securities and Investments Commission (ASIC) warnings related to the large exit fees charged by some older, legacy superannuation products which still hold some clients’ funds.
A recent ASIC inquiry found at least 550,000 Australians have ‘old style’ or ‘legacy’ superannuation accounts bought from life insurance companies in the 1980s and 1990s that might be subject to significant exit fees if funds are moved under choice.
“Some planners may not be aware some producers of those products have heeded the regulator’s warnings and are going to offer members a better deal under choice. They will allow affected members to move into one of their other products under choice, from which they can then opt out with a lesser penalty,” Ryan says.
Insurance cover
Assessing the level of insurance cover offered by super funds is also crucial, “particularly whether there’s a basic minimum cover and what the cost of this is, and then what the cost of increasing this cover is”, Ryan says.
“Planners will really have to be on top of their game over insurance because it would be terrible for a member if they opted into another fund and in the course of that change lost their insurance cover.”
She says many funds have been able to “buy insurance cover for their members wholesale and offer it to their members at a very low rate, and also offer them minimum cover without getting medical reports”.
Another “huge advantage” for some members is they have “generally been able to get both salary and disability cover at a very low rate” through their fund, she says.
“It costs an enormous amount to buy the equivalent cover privately and you have to produce a vast array of medical reports covering your whole life.”
The Federal Government has responded to concerns over the insurance cover issue under choice and is now requiring funds to offer a minimal insurance cover (see opposite).
“We welcome this move, but of course it’s still possible for people to opt out of a complying fund that has a very good cover into one with a lesser cover,” Ryan says.
Returns
While investment performance is not the be all and end all of choosing between funds, it is obviously top of mind for most clients and will have to be acknowledged by planners when they provide advice in a super choice environment.
ASIC has also recognised the importance of performance returns in choosing between funds, with the corporate regulator releasing a guide last month to give consumers a realistic picture of what they should expect over the long term from their superannuation investments.
The guide was compiled with the assistance of four research groups — Assirt, Morningstar, SuperRatings and SelectingSuper.
It states that members in super fund growth options should typically have received returns of between 3.9 and 5.5 per cent over the five years to the end of December last year, while those in balanced options should have received between 2.1 and 5.2 per cent. Members in capital stable options could have expected between 4.2 and 5.6 per cent over the past five years (see table p27).
At the launch of the guide, ASIC executive director of consumer protection Greg Tanzer said: “Because your fund’s investments usually make a big difference to how much you will have to retire on, it’s important that consumers can judge how well their super is performing.
“Predicting performance can be very difficult which is why many people look to past performance. However, consumers have often been presented with figures quoting past investment performance that were short-term, and of little help in judging performance.
“To ensure consumers take a sensible long-term approach to super, which is after all, a long-term investment, ASIC recommends using data compiled over at least a five-year period.”
