Superannuation fund planning: who benefits?

As superannuation funds seek to move further into the provision of full service financial planning, a recent report prepared for the West Australian Government has raised some serious questions about what is really in members’ best interests.

As a growing number of superannuation funds seek to enter the financial planning market, a report prepared for the West Australian Government has thrown up a range of issues that cannot be ignored by either the Federal Government or the Australian Prudential Regulation Authority (APRA).

The report, Putting Members First – A Review of Public Sector Superannuation Arrangements, prepared by Commonwealth Public Servant, Rob Whithear, reviewed the activities of big West Australian public sector fund Government Employees Superannuation Board (GESB) and recommended it return to its core responsibilities, including exiting full-service financial planning arrangements.

The executive summary of the report goes to the kernel of its findings – “that the GESB should focus on Government Employees Superannuation rather than being an active participant in well established superannuation and financial planning markets, competing directly with the private sector”.

“The Report does not support the State Government funding the establishment of a financial services provider competing in that market,” the executive summary said.

The findings of the report, while specific to the objectives of a Coalition West Australian Government and the activities of a public sector fund operating in that state will nonetheless resonate with many participants in the broader financial planning industry and raise questions about the extent to which superannuation funds are being allowed to provide advice and the terms on which that advice is being provided.

In particular, it suggests that if the sole purpose test is not being broken by some funds, then it is certainly being bent.

What will most interest the financial planning industry about the West Australian report is the manner in which it points to a strategy pursued by GESB in its bid to pursue additional revenues by entering the full-service financial planning market. There is, too, the suggestion that the super fund’s desire to expand its financial planning offering was driven as much by revenue requirements as the provision of member services.

The fund’s desire to deliver a full-service offering via a subsidiary company had its genesis in the initial decision to provide fund-specific advice to members in 2005.

As member take-up of its advice offering gained traction and as other superannuation funds pursued their own objectives in the financial planning industry, the GESB trustee board in November 2008 sought a further $2.5million to expand into the broader wealth management market.

The proposal was rejected by the State Treasurer in January 2009, and GESB was advised to constrain its operations to services set out in its original business case and within the scope of the Sole Purpose Test as administered by APRA.

The Whithear report suggested that notwithstanding the State Government’s clear intention that the establishment of GESB Wealth Management (GESBWM) was founded on the basis that it would provide advice only to GESB members about GESB products, it had subsequently moved well beyond that brief.

The review found that GESBWM was providing a range of advice which could be described as “full complex advice” and noted “the range of advice is consistent with what might be expected to be obtained from a full service financial advisory entity”.

“A number of these services would only have a tangential relationship to superannuation, and the GESB schemes in particular,” it said.

The report then quoted an APRA superannuation circular dealing with the application of the sole purpose test and, in particular, the following extract: “... fund sponsored programs, including financial planning services, which are targeted at broader, non-superannuation savings and investment opportunities, products or services, such as investment or tax advice and health insurance are inappropriate.”

“Financial planning is now a service which many trustees are considering offering to members … if the service is aimed only at a member’s interest in the fund, such services would generally fall within the sole purpose test. If, however, broader advice is offered, it would be inappropriate for the cost to be borne by the fund.”

The section of the report dealing with financial planning is revealing because many financial planning principals would be interested to note the “the revenue model for GWM is based on charging clients an hourly rate of $290 per hour”.

It said the business case prepared by GWM to move to a full advice model assumed that preparation of a Statement of Advice would take five hours.

“During 2007/08 the preparation of a Statement of Advice (SOA) required 19 hours work. GESB advised that this had subsequently been reduced to 15 hours,” it noted.

The report said the GESB business case also assumed that the first year of operation would attract 1,670 clients at charges of $250 per hour, resulting in income of $1,250 per SOA. It said actual income per client during 2007/08 was approximately $2,700 per SOA for 340 clients.

However, it said this revenue per SOA continued to grow, with GESB reporting income per SOA as ranging between $3,500 and $4,500 each.

The business clearly gained traction, however, with the report noting that GESB financial planners met with 348 members during the June 2009 quarter with the planners being engaged by members to provide 201 Statements of Advice as a result of those meetings.

“Nearly 540 SOAs were prepared during the 2008/09 financial year, leading to revenues of $2.27million ($2.51million in Income Statement) for GESB Wealth Management for that year,” the report said. “GWM paid GESB $2.24million for the performance of services as GWM financial planners are actually employed by GESB. GWM pays GESB for financial planning services delivered to GESB members on behalf of GWM.”

The report to the WA Government conceded that the desire to provide a full service financial advisory offering to GESB members was understandable and that “the expansion of the breadth of financial advisory services along the path to the planned mutualisation was also understandable”.

“However, revenue forecast uncertainties, recourse risks to the State Government and mooted changes to the regulatory environment for financial advice suggest that this expansion involves significant risk. This risk is only exacerbated if considered in the context of uncertainty about the financial viability of GESB Wealth Management or in contemplation of potential claims against the State,” it said.

“The recommendation contained in this Report that the planned mutualisation of GESB be cancelled, crystallises the above points and leaves the State in the potential position of being the long-term owner of a full service financial planning entity.”

“The Review considers this is not in the interests of the State and that the Government should wind up GESB Wealth Management.”