The financial services industry has experienced increasing levels of regulation during the past few years, with one of the primary objectives being better protection for consumers. This reflects the fact that our industry has been too slow to respond to changing consumer needs and sentiment. This trend will continue until we start to proactively address some of the issues our industry is facing. One of these issues is products with exit fees.
For the past few years there has been increasing pressure on the financial planning industry to improve the transparency of fees for investors. This has been played out in dollar disclosure regulation and new Australian Securities and Investments Commission (ASIC) and industry guidelines around ‘soft dollar’ payments for advisers.
In recent months there has been considerable focus on products with exit fees and their impact on customers wishing to take advantage of the fund choice regime coming in on July 1, 2005. Government, consumer advocates and the media have all stated that exit fee products limit flexibility for customers. The Senate Select Committee on Superannuation has stated that the future of exit fees is limited. Furthermore, the impact of exit fees was picked up by both parties in the recent lead up to the Federal election.
Earlier this year, MLC conducted a review of its on-sale exit fee products; MLC MasterKey Superannuation Five Star and MLC MasterKey Allocated Pension Five Star. This review was in line with MLC’s commitment to improve transparency for investors.
The review showed a decline in support for the Five Star products as many advisers have moved to alternative remuneration models in their businesses, including fee-for-service models. At the same time, we saw an increase in the popularity of our Gold Star products, which have an entry fee rather than an exit fee pricing structure.
Taking these findings and public sentiment into consideration, we decided to withdraw both Five Star products from offer to new business and will not accept any applications after March 31, 2005.
Decisions like this are always surrounded with heated debate and much discussion was had both within MLC and with advisers. This is because there is a relatively strong argument that exit fee products meet the needs of a certain type of investor, who do not want to see a portion of their money removed upfront for entry fees. It can also be argued that in many cases, the impact of an entry fee on investors ends up being the same as the impact of an exit fee. The fact remains that data conclusively shows that consumers and advisers have been self-selecting out of these types of fee models for the past few years.
However, this debate is about much more than just the fee structures of these products. It goes to the heart of client trust and the credibility challenges our industry is facing with customers. If we want to inspire more people within our community to seek financial advice, we need to provide them with products and services that they trust and feel comfortable with. Media headlines such as “Costello urged to get tough on steep exit fees” (West Australian, July 26, 2004), “Lobby group wants exit fees on funds outlawed” (Gold Coast Bulletin, July 26, 2004) and “The Price Of Freedom” (Sydney Morning Herald, June 16, 2004) clearly do not help build this trust.
Legislation such as portability and fund choice, combined with trends such as increasing super account balances, a more transient work force and an increased focus on fees, will encourage people to take a greater personal interest in their super. This is a great outcome and is the only way we are going to start to close the $600 billion savings gap in Australia. This increasing interest in super means we have to continually review our products and services to ensure they remain relevant and are effectively meeting customers’ needs. The exit fee structure of our Five Star products does not support portability or fund choice, which is one of the reasons we have decided to withdraw these products from market.
The introduction of dollar disclosure and fund choice in 2005 represents another significant turning point for our industry, with both issues going to the heart of transparency and consumer protection. We need to consider today what the implications of these events will be and respond accordingly.
The number of people seeking financial advice is not going to significantly increase until our industry as a whole addresses the many issues associated with fees and transparency and starts to more actively acknowledge and respond to consumer sentiment.
At MLC we have made a decision that will be unpopular with some financial advisers, but we believe it is the right decision and reflects the future of this industry. And if it helps to build the community’s trust in our industry and encourages more people to seek advice, then we believe we are contributing to a more positive outcome for both advisers and customers.
Steve Tucker is chief executive of MLC Australia .
