The Federal Court recently delivered another salutary lesson to investors about the importance of reading the fine print, when it upheld the right of a respected and legitimate fund manager to levy an exit fee of more than $13,000 on a $30,000 personal superannuation fund.
That a situation like this was able to develop — and it wasn’t an industry first by any means — makes you wonder whether superannuation exists to provide for members’ retirement, or to fatten the coffers of fund managers who have reaped a bonanza of fund inflows since compulsory superannuation was introduced.
Fees and charges are often buried in the fine print of superannuation contracts, and are sometimes so complex, it’s nearly impossible for the non-expert person to calculate the total fees they’ll be billed. That’s why the concept of one composite summary fee figure has long been called for by those with investors’ interests at heart.
Unfortunately, another attempt at just such a summary fee failed last month, when the Investment and Financial Services Association (IFSA) and the Association of Superannuation Funds of Australia (ASFA) announced that their efforts to agree on a single fee measure for superannuation and managed funds had reached an impasse — a stunningly unacceptable outcome.
But then really, who are we kidding here? Why would the fox want to disclose just how deeply its paw reaches into the hen house? Far better to leave the Government to grapple with the issue. Given the complexity, it should take a year or two. The fox can raid a lot more hen houses in that time.
The fund industry may have given up simple fee disclosure as a bad joke, but isn’t the joke really on investors generally, and employees in particular? They’re forced to contribute to super, often with very limited choice on where their money can go, and with a limited understanding of the fees that will be levied on their savings.
It’s ironic then that, speaking on the importance of financial literacy at the recent launch of Financial Planning Week, Senator Helen Coonan warned consumers to be wary of “dishonest operators” who will try to rip them off.
No mention was made of the importance of being wary of respected and legitimate managers and their superannuation contracts — contracts that may include two pages of complicated formulas to explain how exit fees work.
So Portfolio Construction Forum’s representative put the question to Senator Coonan: What about the not-so-shonky operators — the ‘respected and legitimate’ fund managers in fact — who rip off consumers? (After all, no matter what spin is put on it, how can taking nearly half of a superannuation fund balance as a penalty fee be anything but a ‘rip off’?) Senator Coonan said she was aware of the case in question, and conceded that: “Some of the superannuation products and some of the older products have quite unacceptable exit fees. But contractual agreements make them difficult to undo.”
Older? The investor in question bought the product just 10 years ago.
Coonan also suggested that the contract could perhaps be set aside in a court process. That’s all well and good, but it is a lot of expense for the investor in question, with no guarantee of a positive outcome. To my mind, it is the Government that should take the action on her behalf; after all, it was the one that required her to save in a super fund in the first place.
And what of the financial planner who placed her into this product — a product on which, it has to be said, the planner received a rather generous commission. The fund manager concerned has reportedly said that part of the reason the exit charge was so high was because the planner had to be paid nearly $4,000 in commission.
It’s also worth noting that the product was reportedly advertised that as having no contributions charges, policy fees or entry fees. With such a promotion about the fees, it is surely reasonable for the consumer to believe that the product is ‘low’ or ‘no’ fee. It’s not reasonable or fair to expect that the consumer would have thought to think about, let alone ask about, exit fees as well.
And the investor says that her $4,000 planner did not explain that an exit penalty existed. Yes, I’m sure she did sign a form saying she’d read and understood all the terms and conditions — that only makes it legal to fleece her of $13,000 out of $30,000, it doesn’t make it right.
In the brave new world of Financial Services Reform, the Financial Planning Association and IFSA will no doubt chant their standard ‘that wouldn’t occur these days’.
But that’s of little comfort to those people to whom these policies have been sold. And nor is the knowledge that the product terms and conditions are so complex that the industry that designed them can’t agree on a transparent way to disclose them.
While Senator Coonan indicated that the Government will have to step in and decide on fee disclosure requirements, the question has to be asked: why has it allowed these sorts of exit fees to exist in the first place?
Although she indicated she would look into the case in question, Senator Coonan conceded it may not be something she can do much about. She added: “I entirely agree that transparency and disclosure is crucial. The Government supports choice and people being able to vote with their feet.”
But if people can’t vote with their feet because they’ll be scalped in the process, what “choice” do investors really have?
Graham Rich is publisher and managing editor of www.portfolioconstruction.com.au
