25/11/2010 - 00:00

Retail funds trying to get back in the game

25/11/2010 - 00:00


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We should be paying more attention to the changes under way in the superannuation industry, because they’ll affect us all.

WHILE superannuation may not be high up on the list of ‘dinner party conversations I can’t wait to have’, it is one of the biggest and most contentious industries in the country, and has a massive effect on the rest of business due to its investment power.

Right now it is undergoing yet another round of drastic changes, from the amount we contribute to the way financial advisers are paid.

It is a pity that superannuation is so tedious, because we really ought to be paying closer attention to this vital force in our economy.

I don’t pretend to follow every minute detail in the various debates raging across the sector but I was reminded of a number of issues while attending a luncheon this week held by the Association of Financial Advisers, at which Financial Services Council CEO John Brogden spoke.

The FSC effectively represents retail investment fund managers such as AMP, Investec, MLC and Colonial, to name but a few. These are typically independent or bank owned.

Some have their own sales force, others use the independent advisers, who are generally paid on commission.

This part of the industry has taken a battering from the industry funds, which have staked out the moral high ground in the debate over value for money and trustworthiness. The former was created by a series of advertisements that purported to show how much better off members of industry funds were because they didn’t pay commissions (even though they were paying millions for their promotional campaigns).

The cause of retail funds and independent financial advisers was not helped by the failure of high-profile advice groups such as Storm Financial, even though such collapses are a mere drop in the bucket of the annual superannuation and investment market.

Industry funds, often union dominated, have taken advantage of their perceived better performance to stake out a whole host of beneficial arrangements with the federal government since the Labor Party won government.

Under the new industrial awards, for instance, default superannuation funds are now prescribed by the federal government. Industry funds dominate this, which by the nature of the way superannuation works means they will get a huge flow of funds and members for no effort at all.

Business has been somewhat mute on this subject but, of course, it is part of the industry fund cabal. Take Westscheme, a rare example of an industry fund based in Western Australia. It has three directors appointed by UnionsWA and three from the Chamber of Commerce and Industry WA, with an independent chair.

The chair is paid $114,490 and the directors $54,956. Who knows whether this is paid directly to the person or, in the case of those already working for unions or industry bodies, whether it goes back to their organisation. Either way it helps these organisations fund their vital executive positions. Not a bad annuity for capturing a government-mandated saving of 9 per cent of salary, soon to be 12 per cent.

As a result of the industry fund campaigning, the big change (among many) for the retail funds and independent advisers is the end of commission payments as we know it. This suits the industry funds, who are allowed to offer so-called free advice via their own sales teams to customers channelled through the unions, default superannuation mechanisms and associate entities, such as the ME Bank, some of them own.

Regrettably, retail superannuation funds have had a bet each way, allowing their industry rivals to take the moral high ground on commissions. Because they, too, have in-house sales teams they could live with this change. But clearly something is happening to make them realise that by cutting off their adviser base they may be creating trouble for themselves.

One thing to belatedly balance the equation is that the industry funds’ reliance on alternative investments, such as long-term infrastructure, has not done so well as the immediate post-GFC environment showed. But that has not yet filtered down to the public.

Retails funds are focused on equities, whereas many industry funds have had big weightings in things such as CBD buildings, power stations and road tunnels.

A lot of those investments have gone pear-shaped in the past 18 months because big static assets are hard to sell in times of panic, especially when they are loaded with debt. But that is too late for anyone who believed the TV ads that showed how much better the industry funds performed. We don’t see those ads so often now, do we?

Mr Brogden offered a mea culpa on the commission issue last week, admitting that the retail side of the sector had allowed the industry funds to demonise commissions and make the advice argument all about cost.

He said dumping the commission structure was irreversible but the retail funds, and by default the advisers, could still argue their case on a number of other key issues.

“We created our own difficulties by hiding in a corner,” Mr Brogden said.

“We now have to address the challenge of convincing Australians of one thing and one thing only, that is the value of financial advice.”

Advisers, too, admit they have had their heads in the sand on this issue. They did not fight back in public, something of which I have long been critical.

Instead they have focused on lobbying, with limited success.

Two weeks ago, more than 100 advisers from around the state attended a meeting at the South Perth Yacht Club with five Liberal and one Greens senator.

I am told this was a catalyst to a successful push to force the federal government to complete a productivity commission report into competitiveness is default superannuation.

This is a good-but-rare win, reflecting the fact that until recently financial advisers believed lobbying was enough.This is the same mistake the mining industry made. The advent of the Resource Super Profits Tax and its eventual repackaging to the Minerals Resource Rent Tax has shown that lobbying is vastly improved when the potential for advertising and publicity is there.

The miners achieved nothing until they had a $100 million advertising budget and showed they were prepared to spend it (actually they only spent $17 million). Lobbying with a big advertising budget is like diplomacy, it is much more effective when there is the implied threat of military intervention.

One bit of credit, though, the advisers are not as well off as the miners.

Right now they are passing the hat around for $500,000 as a start-up fund for what they hope might be a $3 million campaign.

It is about time we started to see an industry, predominantly made up of small business people, hit back at the union-dominated funds that have used financial muscle to gain the political ear.

• mark.pownall@wabn.com.au



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