2.3.1Deduction of advice fees from superannuation accounts
One of the key elements contributing to the charging of fees for no service was the invisibility of the charges made. In almost every case the fees were charged directly to the person’s investment accounts – often enough to the person’s superannuation account.
On its face, it may seem odd that such fees were being deducted from superannuation accounts at all. No doubt the trustee of the fund may resort to the funds held in order to reimburse the trustee for outgoings incurred in the course of performance of the trust. No doubt the trustee may resort to the funds held to meet fees owing by members to the trustee under the rules of the fund. Hence fees like administration fees are properly charged to members’ accounts.
But ongoing service fees payable to an advice licensee or the authorised representative of an advice licensee are neither outgoings that the trustee incurs in performance of the trust nor fees charged to members under the rules of the fund. They are fees charged under a contract the member has made with the advice licensee or the authorised representative for provision of advice.
More often than not, trustees of RSEs have permitted payment out of a member’s account of fees certified by either the advice licensee or the authorised representative to be fees for advice about the member’s superannuation arrangements. But in many cases, the services to be provided by the adviser have been so loosely defined that the advice provided may, but need not, include advice about whether to alter the client’s financial plans or arrangements about post‑retirement income.
I consider that using superannuation money to pay for such broad financial advice is not consistent with the sole purpose test prescribed by section 62 of the SIS Act. That requires the trustee of an RSE to ‘ensure that the fund is maintained solely’[1] for identified purposes. All of the core purposes specified hinge on the provision of benefits upon a member’s death or retirement. So understood, it is not consistent with the sole purpose test for a trustee to apply funds held by the trustee in paying fees charged by an adviser to consider, or re‑consider, how best the member may order his or her financial affairs generally or may best make provision for post‑retirement income.
It follows that the nature of the advice that may properly be paid for from a superannuation account is limited to advice about particular actual or intended superannuation investments. This may include such matters as consolidation of superannuation accounts, selection of superannuation funds or products, or asset allocations within a fund. It would not include broad advice on how the member might best provide for their retirement or maximise their wealth generally. Any practice by trustees of allowing fees for these latter kinds of financial advice to be deducted from superannuation accounts must end.
As (in my view) this is what the law already requires, no further amendment is necessary. But I would modify the general rule in respect of MySuper accounts, and permit no deduction for advice fees of any kind. The simpler the arrangements about MySuper, the better. It is difficult to imagine circumstances in which a member would require financial advice about their MySuper account. If a member wants financial advice, the cost of that advice should be charged to and paid by the member directly.
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Recommendation 3.2 – No deducting advice fees from MySuper accounts Deduction of any advice fee (other than for intra‑fund advice) from a MySuper account should be prohibited. |
It is now necessary to say something about ongoing advice fees.
2.3.2Ongoing advice fees
Given the limited nature of the advice that may be paid for from a superannuation account, it might be thought that there are few circumstances in which paying fees for ongoing advice of that kind would be in the best interests of a member.
Perhaps a superannuation member invested through a platform would benefit – or believe they would benefit – from ongoing financial advice in respect of their superannuation investments. But such benefits would be relatively modest, and would accrue to relatively few members. As I said at the outset, the invisibility of ongoing advice fees was a key element in the charging of fees for no service. As long as ongoing service fees are permitted, some risk of members being charged fees for no service will endure. It may be that the benefits of eliminating that risk, by prohibiting ongoing service fees from superannuation altogether, outweigh any limited benefits these arrangements may provide.
I acknowledge the submissions from some entities that prohibiting ongoing advice fees would reduce access to financial advice for some (or many) Australians.[2] But if the recipient will not pay the fee that the adviser charges except out of a superannuation account, what does that say about the value to the recipient of the advice that is given? Does it show that the taxation treatment of superannuation contributions and benefits are driving the matter? And if they are, what does that reveal about how the recipient values the advice that is given?
Absent some convincing explanation from those who seek to maintain a system of charging fees against superannuation investments, the most likely conclusion must be that what is proffered by the adviser is not seen by the recipient as warranting the fee the adviser charges. And if that is right, the proposition that needed advice will not be given loses most if not all of its force.
However, if ongoing advice fees continue to be permitted, they should be tightly controlled in at least two ways. First, as I have said above, the advice in respect of which fees may be charged is limited to advice about particular superannuation investments. Because this is what the law already requires, no change is necessary. And second, consistent with what is written in the chapter on financial advice, any such ongoing advice arrangements should require annual renewal. Two years without confirmation that the member wishes the arrangement to continue is too long.
Two years is too long not only for the member, but also for the trustee. As the case studies showed, the existence of ongoing advice fee arrangements poses a danger to trustees: if they permit ongoing advice fees to be deducted, and no service is provided, they are likely to be in breach of their obligations under the SIS Act. Accordingly, the trustee itself – separate from the advice licensee – should also receive annual confirmation of the member’s agreement to keep paying fees. A prudent trustee would require nothing less.
If ongoing advice fees are to be retained, an issue arises as to the treatment of ongoing fee arrangements made before Division 3 of Part 7.7A of the Corporations Act 2001 (Cth) (the Corporations Act) came into operation. For completeness, I should say that I would neither preserve those arrangements further nor provide any grandfathering arrangements to qualify the general principles I now propose. Consistent with what I have said in the chapter on financial advice about ongoing fee arrangements, I would introduce the new rules with effect from a time that would give no more than 12 months’ notice of their coming into effect. The choice of 12 months is dictated by the proposal made in that chapter that ongoing fee arrangements be renewed annually.
Finally, nothing I have said above (including in respect of MySuper) relates to what is known as ‘intra-fund advice’: the provision of advice that is not personal advice, to members of a particular fund about their interest in that fund, where the cost of the advice is charged collectively to members of the fund in accordance with the SIS Act.[3] It was not suggested that any misconduct arose from such arrangements and I say nothing about them.
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Recommendation 3.3 – Limitations on deducting advice fees from choice accounts Deduction of any advice fee (other than for intra‑fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met. |
2.3.3Paying grandfathered commissions
As I have explained, both in the Introduction to this Report and in the chapter on financial advice, and as reflected in Recommendation 2.4, I would bring the grandfathering arrangements made at the time of the Future of Financial Advice (FoFA) reforms to an end. The time for transition has passed.
[1]Emphasis added.
[2]ANZ, Module 5 Policy Submission, 7 [41], 8–9 [44], 9 [46]; CFSIL and Avanteos, Module 5 Policy Submission, 20 [108]; NAB and NULIS, Module 5 Policy Submission, 16–17 [72]–[75]; Westpac, Module 5 Policy Submission, 18 [66]–[67].
[3] SIS Act s 99F.