Australian Finance Minister Mathias Cormann appeared to open a new front in the FOFA battle this morning when he told Fairfax that industry super funds should lose their exemption from some aspects of FOFA if the Senate doesn’t pass his regulatory changes introduced last week.
As I tweeted at the time, it looked a tad vicious.
But after putting some questions to Cormann and reading through legislation and ASIC information today, I’ve come to the view that there’s a very simple explanation on why Cormann wants to make this change.
FoFA was, and remains, disruptive in all the sense that technology professionals like to use that term.
It is a game changer for the financial planning and advising industry whether you were running a one man band in Nelson Bay, a big practice in Brisbane, an industry super fund, or the wealth management arm of one of the major banks or AMP.
FoFA has threatened livelihoods and it threatened business plans in an industry which was originally built on a sales culture but which, by necessity, is remaking itself into a profession. It threatens sellers of product, producers of product and everyone in between and it is causing them to rethink their business plan.
And this is where each constituency is fighting for its turf but still with an eye to what’s right for the clients – but fighting nonetheless.
Cormann told Business Insider that seeking to extend the FoFA provisions, which apply disclosure requirements and opt-in for the rest of the industry, to Industry Super Funds “intra fund advice” was necessary in the interest of fairness what he called “competitive neutrality”.
Intra-fund advice, according to ASIC, “refers to the types of advice that a superannuation trustee can provide to members where the cost of the advice is borne by all members of the fund”.
“The objective of the Australian Government (Government) is that superannuation funds can continue to provide a member with simple, non-ongoing personal advice on the member’s interest in the fund and that this advice can be collectively charged across the fund’s membership.”
So costs for such advice is spread across the entire membership of the fund – not the individual who is seeking the advice. It’s cross subsidisation if you like by non-users of users.
Put another way, if I’m in an industry fund and I seek advice from the trustee, all the other members pay for my inquisitiveness.
We know what Pareto might say about that idea – 80:20.
But to me it looks deeper than that.
The potential for FoFA regulations on opt-in and transparency is likely to put pressure on industry super funds who attract members through not only their industry affiliations, but also their low fee structure. Who hasn’t heard the jingle “from little things” or seen the ads comparing the lifetime return of two similar people – one in an industry fund and one not.
Low fees make a big difference over a lifetime of superannuation saving.
But if fees can be spread across the entire membership of a fund (not just industry for intra-fund advice but all funds) rather than disclosed individually then it’s easy to see how you can quickly end up with a non-transparent fee structure and appearance of lower costs.
These funds hold tens of billions of dollars of members’ money. When the fund administrators dip into the pool for fees, it should be perfectly clear how much is being charged and why it’s being charged from members’ accounts, including when some uppity fund member decides to seek some advice and everyone else gets charged for it.
Is it an “administration” fee or is it an “investment” fee?
Which is where we get back to Cormann’s idea of fairness – competitive neutrality – and transparency comes back in.
If non-industry funds need to disclose fees, and planners across the country need to disclose fees, then why not industry funds?
At least that is what Cormann is arguing. And it’s a reasonable question.