On May 29, the Productivity Commission released their draft report on efficiency and competitiveness in the superannuation industry. The draft report starts to focus on a process that commenced in July of last year.
In the most part, it concentrates on default superannuation funds for new employees however its recommendations cast a shadow over superannuation advice.
wealthdigital’s Technical Manager, Rob Lavery, believes this impact on advice has been somewhat missed.
“Certain aspects of the draft report have received significant coverage,” Lavery said. “The Productivity Commission’s unfavourable view of advice given in relation to SMSFs has been commented upon, however there are more pressing issues that advisers need to consider.”
“At the core of the issues affecting advice is the recommended creation of a “best in show” list when allocating default super funds. When an employee with no existing super fund commences their first super-supported employment arrangement, they would be directed to an online form where they would be able to choose a super fund. Their chosen fund can be any complying super fund but, for those who don’t have a specific fund in mind, a list of 10 “best in show” funds will be provided from which they can choose. If no choice is made, the employee is put into one of the 10 “best in show” funds on a rotating basis.”
“Leaving aside the issues around how these “best in show” funds are chosen, it is a few short paragraphs buried on page 369 of the draft report that should concern advisers,” Lavery said. “The Productivity Commission note that ASIC has stated that this “best in show” list would be taken into account when guidance is provided to advisers, particularly around the best interests duty.”
“Furthermore, the same section of the report notes that ASIC would consider making it mandatory for advisers to consider the “best in show” list. This rule has been referred to as the “if not, why not” rule.”
Lavery sees some merit to this approach. “Having a clear-cut, 10-fund list that forms the core of every adviser’s superannuation Approved Product List (APL) would create consistency in the advice provided to clients. It would also, hopefully, provide advisers with a more clearly defined safe harbour than is now the case”
“That said, there are a number of drawbacks to this approach,” Lavery continued. “When it is known that using a fund from the “best in show” list cannot be viewed to be outside the client’s best interests, why risk an off-list recommendation? The risk of cookie cutter advice is significant.”
“That the recommended “best in show” list is only reviewed every four years is also worrying. A lot can happen in a four-year period and it may not be in a client’s best interests to be invested in the 9th best fund from three and a half years prior.”
“It is less relevant to advice,” Lavery added, “but, the recommendeded model only defaults once, at the start of an individual’s career. The default fund follows them from employer to employer over their working life. As such, if they never switch funds they may find themselves in the 9th best fund from 40 years earlier.”
Lastly, Lavery has concerns about the impact such a list would have on the funds available to advisers and their clients. “By limiting the possible default funds to 10 for a four-year period, those funds not on the list will stagnate and, in all likelihood, lose membership and cost effectiveness. The growing, “best in show” funds may well start to consume the disadvantaged funds that missed the list.”
“In such an environment, what incentive is there for a new participant to enter the market? It would be an enormously loss-leading exercise for a new fund to attempt to survive off those individuals who voluntarily switch and those advisers brave enough to make off-list recommendations. Innovation in superannuation will suffer as a result.”
The window for making a submission to the Productivity Commission regarding the draft report is open until 13 July. “Advisers should ensure their voices are heard on this important assessment of the financial services industry,” Lavery added. “Any changes that reduce the incentive to provide tailored advice and issue innovative products need to be thoroughly examined.”