Burying the hatchet

Industry superannuation funds and the financial planning industry have often been uneasy bedfellows. In fact, in the past they have railed against each other.

Some planners thought the well-known ‘Compare the Pair’ industry fund advertising campaign was smug and even untruthful, while those in the not-for-profit superannuation fund space viewed financial planners with suspicion, thinking they were product-flogging opportunists.

Anne Fuchs, Sunsuper’s national manager, retail distribution and advice – who was previously chief commercial officer at the AFA – illustrates this point with an anecdote about an address to an AFA conference by Industry Super Australia head David Whiteley.

“It was very brave of him, entering a room of 700 advisers on the Gold Coast,” she remembers. “He said, ‘You don’t like me and you haven’t liked our campaign and that’s because in 1999 [then Prime Minister] John Howard introduced choice to super and we started to lose market share, so our campaign focused on our unique value proposition and it was a success and that’s why you’re angry’.

“The Industry Funds Management (IFM) movement questioned that value that members were getting for advice for the fees that were being deducted from members’ super funds,” Ms Fuchs says.

An evolving relationship
In more recent times, this once frosty relationship has begun to thaw, as both parties realise there are benefits from joining together.

For years, industry super funds have seen money pour in. According to the Association of Superannuation Funds of Australia (ASFA) statistics, as at May 2015, industry funds had $437 billion in funds under management across 44 funds. But now, there are competing pressures.

According to the Australian Taxation Office, in the five years to 30 June 2014, SMSF assets grew by 49 per cent.
In the same period, total super assets grew by 53 per cent, with SMSFs contributing 28 per cent to overall growth.

The number of SMSFs also grew by 29 per cent during the five years to 30 June 2014. In June 2009, there were just shy of 400,000 SMSFs in Australia, but by June 2014 there were 534,000.

At the same time, the DEXX&R Market Projections Report indicates the retirement income market will grow from $527 billion (as at December 2014) to $1.078 trillion in 2024. It predicts the largest proportion of retirement income FUM will be held by SMSFs, at 48 per cent, followed by retail allocated pensions (38 per cent).

Industry funds will have only 12 per cent, according to the report.

As baby boomers look towards retirement and SMSFs continue to put pressure on traditional super funds, industry funds are looking at ways to maintain prized funds under management.

AustralianSuper’s group executive – member experience and advice, Shawn Blackmore, says the ageing population with higher super balances is one reason why AustralianSuper has been focusing on advice.

“At AustralianSuper, our core purpose is to maximise retirement outcomes for our members. We firmly believe that implemented advice is fundamental to guiding and influencing members in their retirement decisions and so we aim to provide quality financial advice to members at an affordable cost while looking towards longer term financial sustainability,” he says.

“The government has in recent years been very supportive of super funds providing advice, particularly scaled advice to its members relating to their super accounts. The existence of ‘intra-fund’ type advice is proof of this.”

Ms Fuchs agrees and says that while industry funds have embraced the worth of financial planning, there is also an acknowledgement that fund members may seek advice outside the fund that could see them leave.

“The industry fund movement has evolved to where they understand that as people head towards retirement, they can’t afford to make any poor decisions and they may go to an expert adviser or accountant to get that advice,” she says.

Hanging on
So while industry funds generally say that their increasing focus on financial planning is a way to provide a better service to members, undoubtedly it is also about retaining members who are faced with a plethora of options.

The chief executive of Workplace Super Specialists Australia (WSSA) Douglas Latto agrees that the industry funds are in danger of losing the “big end” as people near retirement.

“They’ve suddenly realised that they are going to start bleeding high-end members. The whole industry is in the process of redeveloping,” he says.

Mercer financial advice leader Michelle Smith says that using advice for retention seems to be working.

“The ultimate reason for the growing relationship between financial planning and industry funds is retention or engagement,” she says.

“As the wall of money moves more and more towards pension assets, that’s when a lot of funds will lose members to other advice firms. So if you’re about to retire, you go to the bank or you go to an adviser that your friend knows, the money leaves that fund and goes to another.

“There has been a significant shift in how much members were contributing to super when offered advice. They were three times more likely to take out insurance and were doing a lot more consolidations,” says Ms Smith.

While there are obvious reasons why industry funds are looking to planning, there are also reasons why non-aligned advisers are coming to the not-for-profit fund party.

The most obvious is that there is a huge number of members to service. Currently there are more than five million Australians who count themselves as a member of an industry fund.

“When you look at the numbers, if only 10 per cent of industry fund members want advice that’s still a big number and we’re really excited about the opportunity to help industry funds work with clients at that level,” Infocus Wealth Management’s managing director, Rod Bristow, says.

Geoff Brooks, executive officer – strategic marketing and communications with industry fund Equipsuper, says advisers can pick up business by being aligned with a superannuation fund.

“It’s important that we maintain our high member satisfaction levels as referrals are a very important source of business,” he says. “Members who access our financial planning services are our best word of mouth referrals and they are happy to promote our financial planners to our members.”

AustralianSuper’s Mr Blackmore agrees. “The external advice businesses largely depend on the volume and quality of referrals, so our external advisers are very supportive and appreciative of the referrals they receive from the fund and act accordingly to ensure members received the right advice,” he says.

Ms Smith says she is also seeing many young advisers attracted to the space.
“We attract a lot of young advisers into our scaled advice where you can do single issue advice and get to know customers and members,” she says.

“It’s a nice learning ground for graduates, but we tend to attract advisers who like working in a salaried environment who can choose the right strategy for the client and don’t have KPIs that are related to sales.”

For the non-aligned adviser, this is obviously a major selling point.

Luke Eres, chief executive of SMSF specialist advisory firm Innate Wealth, says he believes there is a cultural and philosophical alignment between industry super funds and his non-aligned firm.

“The key here is that we are both working with the best interests of the client in mind,” he says. “The competition between industry funds versus financial advisers is thankfully becoming a thing of the past.

From where we sit, it is about working together so that client outcomes are maximised.”

Striking deals
While a number of deals have been struck that have attracted the attention of the financial services industry, it was arguably the first Financial Advice in Super Symposium in 1999 that kick- started the conversation.

It aimed to promote the importance of financial advice and was set up by Bill Danaher, chief executive of Industry Fund Services (IFS), which provides, among other things, advice services to industry super funds.

“The Financial Advice in Super Symposium is an important acknowledgement of the growth and consolidation of financial advice in the not-for-profit super sector,” Mr Danaher said. “This year will be the Third Symposium held and the focus will be on member-focused financial advice and will cover topics such as the changing regulatory framework for educational and professional standards; building an ethical and professional culture; enhancing retirement incomes; and innovation.”

More recently, referral deals between super funds and advice firms have got the industry talking, with some pundits predicting that industry super funds are likely to play a pivotal role in the financial advice industry’s future.

In 2013, the FPA struck what was described as “a landmark agreement” with building industry fund Cbus to set up a professional referral service.

This year, non-institutional dealer group Infocus Wealth Management entered into an agreement with IFS to provide advice services to First Super.

Under the terms of the deal with IFS, Infocus advisers will provide face-to-face advice services to First Super members in South Australia in their private homes on a fee-for-service basis.

Infocus followed up this agreement with a similar deal with TWUSuper – and Infocus’ Mr Bristow tipped that there would be more deals to come.

“IFS are aware that many clients from their member funds will need advice at some point in the future and they know they need to grow their own businesses as well,” Mr Bristow says. “We think that we will expand nationally, over time – we’re seeing if it works.”

Sunsuper is another fund that has recently struck a deal with the planning industry. Ms Fuchs says the firm has been approaching advice firm licensees and individual advisers to join its national IFA adviser panel, which is tasked with providing advice to the superannuation fund’s more than one million members.

Applications to sit on the Sunsuper national advice panel were accepted from the start of this year, with advisers able to submit expressions of interest via the FPA professional practice program.

Ms Fuchs told ifa there are currently 35 advisers on the panel. However, due to a number of institutional tenders, the superannuation fund would be looking to increase the panel numbers.

“We are now sourcing them via our individual networks and our licensee CEO networks. We’ll most likely get to between 50 and 60 in the first 12 months with the way business is going and then we’ll do another review,” she says.

Modelling it
Despite these deals, there remains division over the best way to offer financial advice within superannuation.
There are numerous options: intra-fund, holistic, general, comprehensive (superannuation and non-superannuation), income stream and retirement.

The type of advice offered, however, is very much dependent on the types of members that a fund may have and their individual needs.

Funds such as AustralianSuper and Equipsuper have used a combination of approaches to their planning operations, but both have made use of the “embedded model”, which they say allows more control.

“AustralianSuper has provided advice to members for the best part of 10 years,” says AustralianSuper’s Mr Blackmore.

“Initially, this was through IFS’ advice arm, Industry Fund Financial Planning, where advice was provided by ‘pooled’ financial planners who serviced a number of funds. This was later expanded to include phone-based general and scaled advice through the financial education and advice team set up through our administrator.

“Around five years ago, AustralianSuper also began providing scaled advice online under its own AFSL, and in 2011 established an accredited adviser channel, including a number of external dealer groups and IFAs.”

Mr Blackmore says the fund is also moving towards solidifying its embedded model, whereby planners will become AustralianSuper employees and work within an authorised representative arrangement but continue to be licensed under the IFS AFSL.

AustralianSuper currently has 13 phone-based super advisers, 15 face- to-face embedded financial advisers and 500 accredited advisers. It has major relationships with Link Group, IFS and an accredited adviser channel which refers out via Godfrey Pembroke, Matrix, Dixons, Elders and Mercer.

Equipsuper also used Industry Fund Financial Planning but launched its own Equip Financial Planning in 2007 as a corporate authorised representative of Health Super Financial Services. Since 2014, however, Equip Financial Planning has operated under its own AFSL.

“Equip Financial Planning has always operated on a fee-for-service basis, with members paying for financial advice when they access the service, and we have not received commissions. In the main, we focus on providing face-to-face financial advice,” says Equip’s Mr Brooks.

The fund has five or six financial planners who, on average, have 16 years of financial services experience, while Mr Brooks says that running an embedded model allows for quality control.

“I think it comes down to whether you have the ability and willingness to operate a salaried financial planning operation,” he says. “It’s a little easier to enforce standards for salaried financial planners as the planners operate under a contract of employment and that can be tighter than an agreement with an outsourced provider.

“We know firsthand how our members are being treated and the value proposition being delivered and we are able to enforce activity levels to ensure that members are being properly serviced,” he says.

“With outsourcing, there are always the questions as to how will the member be treated and what is the value proposition that is delivered by the outsourced financial planner.”

From embedding to referrals
While using an embedded model no doubt provides a fund with control, it does not provide a solution for providing advice at scale. As a result, referral deals such as the ones discussed earlier are becoming more attractive.

Former Local Super chief executive and Mercer consultant Nic Szuster – who has joined AIOFP’s staff to drive the association’s industry fund co-operation strategy – says that many industry fund boards were turning their back on the traditional “embedded model” in favour of referral partnerships with existing advice networks.

“The model that is getting the most traction is the referral model,” he says.

Sunsuper’s Ms Fuchs agrees, noting that funds often cannot meet the needs of their members via the embedded model.

“Sunsuper has over 1.1 million members and we have 16 people on the phone who are authorised to give intra-fund advice and we have four comprehensive advisers,” she says.

“There is no way we can reach the number of Sunsuper members required with that ratio of staff. There are some businesses like QSuper that have a salaried model, but this is a very expensive way to go for the number of members that we have.”

Currently Sunsuper is building up a network of qualified advice professionals.

“We have a memorandum of understanding with the FPA, but we work in partnership with the FPA and let them know when we are sourcing or have appointed a planner, but we are sourcing the planners directly,” Ms Fuchs says.

“For example, we have 35 appointed at the moment and we’ve got a number of big institutional tenders on the go at the moment. If I need to source advisers, I will call the CEO of a licensee and say, ‘I’m looking for a firm in X location and do you want to put forward your firm to be considered? We then go to the firm and validate it,” she says.

This allows Sunsuper to be sure of the advisers they are recommending to their members.

“We are not relying on a dealer group or a body to pre-vet those firms for us because we take that responsibility incredibly seriously,” she says.

“They need to be a CFP or equivalent. We have very strict criteria and we’re very picky about who we’re dealing with.”
Infocus, which has about 180 advisers, is another firm that has been striking deals with industry funds and says it has an equally rigorous process for vetting its advisers.

“We have been working very hard with funds and with IFS to build a bridge across some of those cultural and historical barriers,” Mr Bristow says.

“Cultural fit is one of the things that we take seriously as a business and we have an Infocus leadership competency model that is the core of what we do.

“It involves trust, integrity and innovation and the advisers that choose to be part of the program, even though they are self-employed advisers and they have the same discipline”.

Meanwhile, AustralianSuper’s ‘triage’ of member queries regarding advice is crucial to getting members to the right advice solutions.

“Having our external advice channels allows us to have a broader service model to meet members’ needs and demands.

The external advice businesses largely depend on the volume and quality of referrals, so our external referral advisers are very supportive and appreciative of the referrals they receive from the fund,” Mr Blackmore says.

Remaining flexible
Mercer’s Ms Smith says that whichever model a super fund chooses to use, being flexible is extremely important.

“A lot of advice firms are trying to build a business model where you have scaled, simple issue advice that you can deliver at a low cost really quickly, and then a high-end option, rather than having high end which was the traditional financial planning model.

“So unless you had a lot of money or you were complex, there was no one that could help you so we’ve spent a lot of time and effort building up phone- based and video advice,” she says.

“We’re having more and more funds approach us and it usually comes down to what their membership looks like and how they want to be engaged, so I don’t think we can go to market and say we have a perfect solution. We have an end-to-end solution and funds can buy pieces of it.”

IFS is also making sure the firm has a variety of options for industry funds to take advantage of.

“We offer a broad spectrum of services to industry super funds including advice services available in a number of models [and] online advice services via a suite of digital advice tools.

“We also offer services for the collection of unpaid super, a repository for funds to relocate their lost members, a pension product and a wrap-style service, specifically designed to cater for the non-super investment market,” Mr Danaher says.

“From an advice perspective, it’s more around increasing the flexibility with which we provide support to funds. We work closely with funds to understand them and their membership and then look to deploy support in a way that best meets the fund’s goals and objectives.”

Workplace Super Specialists Australia’s chief executive, Douglas Latto, says funds also need to be proactive rather than reactive.
“There are around 70 or 80 advice firms nationally that specialise in workplace financial education,” he says. “The deals we are striking are more proactive. We bring the education to the workplaces rather than waiting for them to come to us.”

Acting in best interests
Advisers who work for industry super funds – as do their counterparts elsewhere – have to abide by the best interests duty.

When asked earlier this year whether the best interests duty could be a sticking point when a recommendation to exit an industry fund is made, Mr Szuster said FOFA’s remuneration reform has watered down this potential hurdle for referral arrangements.

“Advisers will act in their clients’ best interests and that would include advising to take members out of the fund.

“However, with a move to fee for service, the incentive for an adviser to move a member out of one fund and into another is diminished,” he said.

Mr Bristow agrees, noting that all advice provided by Infocus is fee for service, with no product incentives.
“We’re all bound by the same regulation and I think those potential conflicts have been there in the past, but I don’t think they will be there in future,” he says.

“In terms of product selection, this really is a secondary issue. The primary one is what is the client looking for and what are their needs and objectives and what we’ll do is work out the right solutions to get them there.”

AustralianSuper’s publicly available charter of Advice Principles declares to members, among other things, that:
“Where it’s not in our best interest to keep your AustralianSuper account, or if it’s in your best interest to receive advice from another provider, we will help you make alternative arrangements”.

Mr Blackmore points to a case of when AustralianSuper did just that.

“As an example of this ‘members-first’ approach, AustralianSuper last year transferred around 2,000 of its members, with defined-benefit super accounts worth a total of around $700 million, to another super fund because that fund was better able to administer those members’ accounts, and at a lower cost to those members,” he explained.

“At AustralianSuper, we have always done our utmost to act in the members’ best interests, well before the ‘best interests duty’ was introduced. The external network of accredited advisers adds another layer to this and generally has the ability to recommend any product on their APL.”

Mr Eres, chief executive of Innate Wealth, one of Sunsuper’s referral partners says he sees no conflicts for an adviser working for a super fund.

“While best interest would suggest there aren’t any conflicts, this might be difficult for a specific super fund or institutions. Ultimately, they are measured by activity and as demonstrated by the various scandals, sometimes this activity can override what is best interest,” he says.

“For Innate Wealth, this is not the case. Being independently owned means that we are not restricted in any way whatsoever. Ultimately, we will only ever recommend something that is in the best interests of our clients. If that happens to be Sunsuper then so be it.”

Despite the hope for an unmitigated advice experience, Sophie Grace Compliance’s director Sophie Gerber says there will always be an inherent issue when a planner is employed by a product manufacturer.

“I am sure there are a lot of people who will take the best interests duty very seriously and not be influenced by the remuneration implications of recommending another product,” she says. “For example, if it is going to give an adviser more money/benefits to refer their client to an SMSF then they are going to have an incentive to do that.

“Where the adviser is employed by the product provider [an industry super fund] then they are going to be motivated to keep clients in the industry super fund [regardless of whether it is in the ‘best interests’ of the client] because it will keep their employer happy if they are keeping clients within the organisation. We have seen this with CBA, NAB, Macquarie and many other organisations.”

Ms Gerber says it is very hard to cut out this type of conflict altogether, despite best intentions.

“I think that consumers in Australia are becoming more aware of these ‘alignment risks’ after all of these financial planning scandals,” she says.

“The trouble for the average consumer is understanding exactly when these product provider alignment risks exist – it can be quite easy to disguise the links using ‘authorised representative’ branding etc.”

While Sunsuper’s Ms Fuchs says the advisers the firm uses must act in members’ best interests, she adds that the fund will only work with licensees where Sunsuper is able to be put in the approved product list.

“Sunsuper has a very competitive product so I make no apologies for that, but equally, if Sunsuper is not the right product then the members need to be rolled out to another industry fund or an SMSF,” she says.

A true alignment?
So, it seems that while industry funds and advisers have long been diametrically opposed, they may in fact have more in common than they have differences – that common area being the best interests of the client or member. IFS’s Mr Danaher certainly believes this to be true.

“This can often get lost in the noise surrounding our industry, but I believe at the heart of the majority of every financial adviser is the desire to improve the outcomes of the people they see and to help more people reach their goals,” he says. “I believe that we can all agree that the financial planning industry is integral to the lives of millions of Australians and whilst there are differences in how we achieve that, I believe we are all perfectly aligned on that.”

Mr Eres agrees, noting that this strengthening of the relationship could assist the advice industry in finally being recognised as a profession.

“Advisers, provided they are wired correctly, can have a massive impact on the lives of clients – by impact I mean ensuring that clients make the right financial decision,” he says, “In terms of industry funds, they are here to stay and it is essential that advisers work with them rather than view them as competition. As I said before, working together to maximise the client outcome is what it should all be about.”