Trustees of SMSFs need to be on guard as ASIC monitoring continues

The number of Australians establishing SMSFs has been rising consistently since an amendment to the Superannuation Industry (Supervision) Act 1993 in 1999 allowed for SMSFs to be controlled by trustees rather than the federal government.

The Australian Prudential Regulation Authority’s recent statistics on SMSF funds showed there were 595,840 SMSFs operating in Australia, holding $712 billion in assets. The recent revelations from the banking royal commission around the lack of transparency of retail funds’ investments and their tendency to focus on profit rather than the interests of members is likely to only drive more people to set up their own funds.

But how well equipped are SMSF trustees to be managing their own retirement investments?

As part of further investigations in recent years, the Australian Securities and Investments Commission (ASIC) conducted an online survey of 457 SMSF members who had set up their own fund in the preceding five years. The results were published in two reports, “Report 575: SMSFs: Improving the quality of advice and member experiences” and “Report 576: Member experiences with self-managed superannuation funds”. The reports make for sobering reading.

The main reason for setting up an SMSF is greater control over investment decisions. According to ASIC, around one-third of SMSF trustees are naïve about what is required to run their own fund and the benefits of diversification.

In one case, an SMSF member, believing the property market was “over-inflated” and the stock market was too “risky”, held 100 per cent of their SMSF balance in cash with a view to investing in property “in maybe three or four years”.

Survey respondents reported misalignment of their expectations and actual experiences as SMSF members in a number of key areas, including:

  • costs to set up and run an SMSF,
  • time spent on administering an SMSF,
  • the unexpected complexity of running an SMSF, and
  • member understanding of SMSFs and their legal responsibilities as SMSF trustees.

 Costs of setting up and running an SMSF

Individuals looking to set up an SMSF need to factor in all costs to establish and run their SMSF including amounts to cover any initial and/or ongoing advice, as well as establishment costs, including the appointment of the trustee and registration of the fund.

Once established, there will also be the annual cost of running the fund, including accounting, auditing and reporting costs associated with ensuring the fund is compliant, and the ability for members to extract relevant information during any period of the financial year if needed.

What is the ideal starting balance for an SMSF?

At the heart of this question should be an examination of the client’s needs, goals and objectives: why does the client need an SMSF and would they be better served by a retail fund or even an industry fund?

Advisers should start with an exploration of the client’s ability to act as a responsible trustee. Do they understand their obligations as a trustee and do they have the time, interest and ability to ensure the fund is adequately serviced and remains compliant?

Cash-flow analysis, on both the fund’s proposed underlying investment assets and the overall fund itself (particularly where direct property may be part of the fund’s investment strategy), will also influence the suggested starting balance.

Time to spend on SMSF administration

The time required to manage and administer an SMSF will often depend on what type of investor the client is and how active they are when managing their SMSF investment portfolio. Having said that, 38 per cent of respondents in the ASIC survey said running an SMSF was more time consuming than they expected.

All SMSF trustees will need to undertake some level of regular investment research on their investment options. Hand in hand with this is the ongoing monitoring of the investment strategy and the performance of current and future investments. This may include the need to organise annual valuations of assets such as direct property investments.

Trustees also need to be mindful of the need to meet their regular reporting obligations, ensure the fund remains compliant and keep abreast of changes in regulation or super laws that may affect trustee responsibilities.

They need to appreciate that they remain responsible, and will be held accountable, for the compliance of their SMSF at all times.

Dealing with the complexity of running an SMSF

The main arguments against SMSFs relate to the complexity of running the fund and in meeting compliance obligations.

Trustees can certainly outsource many aspects of running a fund, but are obligated to ensure the investments selected for the fund remain appropriate. The ASIC survey revealed 6 per cent of SMSF members had not made any investments since setting up their SMSFs, with the most common reason being they had not yet found the right property to buy.

The ATO can conduct a random audit of an SMSF at any time. The penalties for non- compliance are high and receiving a notice of non-compliance from the ATO usually has devastating tax consequences.

Understanding of SMSF concepts and legal responsibilities as a trustee

SMSF trustees are required to have a sufficient level of financial literacy to make investment decisions that are consistent with their fund’s investment strategy. However, ASIC’s advice review revealed 33 per cent of members did not know their SMSF was legally required to have an investment strategy. Even fewer than that (28 per cent) were aware SMSF trustees are required to consider the insurance needs of all members when drafting an investment strategy.

Clients should also be made aware they – not their financial adviser, accountant or lawyer –are legally responsible for their SMSF. A few simple questions during the initial interview will quickly determine whether a person has the requisite financial literacy to carry out the legal responsibilities of an SMSF trustee.

Just as important is recognising when clients no longer have the cognitive ability to function as an SMSF trustee. Assisting clients with succession planning and/or winding up their SMSF is crucial at this time.

More Australians seek understanding on early access to their superannuation

As individuals get closer to retirement, many are seeking further advice to help them better understand the circumstances required to allow them to access their superannuation savings, often with the desire to access their super at an earlier age. Many consumers often don’t  understand the rules and conditions necessary to allow for the release of their super savings.

According to a recent AMP report “In particular, many Australians don’t realise they can access super early if they change jobs between the ages of 60 and 65, even if they continue working in a new job, however, super benefits can be accessed as a tax-free lump sum during this period, or used to commence a retirement income stream, which receives both a tax exemption on earnings, and has no maximum pension restriction.” 

With respect to the desire to access super balances early, there are very limited circumstances when you can access your super early. These circumstances are mainly related to specific medical conditions or severe financial hardship.

Consumers need to be aware that some promoters claim to offer early access to your super by transferring your super into a self-managed super fund. These schemes are illegal and heavy penalties apply if you participate. Access to your superannuation outside of the traditional “retiree – commencement of pension” methods are limited and well policed by the regulators.

Access on compassionate grounds

You may be allowed to withdraw some of your super on compassionate grounds. Compassionate grounds include:

  • paying for medical treatment for you or a dependant
  • making a payment on a loan to prevent you from losing your house
  • modifying your home or vehicle for the special needs of you or a dependant because of a severe disability
  • paying for expenses associated with a death, funeral or burial of a dependant.

Access due to severe financial hardship

You may be able to withdraw some of your super if you have received eligible government income support payments continuously for 26 weeks and are unable to meet reasonable and immediate family living expenses.

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. The minimum amount that can be paid is $1,000 (unless your super balance is less than $1,000) and the maximum amount is $10,000. You can only make one withdrawal from your super fund because of severe financial hardship in any 12-month period.

There are no cashing restrictions under severe financial hardship if you have reached your preservation age plus 39 weeks and you were not gainfully employed on a full-time or part-time basis at the time of application.

Access due to terminal medical condition

You may be able to access your super if you have a terminal medical condition.

A terminal medical condition exists if:

  • two registered medical practitioners have certified, jointly or separately, that you suffer from an illness, or have an injury, that is likely to result in death within a period (certification period) that ends no more than 24 months after the date of the certification
  • at least one of the registered medical practitioners is a specialist practising in an area related to your illness or injury
  • the certification period for each of the certificates has not ended.

Your fund must pay your super as a lump sum. The payment is tax-free if you withdraw it within 24 months of certification.

Access due to temporary incapacity

You may be able to access your super if you are temporarily unable to work or need to work less hours because of a physical or mental medical condition. This condition of release is generally used to release insurance benefits from a super fund.

You will receive the super in regular payments (income stream) over the time you are unable to work. A super withdrawal due to temporary incapacity is taxed as a normal super income stream.

Access due to permanent incapacity

You may be able to access your super if you are permanently incapacitated. This type of super withdrawal is sometimes called a ‘disability super benefit’.

Your fund must be satisfied that you have a permanent physical or mental medical condition that is likely to stop you from ever working again in a job you were qualified to do by education, training or experience.

At least two medical practitioners must certify this for you to receive concessional tax treatment.

You can receive the super as either a lump sum or as regular payments (income stream). A super withdrawal due to permanent incapacity is subject to different tax components.

Superannuation Balances less than $200

You may be able to access your super if your employment is terminated and the balance of your super account is less than $200, or if you have formerly lost super held by a super fund or by us that is less than $200.

Other questions often raised with advisers include:

  • How much can be contributed to super through non-concessional contributions?;
  • How transition to retirement pensions work?;
  • Understanding how the superannuation death benefit works; and
  • Understanding how total and permanent disability insurance works within superannuation.

Consumers should seek out advice from their financial planner for further information. 

Government needs to increase access to advice, not reduce it

The release of ASIC’s Report 627 Financial advice: What consumers really think, highlighted that among Australians who have received professional financial advice, 89% intend to get advice again in the future.

The report also revealed that almost four times as many Australians who received advice in the past 12 months had a ‘great deal of trust’ in their advisers compared to those people who had not received advice recently.

It was a resounding endorsement for the advice industry but one that is not reflected in the level of support it is currently receiving from the Federal government, which is standing by while the Australian financial advice industry is experiencing death by a thousand cuts.

The other very important piece of information that Australian consumers provided in this research was that the main reason they did not obtain advice was that it was too expensive.

And yet the industry is about to have a reform agenda thrust upon it that will greatly increase costs to the consumer.

The ASIC report also highlighted that advised consumers are more engaged with their financial affairs, have higher incomes and levels of education. If their interaction with advisers has improved their financial behaviour, then that is another reason to seek advice.

Either way, the government should be looking at ways to get more people into advice rather than increasing the barriers such as cost and creating trust issues by blaming advisers for things that are out of their control, such as product failures.

In the absence of strong government leadership, the mainstream media has filled the vacuum and been allowed to drive the narrative on this issue.

During the Royal Commission, the mainstream media focused on the horror stories that mostly came out of the wealth management arms of the large institutions without making the distinction between that model and the non-institution aligned financial planning model.

The ASIC report indicated that there was significant mistrust of financial advisers, but that it was mainly prevalent among people who had never received financial advice.

The only conclusion that can be reached from this is that those people who don’t trust advisers have formed that opinion from statements made by politicians and sensationalist mainstream media coverage. Actual recipients of advice remain overwhelmingly positive about their experiences with advisers.

This has had the effect of vilifying all 30,000 financial advisers in the industry when the over- whelming majority of them always act in the best interests of their clients to improve their financial circumstances.

This would indicate that the government has dropped the ball on this issue and our elected officials need to develop a better understanding of our industry before they destroy it, to the detriment of all Australian consumers.

My belief is that the negative perception of financial advisers can also be attributed to lack of understanding. As the ASIC report acknowledged: “Even limited knowledge of recent reforms (e.g. the Future of Financial Advice (FOFA) reforms or the professional standards re- forms for financial advisers) appeared to improve perceptions of the financial advice industry”.

To its detriment, the industry did not speak up in its own defence in the wake of the Royal Commission.

For example, planners themselves have no control over product failures but this fact was never part of the public debate.

The government has agreed to act on the recommendations of the Royal Commission, which were essentially motivated by public pressure to rectify the dysfunctional situations in the large financial institutions. But around half of the advisers not aligned with institutions ended up as collateral damage and by the time all the advice arms of the institutions are closed down or reduced in size, it will be many more.

These small business people, who invested their own savings to build a business, and al- most all of whom followed the rules to the letter, are suddenly looking down the barrel of a significant and permanent loss of income.

The recently announced legislation to remove trailing commissions from the industry has not given due weighting to the fact that commissions act as a vital funding mechanism for Australians who cannot afford to pay high fees to access financial advice.

In addition to a loss of commissions, increasing compliance, education and licensing costs are also cutting into advisers’ bottom lines, with some saying that revenues will fall by 30%. Most of these costs will have to be passed on to clients.

This upheaval is forcing many advisers out of the industry. Almost 3,000 advisers, around 10% left the industry in the first half of 2019 alone.

For those that remain, the stress is having a terrible impact. It is at the point where a few licensees actually have some of their financial advisers on a suicide watch list.

Furthermore, advisers who have successfully served their clients for 30 years or more have been told that they have to become degree qualified. Thankfully, the deadlines for completion were extended last week as a small concession.

All of this has advisers wondering what’s lying in wait for them around the next bend.

As Julie Bishop said in her address at the Association of Financial Advisers National Conference: “It’s so important that politicians and regulators understand the impact of legislation”. The Royal Commission certainly failed to recognise unintended consequences for the industry by focusing its efforts on stamping out misconduct and ignoring all other factors. The government owes it to the public to look at the broader effects of these reforms. ASIC’s Report 627 provided vital information in this regard that it would be negligent to ignore, as it highlights the fact that consumers are better off with financial advisers. We need a reform agenda that enables more Australians to seek advice, not less.

Why it doesn’t pay to pay off your uni debt

Australians who have racked up sizeable study debts should not rush to pay them back and instead should divert their money elsewhere, experts say.

The Higher Education Loan Program (HELP) debts are one of the cheapest forms of debts people can have because they do not attract interest charges.

Lifespan Financial Planning’s chief executive officer Eugene Ardino said Australians should be focused on paying down debts that attract interest.

“It should be a priority, all other forms of debt generally come with minimum repayments and you must repay them irrespective of whether or not you work,” he said.

“If you have any other debts I would be paying them off first. HELP debts are indexed at inflation on June 1 every year.

In 2019 they rose by 1.8 per cent.

Most credit cards attract rates around 20 per cent, followed by personal loans at often more than 10 per cent and home loan debt at about 4 per cent.

Those owing still owing debts at death, must have all their tax returns filed and once that is completed, any further outstanding HELP debt is wiped.

Financial comparison website RateCity’s spokeswoman Sally Tindall said the government had failed to do enough to encourage people to pay back their loans sooner.

“The government isn’t doing much to encourage people to clear their loan early,” she said.

“In 2017 they scrapped the 5 per cent bonus for voluntary repayments, and in doing so, they took a very large carrot off the table.”

But she warned Australians having a HELP debt could impact their ability to get other loans down the track.

“An outstanding HELP debt could potentially become a thorn in your side when you go to get a mortgage because the compulsory repayments can eat into your disposable income and potentially curb how much you can borrow,” Ms Tindall said.

University debt

  • AGE: 0-19 DEBT: $353m
  • AGE: 20-29 DEBT: $33.64b
  • AGE: 30-39 DEBT: $17.8b
  • AGE: 40-49 DEBT: $6.3b
  • AGE: 50-59 DEBT: $2.5b
  • AGE: 60-69 DEBT: $962m
  • AGE: 70+ DEBT: $315m
  • AGE: N/A DEBT: $44m

TOTAL: $62 billion

Source: ATO 2017/18 financial year, numbers rounded up

Mr Ardino said investing any excess money you had would be better down into the sharemarket than paying off HELP debts.

“For younger people you would be better to use excess savings and start an investment portfolio or potentially put the money aside to buy your first home,” he said.

But he warned the government that writing of HELP debt at death meant they were costing themselves money.

Let’s make the Retirement Income Review Worthwhile

The federal government has appointed a panel to undertake a review of the three pillars of the Australian retirement income system: the age pension, the superannuation guarantee (SG) and voluntary contributions. Here are the key issues I believe the review panel should highlight for further attention.

I must admit that I am not convinced that the retirement income review will deal with anything that the Morrison government deems remotely problematic for its re-election prospects, such as the inclusion of at least a portion of the family home in the pension assets test, increasing the age pension eligibility age and increasing the superannuation guarantee (SG) beyond 9.5 per cent.

Lifting the SG gradually to 12 per cent, as proposed, would increase fund flows to industry super funds, whose values are aligned with those of the unions – a group whose influence this government would very much like to diminish.

Having said that, it must be acknowledged that this review is an opportunity to confirm the baseline information on which future policy decisions can be made to deliver a much-needed reset of aspects of our retirement income system.

I don’t pretend to have all the answers but I do know that the best way forward involves strong political leadership and industry consultation, which will hopefully follow this fact finding review. Here are some points I urge the review panel members to consider.

Shifting the focus from accumulation to draw down

The focus of the Australian superannuation system until now has been on the accumulation phase – and that has been successful. Recent research has shown more than half of Australians aged 66 are not accessing the aged pension at all because their assets and incomes are too high, and only 20 per cent are on a part pension.

Regardless, both self-funded retirees and those entitled to the age pension need support, education and appropriate retirement-income solutions. The focus now needs to shift to helping all Australians achieve their income needs and goals in retirement.

There are a number of obstacles that need to be removed, or at least addressed, in order to optimise superannuation savings for the average Australian such as housing affordability, wages growth and persistently low interest rates. There is also the issue of too many women still retiring with inadequate superannuation balances.

The first generation of contributors to our compulsory superannuation system is about to hit retirement. Super funds must be prepared to meet the retirement income needs of this group.

The age pension system is outdated

Since the Commonwealth age pension was introduced in Australia back in 1909, life expectancy has gone up 25 years for men, to 80.5 years, and 26 years for women, to 84.6 years. Yet the age pension eligibility age has increased by just one year for men and six years for women.

With many Australians now enjoying a good 30 years of retirement, clearly, something’s gotta give. The age pension framework has simply not kept pace with Australia’s changing lifestyles and demographics. Its original role as a safety net has been transformed. The age pension now primarily serves as a supplementary source of income to superannuation savings.

Improve incentives to keep seniors working longer

People are living longer and the age pension eligibility age is increasing, albeit far too slowly, but incentives to keep working are not developing quickly enough.

People aged over 65 are healthier than ever before and, increasingly, want to continue to work in some capacity. My experience with elderly people also has shown that they are generally happier and healthier when they are productively contributing to society so long as the work is not too stressful. But financial incentives such as the Pension Work Bonus need to be improved and employers’ attitudes towards older workers must change. Tax incentives to employers of seniors would also encourage them to employ older Australians or keep more retiree-age people in the workforce.

Strategies to increase the ratio of workers to people on welfare

As the Australian population continues to age, the ratio of workers to people dependent on welfare falls. The vast majority of welfare payments are made to age pensioners and people on disability pensions; a relatively small amount goes to unemployment benefits. This trend is largely due to the fact that people are living longer but also due to the natural phenomena that as societies become more affluent, their citizens have less children per capita. This trend is obviously unsustainable and needs to be reversed if possible.

A significant lever to correct this imbalance is immigration. There is never a shortage of people wanting to migrate to Australia, and generally migrants are young people (the median age in 2017-18 was 26), often with families, ready to work and spend and contribute to GDP growth.

Sadly, more recently, there has been populist rhetoric against immigration and, as a result, the number of migrants and people with temporary visas allowed into Australia has dropped significantly in the past few years.

I have no doubt that this is one of the factors causing our economy to slow. The most counter intuitive reason I have heard is that immigration puts strain on our infrastructure therefore we should slow it down for a while. This is an infrastructure problem not an immigration problem.

If some of the lifts in a building broke down, you would not stop new tenants moving in or existing tenants from hiring new staff until the owners got around to fixing the lifts. You would fix the lifts immediately, make do with what you have in the meantime so long as it was safe and allow business as usual. It is absurd to suggest that because our infrastructure needs to be enhanced we should reduce population growth. The very core of GDP growth is population growth.

With interest rates at record lows, now would be a great time to borrow to fund massive infrastructure enhancements, creating jobs and GDP growth. A new influx of immigrants could help do much of the work, and at the same time increase the ratio of workers to people on welfare.

Instead, the government has taken a populist approach and fought to keep our budget in surplus, potentially missing a once in a century opportunity to borrow money for next to nothing to fund much needed infrastructure enhancements.

Former political foes, Paul Keating and John Hewson, have both spoken about the opportunity for an infrastructure-led recovery. I hope the government takes notice rather than taking the road that secures the most votes in the short term.

Increase the superannuation guarantee

Labor introduced legislation in 2012 to increase the super guarantee to 12 per cent by this year. The timetable was subsequently changed by the Abbott government with the SG now set to hit 12 per cent by 1 July 2025.

However, the Morrison government is facing increasing pressure from its own MPs and senators to delay or abolish the planned increases. Those on the other side of the debate such as Rice Warner are saying that a higher SG would alleviate pressure on the age pension system and grow capital markets, which would benefit the entire economy.

In my view, any increase to the SG rate equates to money out of the economy in the short term. The government has said that the current precarious state of the Australian economy is the reason for delaying this.

However, I suspect that the real reason is that it would see more money flow into the coffers of industry super funds, some of which would inevitably find its way to the Labor Party.

Address housing affordability

Another major issue that directly impacts the pension system is housing affordability. Our retirement system was built on the assumption that most people would own their own home by the time they finished working. As it currently stands, an increasing number of Australians are likely to be paying rent in retirement, placing greater pressure on the pension system.

Recent modelling from the Grattan Institute found that the number of people aged over 65 who own their own home will fall from the current 76 per cent to 57 per cent by 2056. For low-income retirees, it will be well under half. The pension system, as it currently stands, is simply not equipped to manage these pressures. Rents have been outpacing the CPI-indexed government rent assistance payments for some time now, particularly in the major cities. There is a definite need to increase assistance for the growing number of retirees who do not own their own homes as well as thinking outside the box on housing affordability.

Treatment of the family home

Is it time for the high-value family homes to be included in the age pension assets test? Again, the likelihood is that no politician would touch this with a barge pole. Just look at what happened to Labor after it took the removal of franking credits to the last election.

Be that as it may, I don’t believe we should throw our hands in the air and give up on the implementation of big picture policy reform in this country. As Paul Keating recently remarked, large scale reform will be necessary to halt the increasing levels of inequality in our society.

There are clear anomalies with the current system. For example, a retired couple with a home worth $4 million and $245,000 in assets is eligible for a full pension, while a couple with a home valued at $500,000 and $860,000 in assets will receive no pension at all.

However, there are two sides to this issue. The above example shows an extreme situation that I am sure most would consider to be quite unfair to the second couple. Others would say that it is equally unfair that a couple who have lived their lives in an affluent area and are entrenched in that community, are forced to downsize to the point of having to move to where housing is more affordable.

So, this is certainly a tricky one. Innovation and competition in the home equity release product market may result in retirees being able to remain in their homes, but to cheaply and efficiently access some of the equity to top up their retirement incomes.

Conclusion

In any case, these changes are going to be unpopular. Whichever way you look at it, they will take money out of the pockets of elderly Australians, which are a large and growing portion of the voter base. However, the longer this issue is left, the worse it will become. Slow and steady change over the next 10 to 20 years will be much more palatable than large sudden shocks. This is also why we should look to employ other mechanisms such as migration to minimise the impacts on the elderly.

How the ban on adviser commissions could hit hip pockets

The federal government might have voted against a royal commission into misconduct in the banking and financial services industry 26 times but it’s making up for lost time.

This month the Senate passed the first substantive stand-alone piece of legislation relating to issues raised by the royal commission. The bill ends the payment of product commissions from fund managers, super funds, insurers and other financial product providers to financial planners and advisers.

The financial services industry is warning that, ironically, higher fees – not lower – could be one of the “unintended consequences” of the legislative change. 

If that sounds a bit like deja vu, you’d be right. In 2012, the then Labor government banned commissions for advisers as part of the Future of Financial Advice reforms.

This represented an overhaul of the mainstream remuneration practice in the industry, meaning consumers, and not product manufacturers, would have to pay for the provision of advice. The thinking was that removing this “conflicted remuneration” would allow consumers to get more objective, impartial advice.

But the rule was not applied retrospectively, which meant advisers could continue to receive any ongoing commissions relating to investments they made before the legislation’s effective date of July 1, 2014, under a so-called grandfathering clause.

After evidence to the royal commission that consumers had been charged “fees for no service”, Commissioner Kenneth Hayne concluded that the carve-out allowing these grandfathered commissions should be “repealed as soon as reasonably practicable”.

After the Parliament did exactly that on October 14, Financial Services Assistant Minister Jane Hume said one of the key benefits of the reform is that it will end the conflict whereby some advisers may have been hesitant to move clients into newer, better-performing products because they were receiving an ongoing commission on the old one. “Consumers will benefit from lower fees following the removal of conflicted remuneration for financial advice,” Hume said.

Higher fees

But the financial services industry is warning that, ironically, higher fees –not lower – could be one of several “unintended consequences” of the legislative change.

Phil Anderson, a policy expert at the Association of Financial Advisers, says advisers have been reviewing whether their clients should be switched into newer products ever since the FoFA reforms, and the total size of the pool of commissions paid to advisers has been diminishing as a result.

But there are important, technical reasons why it might not be in the client’s interest to switch to a newer or cheaper product, he says, even though that seems counter to the government’s thinking and conclusion of the royal commission.

GCT and Centrelink triggers

He says there are certain circumstances where the stopping of grandfathered commissions could actually leave a consumer worse off.

“The requirement to move product could trigger a capital gains tax liability,” Anderson says. “In some cases, the client may be advised to defer the recognition of a capital gain to a later time, when they have a lower taxable income.”

In addition to CGT concerns, advised consumers could also lose Centrelink benefits. In 2004 and 2007, the federal government made changes to the assets test for eligibility for social security payments to include income streams such as annuities and account-based pensions, which were previously exempt.

But these changes were grandfathered so that people relying on the previous rules in planning for their retirement were not disadvantaged.

“If they were moved to modern products now, this grandfathering would be lost and the income stream would be fully included in the asset test,”  Anderson says.

Another potential pitfall could face Australians in superannuation products that include a life insurance policy.

Switching super

Switching to a new super fund could cause them to lose cover which might not be attainable at the same rate or in the same form if the client’s health circumstances have changed over that period.

If rebates of commissions that would have otherwise been paid to advisers are passed on to clients directly – as some of the large bank-owned wealth management companies are already implementing – this could also have implications for older clients.

“A rebate will in many cases be taxable income and in the case of partial-age-pension clients may reduce the client’s pension by 50¢ in the dollar,” Anderson says. “In a limited number of cases it may push the client above the maximum income test threshold for the pension.”

Regardless of age or life stage, switching to a new investment product could also result in hefty exit fees, Anderson adds.

Although exit fees have been banned in the superannuation system, they still exist on some other financial products.

John Ardino, chairman of Lifespan Financial Planning, agrees that clients could face Centrelink and CGT consequences, which could make switching them into newer products problematic.

Aside from these technical issues that could create unintended costs or losses in some circumstances, the industry also warns that ending commissions will simply push up the price of advice, making it more expensive for those who already have an adviser and less accessible for those who don’t.

“The result of all this for consumers is that it will raise the costs of advice, reduce access to advice and leave thousands of clients orphaned without any access to advice,” Ardino says. “This is a major disruption for clients
needing financial advice and a major disruption to the practices of advice providers.”

Anderson warns that if some clients whose advice is now subsidised by product commissions decide they cannot afford a fee for service, their investment portfolios and financial lives could be adversely affected.

“If clients lose access to advice, then they may find over time their asset allocation progressively moves away from their target asset allocation,” he adds.

Beware the warnings

But consumer advocacy group Choice, which has long argued that the grandfathered commissions carve-out should be repealed, said consumers should be wary about warnings from industry bodies and lobbyists.

“There have been countless instances where the industry has squealed about unintended consequences to prevent and slow down reform and there has been no basis to the concerns,” says Choice campaigns manager Erin Turner.

While she doesn’t dispute that switching products could result in complexities and even financial losses, she says that is precisely why conflicted payments needed to end.

“A good, holistic, expert adviser is going to consider those issues and will consider the costs as well as any potential benefits,” she adds. “At least you can now know that the conflict is not there and they can give you a more objective assessment.”