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Top ten problems with our super system, and how to fix them

By Trish Power - posted Tuesday, 11 August 2009


  1. Do the non-DIY super funds manage the tax implications of transactions when investing?
  2. Do the non-DIY super funds offer fund members an effective transition into retirement, which minimises the implications of tax and enables fund members to enter retirement with some certainty?

The super industry is relatively young, and due to the relatively small account balances of fund members has not devoted sufficient energy to maximising retirement benefits through tax management, and has relied on one-size-fits-all investment strategies.

Until recently (circa 2005), most large super funds had simply ignored the fact the members retire and need retirement products, or assistance with any lump sums payable.

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How to fix it. The super review needs to put the superannuation industry on notice about the management of tax within a super fund, and the availability of suitable pension products. If the super industry isn’t up to it, and the government doesn’t want half of the population moving into SMSFs in retirement (as predicted by Deloitte), then the government may have to seriously consider offering an alternative pension product financed by a special self-funding pension vehicle. Also, see problem 7.

6. They’re baaack! Kill commissions now, before they kill the industry

Despite the touchy feely noises from the FPA and IFSA, commission-based advice and commission-based products are going to be with us for a few years yet. And my understanding is that commissions are to remain on administration offerings, commonly known as wraps or platforms.

The debate about commissions and fees seems to be centred on whether the charging of fees is a suitable alternative remuneration arrangement, when the greater issue is: conflicts of interest!

The simple fact is that advisers who are paid via commissions from financial organisations must sell investments from those financial organisations to earn a living. More generally, such advisers are unlikely to encourage direct investment in shares, or to consider direct property as a suitable investment, or to recommend products that don’t pay the adviser a commission.

If an individual simply seeks strategic advice, for example, choosing the right level of super contributions, then the real difficulty becomes seeing how commission-based advisers can provide this advice, unless they plan to do this for free, or … for a fee!

The next question then becomes, if a financial adviser charges a fee for advice that involves financial products, is that advice independent? See Problem 7.

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How to fix it. Immediately remove commissions on any compulsory superannuation products where the individual member didn’t receive direct financial advice (employer received the advice). Immediately cease all commissions on superannuation products unless the financial adviser obtains a signed one-page document confirming that the fund member understands that the financial adviser receives contribution fees (if any) and a trailing commission. And obviously, eventually remove all commissions from all investment-related products.

7. Is the search for independent advice, super’s needle in the haystack?

So, an individual wants independent advice. Where does she go, and if she demands truly independent advice, will a non-independent adviser have the strength to turn her away?

Does the individual know what questions to ask? For example, can an adviser recommend any products, or only products offered by a single organisation, or products on an approved list where the product providers have paid to be on that approved list?

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About the Author

Trish Power is an author and journalist who lived a former life as a superannuation tech-head. She is the author a number of books on super and investing, including super bible, Superannuation For Dummies, 2nd Edition (Wiley). Trish describes much of her financial writing as educative journalism. She is passionately committed to raising the level of financial literacy in Australia and empowering individuals to improve their financial circumstances. She is also the founder of SuperGuide.com.au - a free superannuation resource for all Australians.

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