Much has been going on in the background with the Banking Royal Commission of late, and we feel it would be timely to comment on how this relates to your superannuation funds. As we've mentioned in previous weeks, we're big fans of the wealth accumulation benefits that the superannuation system offers, mainly through tax savings on both contributions and the underlying investments your super holds.
What we're not a fan of is the vertical integration system that many institutional super funds have been using for years, and the negative impact this has had on some people's superannuation fund balances. Sadly, we have witnessed several devastating occurrences when assisting and representing clients who have previously been serviced by the bank and institutional financial planners.
Many (but not all), of the problems highlighted, have stemmed from the vertical integration model that exists within the major banks and institutions. They employ the advisers whom the clients deal with. They own the platforms that host the clients' money. They own and manage the funds where the clients' money is invested. The conflict of interest is immediately apparent. The adviser will inevitably be incentivised to keep a client's money within the corporate structure. As an ASIC report from earlier this year found:
While the big institutions' approved product lists were made up of 21% of in-house products and 79% of external products, when a client's money was invested, 68% of the time it went to their in-house products.
And what happens when the bank or institution is placed before a client? Only 25% of the advice given by the big institutions was considered to be compliant by ASIC. 65% was considered non-compliant, with 10% considered non-compliant with significant concerns. The issue of non-compliance partially stemmed from recommending new financial products when there was no demonstration that a client would be better off.
So how does this relate to your superannuation and why does it matter? When most Australians reach retirement, superannuation is the biggest asset they have alongside their house. It's also the most accessible when it comes to funding income in the retirement years. This means that the more you have in super the better, and you also get a benefit from a higher performance, relative to the risk of the investments.
So what should you do about your super in light of what we're learning from the royal commission?
1. Ask for a second opinion on your fund if you don't know how to look up the fees and performance data or what this actually means for you.
2. Get clear on the type of fund that will work best for you. This might be a basic industry fund, a retail fund with more flexibility, or a Self Managed Super Fund, depending on your goals.
3. Review your super regularly against a reputable benchmark. This is not a set-and-forget asset for you, so make sure you're receiving what you're entitled to.
As always, if you are unclear about your position in relation to your super, make it a priority to seek professional advice. The laws around super are extremely tight, and at best, there are serious penalties for non-compliance, at worst you could well be leaving yourself in a worse financial position during your retirement years.