The Future of Financial Advice (FOFA) reforms pose a threat to the revenues currently earned by dealer groups and financial advisers. However, as the saying goes, “when one door closes, another opens”. Dealer groups are considering alternative methods to generate revenue, including assisting superannuation fund trustees to provide intra-fund advice to their members.
A number of superannuation fund trustees currently outsource the provision of intra-fund advice [1] to external advice providers, rather than providing these services in-house. Some superannuation fund trustees who wish to provide these intra-fund advice services to their members do not have the requisite resources or capabilities to do so (or do not want to accept the full exposure), and acknowledge that there are others in the market better resourced to provide these services.
The introduction of the general fee rules under Stronger Super supports the view that a trustee of a superannuation fund can provide an existing member with simple, non-ongoing (ie. one-off or transactional) personal advice relating to the member’s interest in the fund (ie. intra-fund advice), and charge collectively across the fund’s membership.[2] The trustee can also provide general advice. This advice may be provided in-house by the trustee (or employee of the trustee), or through an external provider acting under an arrangement with the trustee.
Given this support under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and the fact that large corporate plans typically already have a financial adviser associated with them, a question arises whether a trustee can use that adviser to deliver intra-fund advice to its members in a specific employer plan, in a way that complies with the FOFA restrictions.
Outsourcing intra-fund advice for employer plans
Where an adviser or dealer group has an existing relationship with an employer plan, it would seem sensible to consider whether that adviser or dealer group could provide advice to the employees regarding their interest in the employer plan within a superannuation fund.
The arrangement may consist of the trustee paying an “intra-fund advice fee” to a dealer group in return for an adviser providing intra-fund advice to members of a particular employer plan, including, for example:
- providing general advice or limited one-off personal advice in relation to contributions, investment options and insurance offerings, in relation to a member’s interest in the relevant plan; and
- providing member education seminars and other education tools.
For an adviser, a small fee per member each year can add up to significant remuneration where a plan has a large number of members.
From a trustee perspective, a trustee is not obliged to provide intra-fund advice. However, if it decides to do so, the terms of the arrangement would need to be judged as being in the best interests of members. For example, if member take-up was low, a trustee may need to consider if a general charge is justified in the circumstances. In addition, a trustee should consider whether the decision to implement separate arrangements, the choice of service provider(s), and the relevant fee being charged to different groups of members (or members as a whole) are consistent with the trustee’s covenants — including the requirements to act fairly in dealing with classes of beneficiaries and beneficiaries within a class,[3] the general and MySuper fee rules, and the requirement for MySuper members to be entitled to access the same options, benefits and facilities.[4]
FOFA considerations
Intra-fund advice is exempted from being an ongoing fee arrangement,[5] but is otherwise subject to the FOFA requirements — including the provisions regarding conflicted remuneration in Div 4 of Pt 7.7A of the Corporations Act 2001. Trustees can rely on the Australian Securities and Investments Commission (ASIC) no-action position in relation to a breach of the conflicted remuneration provisions for accepting management or administration fees that may reasonably be expected to influence intra-fund advice.[6] While this ensures that ASIC will not take action, trustees must be aware that this does not preclude third parties (such as dissatisfied members) from taking legal action in relation to such conduct.
Trustees need to consider whether they are prepared to accept this risk. Putting aside the trustee’s acceptance of administration fees, the following analysis relates to the payment of the intra-fund advice fee by the trustee to the outsourced service provider. This analysis assumes that the arrangement was not entered into before 1 July 2013 and the parties cannot take advantage of grandfathering.
The question for both a superannuation fund trustee (payer) and dealer group (payee) to consider is how the remuneration may be structured and, in turn, whether the intra-fund advice fee could be considered conflicted remuneration on the basis that, because of the nature of the benefit or the circumstances in which it is given, the fee could reasonably be expected to influence:
- the intra-fund advice provided to members;
- advice provided to the employer; or
- additional advice (beyond intra-fund advice) separately provided to members.
We look at each of these matters in turn below.
Influencing intra-fund advice to members
There is a risk that the intra-fund advice fee could reasonably be expected to influence the intra-fund advice given if the amount paid to the adviser is dependent on the member’s account balance, the nature of their investments within the superannuation fund, whether additional contributions to the fund are made, or whether additional insurance cover has been selected. That type of fee structure may result in the adviser giving intra- fund advice to contribute additional amounts into superannuation or apply for additional insurance cover in order to increase the adviser’s fee income.
By contrast, this risk is reduced where the fee is calculated as a fixed-dollar amount per member per employer plan — for example, a fee of $50 per member per annum. With a fee calculated in this way, the amount the adviser earns is not impacted by the content of the intra-fund advice.
Influencing advice to employers
There are different types of advice that may be provided to an employer that, in our view, can be broken down into phases:
- initial advice regarding the establishment of the employer plan in the relevant fund, that may or may not have the structure in place to contract with the adviser in relation to the outsourcing of intra-fund advice to the members (once the plan is established); and
- ongoing advice to the employer once the employer plan is established in relation to whether the fund remains appropriate for employees.
As a trustee must not include in any fee charged to any member of the fund an amount that relates to costs incurred by any person in relation to personal advice provided by any person to an employer of one or more members of the fund,[7] any personal advice provided to an employer must be remunerated under a separate arrangement between the adviser and the employer.
Even though any advice would be under a separate arrangement, the question of whether the intra-fund advice fee could reasonably be regarded as influencing the advice to an employer should be considered.
Continuing the fixed-dollar fee example, for an employer plan with 1000 members, the fee would be $50,000 per annum. In our view, there is an argument that the intra-fund advice fee could reasonably be expected to influence an adviser in relation to any ongoing advice it provides to the employer as to whether the superannuation arrangements remain appropriate for the employer and its employees, and this risk needs to be addressed. The risk is heightened if the adviser was in negotiations with the trustee regarding such an arrangement prior to the establishment of the employer plan, or the establishment of the employer plan was contingent on such an arrangement.
ASIC Report 371: Overview of decisions on relief applications (February–May 2013)[8] shows that ASIC declined to give a no-action letter in relation to anticipated breaches of the conflicted remuneration provisions arising in the context of an adviser group that proposed to provide intra-fund advice to members and advice to employers with regard to the choice of a default superannuation fund. ASIC considered that the adviser would have been aware that if an employer was given advice about the choice of default fund, there was a prospect that the adviser would be asked to provide advice services to the employees of the relevant employer in return for the payment of a service fee.
Trustees and dealer groups will need to consider this issue carefully to ensure that the arrangement includes protections to avoid any such capacity to influence advice, or breach of the SIS Act in relation to the payment arrangements. For example, trustees may consider whether the arrangement could restrict the dealer group (or specified advisers within the dealer group) from giving advice to the participating employer about maintaining or closing an employer plan. An appropriate restriction could support a conclusion that the intra-fund advice fee paid to the adviser could not reasonably be expected to influence advice to the employer, as no advice would be given to the employer.
Whether or not this is a commercially acceptable approach (as this could result in an employer having to obtain advice on its employer plan from another adviser or dealer group in the future), and/or whether an adviser could still provide factual information to maintain a relationship with the employer, are matters for the trustee and dealer group on which to reach agreement.
Further, trustees should ensure that whatever protections are in place to avoid such capacity to influence advice, the arrangement contains mechanisms to satisfy the trustee that those provisions are being adhered to and that it has sufficient oversight of these activities.
Influencing separate advice provided to members
The provision of intra-fund advice may lead to the development of a separate relationship between a member and the adviser and, in some cases, may result in the member requesting the adviser to provide additional advice services for the member, such as advice in relation to:
- whether to consolidate multiple superannuation interests;
- whether to acquire insurance outside of superannuation; or
- a full financial plan.
In these circumstances, the advice would be outside the scope of intra-fund advice and the member and adviser would need to enter into a separate agreement for the provision of, and remuneration for, those advice services. Again, although this is a completely separate arrangement, the question of whether the intra-fund advice fee could reasonably be regarded as influencing the additional advice still needs to be considered.
There is an argument that, depending on the nature of that separate advice, the intra-fund advice fee in respect of that member (for example, $50 per annum) could influence that additional advice. For example, the intra-fund advice fee may result in the adviser giving advice to a member to remain in the relevant superannuation fund rather than transferring their interest to another superannuation fund. By contrast, there is another argument that the fee amount is small relative to the total remuneration of the dealer group, and such that it could not reasonably be expected to influence an adviser in providing the additional advice — especially considering that the adviser is being separately remunerated for that additional advice.
This is a grey area that the trustee and the dealer group should consider before entering into the arrangement. Once more, whatever protections are in place to avoid such capacity to influence, the trustee will need to ensure that the arrangement contains mechanisms to satisfy the trustee that those provisions are being followed.
Other matters to consider
This article touches on only part of the FOFA issues when outsourcing the provision of intra-fund advice. In providing the intra-fund advice, advisers still need to comply with Pt 7.7A of the Corporations Act, including the best interests duty, the obligation for advice to be appropriate, and the conflicts priority rule.[9] Although a dealer group can rely on the arrangement and process used as the framework for the basis of the intra-fund advice, dealer groups may need to consider the extent to which the “arrangement” can limit the application of these additional obligations.
In addition, trustees need to consider whether they are outsourcing a material business activity; whether each member of a MySuper product has access to the same options, benefits and facilities as required under section 29TC of the SIS Act; and whether it is consistent with the trustee’s covenants, including the requirements to treat members of different classes fairly.
If the arrangement is the outsourcing of a material business activity, the trustee will need to ensure that:
- it has adequate oversight of the arrangement; and
- the arrangement contains mechanisms to satisfy the trustee that the relevant provisions are being followed.
Takeaway points
Trustees and dealer groups need to consider this type of arrangement carefully. The parties should ensure that certain protections are built into the arrangement to avoid the capacity to influence advice to employers or members.
This article was first published in the Australian Superannuation Law Bulletin, Vol 25 No 3, October 2013
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[1] Previously provided under Australian Securities and Investments Commission (ASIC) Class Order [CO 09/210] Intra-fund superannuation advice. [back]
[2] See section 99F of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). [back]
[3] Above, n 2, section 52(2)(e) and (f). [back]
[4] Above, n 2, section 29TC(1)(b). [back]
[5] Regulation 7.7A.10(3)(b) of the Corporations Regulations 2001 (Cth). [back]
[6] See ASIC Regulatory Guide 246, paras 112–16. [back]
[7] Above, n 2, section 99D. [back]
[8] ASIC Report 371: Overview of decisions on relief applications (February–May 2013) September 2013, available at www.asic.gov.au. [back]
[9] Above, n 5, sections 961B, 961G and 961J. [back]