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Episode 17

Advisers and super funds - working together in clients' best interests

September 2019

In the wake of the Banking Royal Commission, which highlighted the importance of trust and integrity in the financial advice and financial services industries, Head of Advice and Retirement Anne Fuchs talks with Rhett Das, Managing Director of Integrity Compliance - a Melbourne-based financial services compliance consultancy firm. They cover issues that are even more relevant to financial advisers in a post-Royal Commission world, including the application of the sole purpose test, fee-for-no-service, bundled fees and risk mitigation.

Intro: Welcome to the New School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

Anne Fuchs: Hello and thanks for listening. Welcome to the New school of Super - Sunsuper's podcast series covering investment markets, money matters, your super and most importantly, helping you achieve your retirement dreams. My name is Anne Fuchs, and I'm the head of advice and retirement here at Sunsuper, and the team and I come to work every day to help our members access the right financial advice for their needs and support them achieving their retirement dreams. Today is a different episode; I don't have Brian Parker with me, and we're not talking investment markets, but we are talking compliance, and I promise you that actually compliance in a post-Royal Commission world is almost as as fabulous and interesting, if I might say so, as our discussions that I normally have with Brian. Our special guest today is Rhett Das who's flown all the way up from Melbourne and he's the managing director of Integrity Compliance. Rhett is incredibly well regarded and known across the industry because he isn't really very much a subject matter expert on compliance relating to super funds, funds management businesses, licences, financial advice, all of those things to do to make sure that we all stay in the good books with the regulator. Now Rhett, a little bit about Rhett - he lives just out of Melbourne on a very large property with a border collie, horses, a wife and a beautiful baby boy that just arrived a couple of weeks ago. So welcome, welcome, welcome Rhett.

Rhett Das: Thank you, Anne.

Anne Fuchs: It's good that you're here today and before we jump into it, I just need to provide a warning which normally Brian would be doing this but today it's me. So I just need to let our listeners know that what we're going to talk about today is general information only, and that any advice doesn't take into account anyone's personal situation. So if you're a financial advisor or on behalf of your clients wanting to act on anything we discussed today in relation to Sunsuper, you can get a copy of our product disclosure statement from our website or by calling us on 13 11 84. Now Rhett, compliance and the importance of it when it comes to brand integrity, trust is so important in a Royal Commission world. And one of the things that came up in this during the event of the Royal Commission was this concept of sole purpose test, and I wondered if you would be able to provide your insights about it because our listeners may or may not know that recently ASIC and APRA sent a joint letter to trustees of super funds around why this sole purpose test is incredibly important. And why also financial advisors and members need to be aware of this.

Rhett Das: Thanks Anne. I think from our perspective, there's been a lack of understanding from advisers, and what's also contributed to this is prior to the Royal Commission, the sole purpose requirement was always there, however we found - and we were probably guilty of this too - that unless you saw what we would regard as the 'car crash' examples of this, it wasn't something that was actively being pointed out. And so when we read the report from the Royal Commission, we actually as a business, said we actually need to go back and look at the way that we test advice and make sure that we're actually capturing this. And to our surprise, we received quite a lot of pushback from a lot of clients where we had pointed out to them and said, 'Well, look, you know, you need to be aware of this now'. And again, I think that comes back to the point that I made earlier, which is there wasn't really a very clear understanding at the adviser level around sole purpose and what it means and how you meet that test.

Anne Fuchs: So sole purpose test if you think about it in the sense of when an advice fee is being charged out of a superannuation member superannuation account, it really is an early release of money. Which is why there are some very strict conditions within the sole purpose test. What are some of the types of advice that meet sole purpose test Rhett?

Rhett Das: So I was actually reviewing a piece of advice for an advisor yesterday, and I explained to him - and just give you some context these clients had quite a bit of credit card debt, and the adviser hadn't actually scoped that advice, even though there was an implied or implicit need that this client would need to address his credit card debt. But he also provided the client with advice around his superannuation. The client was part of a couple, and there was the husband who had a much more sizable Superannuation fund, and the client, when I say 'the client' I mean 'our client' had actually made the decision that he would make a recommendation that the husband would absorb, or his Superfund would absorb part of the fees that were associated with the advice that was provided to his wife. And when we pointed it out to him when we said, 'You're actually you're breaching sole purpose there because you know the husband's money's there in his superannuation for the preservation of his benefits when he retires and by taking or charging a fee to his super to subsidise the wife's fee you're actually breaching', he was shocked. That was probably one of the better examples, we've actually had similar examples with other groups where we've said to them you can't you can't do this for the reasons previous outlined and some people became actually very, very aggressive and were actually quite angry. And again it comes down to the fact that people don't understand. So we've been spending a lot of time focusing on this, and as I said, you know, changing our order question sets to make sure we capture this. And that was actually one of the reasons why I guess I'm here because I think our businesses are seeing this together, that lack of understanding. And I think only since the Royal Commission are we now starting to see a greater awareness of it.

Anne Fuchs: And certainly there's the primary requirements or types of advice that meets sole purpose test which are incredibly obvious, like retirement planning, investment choice within super, transition to retirement, those types of things. But there's also this ancillary and things, I should let you - you're the expert...

Rhett Das: I think you know the example that I was talking about from yesterday, where had this adviser gone ahead with his advice and actually said to the client 'You've got a credit card debt I can charge you or I can give you some advice on how to reduce debt and budgeting, and run that through super as well.' that would have also breached as well, because that's not advice that's directly related to superannuation. We get people that push back on this quite a bit. They'll say to us, 'If they can't get control of their debt, then how they actually ever going to save for their retirement?' . We just have to politely say 'Unfortunately, the law is what it is and you can't do it.'. And again, it comes back to that lack of understanding from our clients and so we will continue to spread this message. It's not the best received message, but we're telling people what they need to hear, not what they want to hear.

Anne Fuchs: I think certainly in a post-Royal Commission world, both the regulator and trustee directors have the importance of following the law, the letter of the law and being really clear around what that means these days. The ramifications - we saw some terrible things and some businesses, iconic brands, the like of AMP that had trust for 130 plus years just evaporate overnight as a consequence of not doing the right thing in in the eyes of community standards. Another area where certainly I think this comes to light if we extend past sole purpose test, is this issue that came up during the Royal Commission about fee for no service. And that's another area that certainly impacts our trustee directors that they have an obligation to ensure that if there is an ongoing fee charged to a member's account that they have comfort that a service is being provided. What are your reflections or insights from out there Rhett?

Rhett Das: This has probably been the hardest message for us as a group to work with our clients to say 'Where you haven't provided an ongoing service but you've charged an ongoing fee that that would need to be refunded.'. We work with a range of licences; small licensees, medium sized and large; and what we're seeing is the licences that have got the money will just say, 'We just need to refund these fees in bulk, we need to get rid of this, and we need to move' but smaller licences who may not have the cash reserves are the ones who are finding this particularly hard to take. When I sort of contrast the attitude I sort of laughed to myself a bit because, as you mentioned, I had a baby or my wife had a baby a couple of months ago, and we've got clients that we see every quarter. And I actually explained to one of my clients-

Anne Fuchs: Your clients being financial advisors?

Rhett Das: Yeah. And I explained to the client 'The baby's due around this date and we've got a meeting scheduled for this [same] date, so if we don't have the meeting on this quarter we'll do two meetings the next quarter.' and one of our clients, the principle of the practice, said no problem. One of the other advisers in the group then said 'We didn't have our quarterly catch up this month, so we're not paying your fee.'. And I thought that's really interesting because when the boots when the boots thing-

Anne Fuchs: When the shoes on the other foot?

Rhett Das: Yeah, but then they can't see that if you haven't delivered a service that they should be entitled to keep the fee. A lot of people will say, 'Well, you know, we provide all these other services and it costs money to keep the doors open' and we acknowledge that. And I think that when you're providing on ongoing fee and you bundle your fees to include different ancillary services, and you don't have that meeting with the client or you don't provide the client with some form of advice, whether it's in the form of an ROA or an SOA for the year ASIC's made their position very clear. And you only need to read info sheet 232, which spells out ASIC's position in relation to this. Now ASIC has said, where you do charge bundle fees if there is some sort of evidence based methodology, then you may be able to refund only a portion of the fee of the client. But we seem to find a lot of businesses who are spending a lot of time and energy on how they can try and get around these things rather than saying, 'Look, I've done the wrong thing and I need to deal with it.'. I think that when this message first came out and this fee for no service issue started to appear a few years ago, people were very angry about it. But I think as time progresses and we're seeing the regulator take action, more people are now more accepting of it. But they don't necessarily like it.

Anne Fuchs: Well, we at Sunsuper currently having ongoing fee facility for members to use to be able to pay for advice. But we are moving from 24 months to 12 months in the spirit of the recommendations out of the Royal Commission. We are seeing too as a trend that advisers, because of the risk of the fee no service and that you could go 14 months for arguments sake because the client's been travelling on holidays or that you're missing that annual review day, that they just are actually charging the fee at the time the service is provided because then you're actually completely mitigating that risk. Another thing theme to, when considering advice and compliance and learnings from Royal Commission, is informed member consent and transparency around fees and charges, particularly in relation to clients Superannuation's account and knowing what what's being charged. Also too, the impact that balance erosion and these fees are having on members balances. What are your reflections about balance erosion Rhett? Do you see much of it? And what's the response been from the advisers?

Rhett Das: We do and we have to take each each file or approach each matter as we see it on its own merits and depending on the age and stage in life of the client. One of the files that I was reviewing yesterday there was a couple, and obviously they've got quite a lot of credit card debt, and they were spending quite a lot of time shuffling around debt to pay off one card and pay off another card. But there was also a real need for insurance. And you know, there was a young family that had home loan, car loan, credit card. But had something happened to the mother then, the father would be left with young children and a mortgage and either has to stop work. And so when you see a situation like that, you sort of say, 'Well, obviously these people need insurance. Are they're going to have to fund it through their superannuation or is it going to be a step premium?' Obviously, I don't think they're going to be able to afford level. But we see these situations a lot, so from our perspective we don't have a hard and fast rule. But what we're looking for is evidence on the file that the advisor has considered these things, has actually considered the affordability, has actually considered strategies where the client may be able to get extra money into superannuation. Have they pointed out to the client, through the use of modelling, that if you keep going down this path, this is where you're your balance would end up. And if the clients aware of that and you've got that informed consent, then we can't sort of turn around and say the advice is not appropriate. Some people might not like the advice that's being provided, whether it's a regulator or another advisor. But at the end of the day, if the advice is meeting the needs of the client, and the advisor can articulate how they've arrived there, then we can't really sit back or stand there and fault their advice, provided there's a basis for it.

Anne Fuchs: I think the contrasting view Rhett there, is that we're walking in the shoes of a trustee, director of a Superfund is the broader member best members best interest test and you know the obligations they bear. And certainly they're not just a regular company director. A trustee director is sort of the highest level of fiduciary duty where they're acting and protecting a person's financial money, financial assets like in a trust and certainly one of the things we really stewed over that matter around balance erosion and insurance and fees. But we did, in the end, decide that for fees where the balance is less than $50,000, we needed to see that statement of advice. Because the risk of balance erosion is just too great and we certainly were not comfortable with any ongoing fees coming out, because again wearing a trustee lens going backwards, the risk of it is just too great.

Rhett Das: I would agree with that. I think that an approach to be commended that, yes, we are going to ask to see advices where you have these low balances because they are vulnerable people. And usually people who have a low balance, there's a reason they have a low balance because they're not working or they're not earning a lot of money in the first instance or that they may not be capable. So I don't have an issue with that, and so I think we agree on those points. From my perspective, we would like to see advisors who are providing advice to these sort of people, because we always get the argument pushed and thrown back at us where, 'Well, these people need advice.' And the reality is, you know, a lot of people do need advice, but if they can't afford it, you sort of have to say well what do they need more today? Do they need to prepare for their retirement? Or do they need the insurance today? Again, we want to see how people have arrived at that conclusion.

Anne Fuchs: The education around sole purpose test, and if I can sort of go back to where we started, we changed our advice fee form. That was one of our learnings from Royal Commission, knowing that it hasn't been I guess policed for want of a better word, that a piece of law for a couple of decades. So my analogy, would be like going to the dentist and you get your private health insurance and they tick the boxes. They've cleaned your teeth, there might have been an X-ray, tick tick. So we've actually laid out on the form the types of advice that meet the definition of soul purpose test from a Sunsuper perspective. But have you noticed that there are broader definitions across Superfunds?

Rhett Das: Definitely. When we have these conversations with people, some of the things that people say to us is, Well, you know, that's something that's that trustees interpretation of the law and we say, look, that's fine - that's their interpretation of the law. And it doesn't help that there isn't really uniformed decisions. But then, in the industry in which we operate - and we're also (my business partner, Charlie and I) are both qualified lawyers - you can ask one lawyer, one opinion, and you will get a different opinion from someone else. And even in our own business, Charlie and I don't always agree on the same thing. But again, it does frustrate us that there isn't that uniformity. And to give you a really more recent example, I was speaking to someone who said: 'in the self-managed Superfund space, if the financial order is prepared to sign off on that, then you know I don't have a problem with that'. And in those instances we're seeing what I would say is one party or partner in the fund who was subsidising very heavily the cost of advice for the members of the fund, but it's being signed off by a financial order.

Anne Fuchs: So your advice to advisors around sole purpose test and these issues of fee for no service that have arisen from the Royal Commission. What would you say to them? Take it seriously at your own peril? Or am I being too grave?

Rhett Das: No, I think that this is an area that will start to receive more focus and another thing that we now do is also perform quantitative analysis on file. So we will look at the advice files now and say to an adviser, look based on the fees that you're charging or the costs that are coming out of this fund, the client just can't recover. Or it's going to take the client two years to recover the upfront fees and all the ongoings. And the interesting thing, too, is we're seeing other trustees like Sunsuperwho are being more proactive now, who were asking the question. I had one client that I still work with, who we had warned him and said, 'Look, you know, your fees are in our view on the higher side, how you articulating the value and do you realise you know, that you're a risk?' And he sort of laughed it off to start with. But then, about a month later, he actually got a letter from one of the funds saying, 'Can you please explain your fees and what you do?'. So I think we will see more of this and I think trustee obligations as you pointed out will force people's hands.

Anne Fuchs: Well, look, I'm sure you have never been busier when it comes to compliance, and certainly every year I I feel like the last 10 years the change that just continues when it comes to compliance and legislation in financial advice. And certainly I hope that what comes out of this will be trust, and five years from now, everyday Australians have a higher degree of trust in financial advice because of the pain that's being experienced now. And I commend you for the leadership you've taken Rhett for many years around that very high bar that you set for compliance, and I know you are very well regarded by many licensee executives and advisors around the country for the work that you do. So thank you so much for coming in today.

Rhett Das: Thank you.

Anne Fuchs: And you're getting on a plane back to Melbourne now?

Rhett Das: I am.

Anne Fuchs: All right. And listeners, thank you, thank you so much for listening. It's been another really interesting episode on the New School of Super, and we look forward to you joining us again soon. Thanks.

Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manager Super, and enjoy your retirement, visit Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at for it feature in one of our future New School of Super podcasts.

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