Can Financial Advice Fees be Charged to a Superannuation Fund?
Posted on October 28 2019
A law enacted in 1993 has once again begun to gnaw at the minds of financial advisers and advice-business owners all around Australia in 2019 as a result of the Royal Commission and the new emphasis it placed on enforcing penalties on those who get it wrong.
Why do we need to consider the Sole Purpose Test when charging fees?
The Hayne’s Royal Commission report released in February 2019 identified the payment of certain advice fees from superannuation as a problem area. Although the Hayne’s report made no recommendations to change the laws or regulations in this area, it emphasised the need to enforce existing law and specifically referenced the Sole Purpose Test provision found in section 62 of the Superannuation Industry (Supervision) Act 1993.
Under the Sole Purpose Test, only fees associated with advice that relates to the member’s superannuation or insurance obtained through superannuation may be deducted from a member’s superannuation account. When compared to the seemingly common practice within the financial advice industry of charging all a client’s fees to their superannuation fund in order to maximise personal cash flows, this definition seems highly restrictive. Yet, that was exactly how ASIC and APRA defined it when they wrote to all Registerable Superannuation Entity (RSE) Licensees in April 2019 and outlined an expectation that fee charging practices be fully reviewed and rectified in line with the Sole Purpose Test.
As we meet advisers around Australia, we are noticing a lot of concern and confusion around the impact of this issue. With no changes in regulations or laws tabled, it is difficult for advisers to understand what needs to change and by when. We are left to interpret a pre-existing law, which as some have noted is overdue for review and clarification.
What is clear is that the Royal Commission is urging the regulators to put an end to the practice of drawing from superannuation funds to pay for general financial advice. At some point in the near future, this “urging” may lead to the unsheathing of the regulatory “whip” in the form of harsher penalties to those not complying!
What advice fees are allowable under the Sole Purpose Test?
In the Royal Commission report, Kenneth Hayne stated quite clearly and assertively: “I consider that using superannuation money to pay for…broad financial advice is not consistent with the sole purpose test”. He further clarifies that a superannuation trustee should not be using members funds to pay fees for advice relating to how a member orders his general financial affairs or how they could generally best make provisions for retirement income. In this context, an individual’s “general retirement goals” are not the same as “superannuation” and the two concepts cannot be treated interchangeably. According to Hayne, the practice of superannuation accounts paying fees relating to the general maximisation of wealth “must end”.
A common misconception in the advice industry is that it is acceptable for any advice relating to retirement can be charged to a superannuation fund. But, consider a fee for service or advice relating to a Government Pension. This clearly relates to retirement income and yet has no obvious, direct connection to the members superannuation – it is unlikely to pass the Sole Purpose Test if the fee was charged to the superannuation fund.
On the other hand, advice relating directly to a member’s superannuation can be charged and paid for by the superannuation fund. This would generally include:
- Consolidation of superannuation accounts
- Selection of superannuation funds or products
- Asset allocations WITHIN a superannuation fund.
ASIC and APRA also indicated that the magnitude and frequency of the fee should be considered also. This indicates that fees charged should be reasonable in relation to the actual services provided. How this is to be determined or policed is not known.
Does this impact SMSF’s as well?
Interestingly, the Hayne Report’s discussion of superannuation fees made no reference to SMSF’s. This may indicate that any short-term changes to way existing laws and regulations are enforced may initially be focused on APRA-regulated funds rather than SMSFs. However, by law SMSFs need to remain compliant with the “Sole Purpose Test” and it would be imprudent for SMSF trustees and advisers to ignore the recent communications from the regulatory and governing bodies.
Recent court rulings, have indicated that SMSF Auditors are beginning to be held to higher standards on these such matters. As SMSF Auditors raise the bar on SMSF Compliance, this will very likely flow through and impact the Financial Advisers providing advice to these funds and fund members. Dealing with this proactively by rectifying any slovenly fee charging practices now seems a much more preferred solution to retrospectively attempting to justify fee charging practices later, perhaps without sufficient documentation to substantiate this in a manner compliant with the Sole Purpose Test.
What are the penalties of not complying with the Sole Purpose Test?
The most obvious risk trustees who are found to have breached the Sole Purpose Test face is the loss of concessional tax treatment within the superannuation account. This penalty typically has a severe impact, as the highest marginal tax rate is not only applied to the usual assessable income of the fund but is also applied to the entire adjusted value of the fund’s assets. The dollar impact on individual member balances can potentially be ruinous.
If this alone is not enough motivation then the additional Governmental powers to disqualify trustees, enact enforceable undertakings, impose fines and – in extreme cases – imprisonment, should be encouragement enough for Clients, Trustees and Advisors to work together to get this right now.
How should an adviser allocate advice fees to superannuation accounts?
Firstly, APRA and ASIC have noted that such a decision should not be left in the hands of individual advisers. To minimise conflicts of interest, a firmwide policy with suitable levels of governance and controls should be put in place.
Secondly, the implications are pretty clear that advisers are going to need to start “slicing and dicing” their fees if they are not already doing so. Having a super fund paying for advice fees that are not related to superannuation, just so a client can improve their personal cash-flow position is a big “no-no”. If a Financial Advice firm wishes to charge fees to a client’s superannuation account, they will need to determine which components of the client’s total fee package meet the Sole Purpose Test and which do not.
Finally, any blanket industry-wide guidance around what services should or should not be charged to superannuation should be treated with caution. At Peloton, we typically encourage firms to use a menu-driven approach to establishing fee levels, based on 18 different service categories. However, determining whether each of the 18 service categories meet the Sole Purpose Test from the top-down is very difficult, as it depends not only on the subtle differences in each Financial Advice firm’s Client Value Proposition and Service Delivery Model, but also on the unique needs and circumstances of each underlying client.
This leaves Financial Advice firms with some important decisions to make. Assuming that ignoring the implications of the Sole Purpose Test is no longer an option, then we are left with either ceasing the practice of charging advice fees to superannuation funds altogether or to establish clear firm wide policies on how to assess and allocate fees for each unique client. The former method is simple, but may result in sub-optimal outcomes for clients; whilst the latter introduces extra complexity into the fee setting process, with best-practice implying additional governance controls and internal-audits to ensure adviser compliance.
To assist firms, Peloton have just released a new version of our fee calculator – which not only includes all our renowned menu-based fee setting functionality, but now also allows Advisers to consider the Sole Purpose Test and allocate fees to superannuation on a service-by-service basis. All individual decisions can be easily tabulated, summarised and inserted into a Client Service Proposal or SOA at the click of a button. The Financial Advice firms we are currently working with have made it abundantly clear that this kind of assistance is not available to them elsewhere in the marketplace presently and is desperately needed to navigate an ever-more challenging regulatory environment.
Accountantsdaily, Advisers warned on superannuation advice fees scrutiny, accessed on 28th October 2019 at https://www.accountantsdaily.com.au/smsf/13353-advisers-warned-on-superannuation-advice-fees-scrutiny
APRA and ASIC, Oversight of fees charged to members’ superannuation accounts, 2019.
Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Volume 1, 2019.
SMSF Adviser, Advisers warned on sole purpose breach with advice fees, accessed on 28th October 2019 at https://www.smsfadviser.com/news/17350-advisers-warned-on-sole-purpose-breach-with-advice-fees.
SolePurposeTest, How much tax does a Non-Complying SMSF pay? accessed on 28th October 2019 at https://www.solepurposetest.com/articles/much-tax-non-complying-smsf-pay/
SuperGuide, What is the sole purpose test, and how does it work? accessed on 28th October 2019 at https://www.superguide.com.au/smsfs/what-is-the-sole-purpose-test-and-how-does-it-work