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Commission says trustees “alone in the dark with our money”

The Financial Services Royal Commission continued its forensic examination of commissions and fees in its Round 5 hearings on superannuation this week. Senior Counsel assisting the Commission, Michael Hodge QC, said superannuation members relied on three safeguards to protect them: regulators; super fund member engagement (which is low); and super fund trustees. Said Hodge:

“What happens when we leave these trustees alone in the dark with our money?”

The trustee’s function sounds simple, with a ‘sole purpose test’ giving a primary role to ensure a super fund is maintained solely for the benefit of its members. As Michael Hodge asked, how is the payment of a commission in the best interests of a client and how does it meet the sole purpose test?

That’s where the problems start. If a for-profit business such as Colonial First State, AMP or MLC is running a superannuation fund, it does so to make a profit, not to only serve the members. It charges fees which reduce returns to members, creating tension in the business.

In my experience working in funds management, the trustees take their responsibility seriously. They ensure the legal rights of members are upheld, but it becomes more problematic when there are tradeoffs between members' returns and company profits. Trustees are also dependent on fund managers and administrators giving them advice, which is potentially conflicted.

The wealth management industry has clung on to commissions paid to advisers by product manufacturers, and it lobbied hard for grandfathering under FOFA. Previous evidence to the Commission revealed that AMP still earns 70% of its advice revenues from commissions grandfathered in 2013. Any steps which result in commissions no longer being grandfathered can have a severe profit impact. When management wishes to change a fund but retain commissions, the trustee is in a tough position supporting the decision due to the potential benefits for clients.

Most of the Royal Commission on days one to three in Round 5 highlighted this dilemma, and even dragged into day four. Hours were spent going round in circles with two NAB/MLC executives as Michael Hodge tried to dig out definitions and answers, met commonly by "I don't recall".

NAB/MLC hangs on to the commissions  

Paul Carter, an Executive General Manager in NAB’s wealth division from March 2013 until February 2017, gave evidence that management believed in 2012 that a Plan Service Fee (PSF) could be charged to members without a linked adviser. The Commission argued that MLC had convinced itself, and also the trustee, that providing online tools and telephone-based advice services without a linked financial adviser, warranted charging the fee. Paul Carter admitted,

“I believe that management had that mistaken belief when they originally put the proposal to the trustee.”

MLC’s executives spent much of 2016 deciding whether it could keep the fees, which both Paul Carter and Chair of NAB's superannuation trustee, Nicole Smith, defended as going through “due process”. Michael Hodge said management was “hopelessly conflicted” in making this decision, and should not have taken the best part of a year to decide.

As with CBA in Round 2, the Commission has now forced the retail funds to concede they cannot charge fees where an adviser was not linked to the client account and providing an advice service. NAB/MLC first acknowledged that between September 2012 and January 2017, $35 million in PSFs were incorrectly charged to 220,460 members. NAB also announced in July 2018 that it would stop deducting a PSF from the MLC MasterKey Personal Super accounts from 30 September 2018, with 205,000 members refunded $87 million.

That’s $120 million so far which no doubt many executives enjoyed as a boost to revenue and bonuses for many years after 2012. Indeed, a hard decision requiring due process.

Commission attempts to understand the fees

During the hearings, Michael Hodge (MH) led Paul Carter (PC) through a cornucopia of fees, including a cash account with total fees of $893 on $1,014 earned. The link to the section is here, page P-4201, and all the transcripts are here.

MH: You will see the various fees paid in relation to this investment wholly in cash. And you see the first amount is an administration fee of $554.32? So just even if we pause on that, our understanding is that this means that for investing in cash with a return of 1.2%, you will pay on the first $49,999 an administration fee of 1.05%?

PC: Yes

MH: And then you will see there’s an adviser contribution fee debited? Now, just again so we can understand this, that adviser contribution fee is the fee that’s debited on any contribution that’s made in in some percentage. And that’s the fee that you think is a – is actually a commission?

PC: Correct.

MH: It’s not a fee at all?

PC: Correct. This is a legacy arrangement with a commission.

MH: All right. And then you see there’s government levies, and the operational risk reserve cost.  That’s – the operational risk reserve, that is a fee that’s charged – or a cost that was charged so that the trustee could build up its operational risk reserve. Is that right? 

PC: I believe that is the case. 

MH: And it was a mandate from APRA, I think, about requiring that there be an operational risk reserve. And then you will see there’s then a Plan Service Fee which is $186.47? And that fee of $186.47, that’s the fee that’s being paid so that a financial adviser is available. Is that right? 

PC: Yes. 

MH: Then there’s a Stronger Super implementation fee of $65?

And later, it’s even worse, as the adviser contribution fee could be as high as 5.88%.

Clients left without an adviser

Here’s the exchange at the Royal Commission on 6 August 2018 which shows how some clients were left without an adviser but were still charged an adviser contribution fee, or a commission:

MH: And if we just assist the Commissioner to try to understand what some of the fees are that apply in relation to MasterKey Business Super, the first is the adviser contribution fee? And that is a fee agreed between the adviser and the employer?

PC: Yes, and the employer, yes.

MH: And there are a range of six options as to what the employer and adviser can agree is going to be that adviser contribution fee? And the highest of which is 5.88%?

PC: Yes. 

MH: Now, one of the things I was hoping you could help us with is you see how there are two columns, one is Fee Percentage and the other is Commission Percentage? Can you explain why there are those two columns, one is fee and one is commission, but they have the identical amounts there? 

PC: I believe one is indicating the fee that the customer pays, and then the amount then that the adviser receives, which are the same.

MH: All right. Insofar as it’s a fee, can you tell the Commissioner what it’s for? 

PC: The adviser contribution fee is best described as a commission. 

MH: And that – you’re saying that because there’s no agreement, as you understand it, to provide any service for it? 

PC: Correct. 

MH: So this is a commission then agreed between the adviser and the employer. This percentage is deducted from any contribution made, any superannuation contribution made for each employee? 

PC: Yes. 

MH: And this we can see is in the MLC MasterKey Business Super. But you see it says including MasterKey Personal Super. So does the adviser contribution fee carry over once an employee leaves the employment of the employer? 

PC: Yes.

What happens to commissions if funds change?

At one stage, MLC wanted to transfer clients from smaller legacy funds into larger funds for efficiency and cost reasons, but they realised this might affect the commissions grandfathered under the FOFA regulations. How could commissions be legally retained? MLC executives needed to convince the trustee that paying commissions was in the best interests of clients, especially problematic since many legacy clients were not receiving financial advice.

A vital part of MLC’s decision to keep paying adviser commissions was that advisers might transfer their clients out of MLC/NAB funds if commissions were removed. The obvious inference was that advisers may not be acting in the best interests of clients. Paul Carter admitted there would have been a financial impact on NAB if commissions were turned off.

Michael Hodge pushed Nicole Smith on why the trustee agreed to keep paying grandfathered commissions to financial advisers. She said the issue was “heavily debated” by the trustee board, but they thought it was likely advisers would tell clients to leave MLC. If members left an MLC fund, the super product might become uncompetitive in the market, to the detriment of members. She agreed MLC management was in a conflicted position, but the trustee's role was one of “governance and oversight”, not getting involved in management decisions. She told the Commission:

"I'm not going to comment on when and how an adviser acts in a member's best interest. We thought the risks called out were real … On balance the trustee believed that grandfathering commissions was in the best interests of members."

Not much time to made the mud clearer

As Michael Hodge said during proceedings: “All right. I hope that’s clear as mud, Commissioner.”

To which an exasperated Kenneth Hayne replied: “Better than mud, yes.”

And given witnesses were being asked details about conversations that happened as far back as 2012, little wonder the most common response was, "I don't recall."

There was not much levity, however, towards the end of a testing day three, when Nicole Smith was asked if she was concerned that events could result in civil or criminal proceedings. Commissioner Kenneth Hayne said: "Did you think to yourself that taking money to which there was no entitlement raised a question in criminal law?" he asked her. "I didn't", she replied.

The Commissioner has only six weeks, until 30 September 2018, to deliver his interim report. Given how far they are behind schedule after spending three days with NAB, my bet is he’ll ask for an extension to the final reporting date of February 2019.


Graham Hand is Managing Editor of Cuffelinks. There are already hundreds of pages of transcripts this week, and comments are welcome on any incorrect interpretation above as much of it is "clear as mud".

Graham Hand
August 14, 2018

Exactly my point, across many subjects, in AFR tonight: "The commission has now spent the best part of 30 hours on NAB's fee refunds. Or to put in another way, about 30 times as much time dedicated to looking at how super is failing Indigenous Australians."

George Hamor
August 13, 2018

Perhaps the best thing that could possibly come out of the RC and other inquiries is that compulsory super is a crock and should be abolished.

I know, pigs may fly...

See Bill English's views regarding this as it applies in NZ.

August 12, 2018

If there is any take home moral to the story it is that investors are better off investing in wealth managers than with them.

To the extent the commission serves a useful purpose it may help to reduce executive hubris and improve the overall level of internal ethical decision making. Most people value their public reputation more than their bonuses and the spectacle will linger in people's minds for a while.

Additionally it should raise general public awareness and maybe improve the public's overall engagement with their super.

It is possible for the industry to wear two hats, including one as trustee but it requires top notch management.

When you consider that the average retirement balance is about $270k for men and $157k for women, it is not a laughing matter for millions of very real people.

And I don't like the sound of Chris Kelaher and meeting minutes 'scribbling' in board meetings when running a public organisation.

Former trustee
August 12, 2018

I am so angry. MLC said they wouldn't pay trail commissions. Rubbish. The big four using the drought as a way to garner support again. And everyone pointing fingers at ASIC when successive govts have reduced its funding exponentially and head count now over 600 less (about 1200 to do its work with 400 just doing revenue collection for the government). ASIC is the biggest revenue collector after the ATO.
And APRA doing a report on CBA as if they were not in part to blame, even though they had embedded supervisors.
And a senior compliance forum on BEAR recently where the speakers failed to see the requisite analysis as an opportunity to rake out law breaches. It makes my blood boil ...

Graham Hand
August 12, 2018

Hi Former trustee, Yes, the super industry has a lot to sort out, and while it's not fashionable to criticise the RC, it is missing most of it while it focusses mainly on one issue, trustee conflicted responsibilities.

Former trustee
August 12, 2018

Thanks Graham. I am passionate about the trustee duty thing. When I was trustee at a super fund, I was too interested in being independent and they decided that I was the problem and we parted company. A disgrace. From trustees demanding tickets to grand finals, to dozens of staff from the same super fund attending conferences, to appointing internal insurers rather than a proper tender, it sometimes astounds.

August 12, 2018

An all too common story I suspect.

August 11, 2018

My Aunt suffered depression and being 85 plus wasn't mobile enough to get out and about so trusted people with her PIN number at her nursing home.
Of course eventually about four or five thousand dollars was stolen from her account.
NAB refunded all of the money even though she was handing out her PIN number.
Sorry, found a place to put out a positive about banks

August 10, 2018

hi graham

I have been following the royal commission and I am sure you understand this stuff better than I do

the banks have been accused of charging dead people for advice.

however they are not expected to know when a person has died.

when they are notified by the executor that the person has died then the estate needs advice just as much as a living person.

so what is the crime that has been committed? I am confused.

charging dead people’s accounts would also apply to Telstra, Norton, McAfee, newspaper deliveries, gas bills, electricity bills and so on.

are all these organisations guilty as well?


Geoff F
August 11, 2018

The root issue is that it seems clear that banks & other financial institutions have been charging people - alive and dead - in many cases, for "services" when NO services have been provided.

As for gas, electricity, papers etc, a service is being provided when the person is alive. And when such person dies, the service is still being provided by the service provider, even though the original "receiver" of the service is no longer the person receiving the service ie. gas and electricity is still supplied to the house, papers still being delivered etc.

Trust this helps.

Geoff F
August 14, 2018

Per the weekend's Financial Review, pg 16 - "And in a sobering reminder that the Commonwealth Bank wasn't the only financier that continued to charge deceased people for advice, the NAB has confessed that in some instances advice service fees continued to be deducted from members' accounts, even though the bank or the trustee had been notified that the member had died."
This occurred despite the bank being told !
In my opinion this is arrogant and egregious behaviour.

August 09, 2018

Great summary of The Commission Graham.

August 09, 2018

I believe the Commission and Michael Hodge are doing a great job exposing in detail the practices of trustees even though he has examined just one fund. All I will state is that I am glad that my superfund does not have Nicole Smith anywhere near it. No - I do not want quantity of cases examined at the expense of a quality examination of a few cases.

Graham Hand
August 13, 2018

Good to see Adele Ferguson in today's AFR (back page) quote me in saying that the RC has many other issues it should focus on. The study of NAB/MLC has now taken most of Monday's (Day 6 of 10) hearings as well, as Andrew Hagger is asked the same question over and over again.

Graham Hand
August 09, 2018

At 1.10pm on Thursday, Nicole Smith finally leaves the witness stand. Except for about one hour yesterday, the first 3 1/2 days have been all on MLC, with Ms Smith in the stand every day for the last three. Just after 1pm, Michael Hodge put four propositions to her on the trustee not meeting its obligations and putting NAB/MLC ahead of members. Ms Smith denied every claim. NAB's QC was given the chance to clarify any points with his client, but did not ask any questions, despite the fact she's answered hundreds of questions. Mr Hodge then said the NAB/MLC case was not closed.

Having listened to most of the evidence for 3 1/2 days, I think the point of trustee conflict was made days ago, and uncovering every additional email, number and nuance has prevented many other issues being explored fully.

Finally, we move on to Ian Silk of AusSuper.

August 12, 2018

You said: "There's so much else it should address: performance reporting, fee calculations, rates paid on cash, valuations of unlisted assets, definition of 'defensive' assets (credit, property, alternatives), performance fees, active managers hugging the index, risk versus return, bid/offer prices, etc."

The RC is not about investigating all aspects of superannuation in two weeks! The Productivity Commission inquiry is in its third year of investigation into superannuation.

The RC has been given one year (with possible extension) to investigate all of financial services. It has been doing a fine job of exposing things which have been deliberately hidden on "conduct, practices, behaviour or business activities by financial services entities" which "fall below community standards and expectations". (see the terms of reference.)

Graham Hand
August 12, 2018

Agree they're doing a great job, but they didn't need three days with Nicole Smith to prove a point, plus NAB's Paul Carter and now Andrew Hagger. The RC has the ability to achieve more than the PC due to its public hearings. Here are the terms of reference, which are very wide. I'll let others judge whether the RC is going wide enough:

August 09, 2018

The Commission has spent four days on MLC, but isn't there an even more basic question for a trustee. Nothing to do with fee for no service or grandfathered commissions. Given the best interest duty responsibility of a trustee to a member, how does the trustee agree any fee charged to a member? The only way is a subjective assessment of the value of the fee, and given most active funds managers can't beat the index, it should be lowest fee for the relevant risk.

SMSF Trustee
August 09, 2018

Frank, I'm glad you're not a trustee of my fund! Simplistic dismissal of the possibility of any fund managers adding value and going for the lowest fee option is not what I want.

The best interests of fund members (and in my SMSF that's just me and my wife of course) is definitely served by having some active management fees. Most of the funds we use have outperformed.

I would hope that super fund trustees think similarly - and put the effort in to find the good managers.

Please don't criticise when the process you offer as an alternative is so naive and unjustified.

Besides, the Commission's terms of reference don't ask it to inquire into normal, accepted business practices, but to cases of malpractice. Perhaps they're spending so much time on this narrow range of questions because they haven't had any complaints about fees of 55 or 75 bps!


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