There’s nothing more likely to cause your blood pressure to rise than when you get hit with a stack of fees – and it gets worse when it looks like you’re getting zero in return.
I’m talking about fees that are based on nothing more than the total value of the money in your superannuation account, year after year. So, the more you save, the more you pay.
Known as trailing commissions, these ongoing fees are charged on non-industry superannuation funds, life insurance policies, and a range of other financial products.
If a financial advisor set up your superannuation account before July 1 last year, trailing commissions are paid to them.
And if you dealt directly with the investment or superannuation provider, those trailing commissions are paid back to the provider, not you.
Rates can range between 0.4 per cent and 1.2 per cent per year, calculated on the balance of the amount – so, if you have $200,000 in a fund, or several funds, that charge one per cent in commissions, you’ll be paying $2000 a year in fees.
Nevertheless, all advisers should be paid for the work they do on behalf of their clients, whether it’s via upfront fees or through a series of trailing commissions. Even critics of commissions agree on that.
The failsafe way to check is to ask your adviser if there is any trail coming back to them.
The negative side of trailing commissions, which advisers have found hard to shake, though, is that they are tempted to choose investments that pay high fees, regardless of the needs of their clients. The actions by enough advisers of pocketing these commissions and not contacting their clients from one year to the next was one of the main reasons for the government making changes to the financial advice regulations.
If that’s your situation, one option is to nominate one of an increasing number of firms that will collect the trailing commissions on your behalf and rebate some – or all – of the commissions to you.
Payment for advice
The other side of that equation though, is that you should use some of those savings to pay for financial advice.
“It’s unreasonable to expect any adviser to give advice for nothing,” says David Calvert, managing director, superannuation, at Dixon Advisory, one firm that does offer to rebate trailing commissions in favour of fee for service advice.
“People should consider the quality of service that they are receiving from their financial advisor, they should work out what fees they are paying to their advisor in total, and then weigh up whether the service they are receiving justifies the fee.”
“The failsafe way to check is to ask your adviser if there is any trail coming back to them.
“The other, more difficult way, is to approach the fund which is named on your statement and ask what fees they are paying a certain adviser – the amount in total and the rate.”
What do you get for your fees?
So, having established that your super balance is indeed paying out trailing commissions or adviser service fees, you need to make the most of ongoing assistance. This should include, at the very least, an annual review.
Generally speaking, your super fund will not give it back to you.
This review needs to consider whether your funds are invested in a way that you are comfortable with (your ‘risk profile’); the fee structure of your account, compared to alternative fund options; the strategies available to you to maximise your super; and the type and amount of personal insurance that you need (the premiums of which can be paid for by your super fund).
“Often investors do not receive this type of service from the agent listed on their fund statements despite the fact that there are trailing commissions being paid to this agent,” says Hamish Pym, chief executive officer of iRefund, a firm that specialises in diverting trailing commissions back to investors, minus a capped annual fee.
Unfortunately, there is no way to simply “turn off” the trailing commissions as the trailing commission costs are built into the fee structure of the account.
“People can ask to have the existing agent removed from their account but this will result in the superfund receiving the trail commissions,” says Pym.
“Generally speaking, your super fund will not give it back to you.”
He added that trailing commissions and renewal commissions often apply to personal insurance policies, such as life insurance, total permanent disability, critical illness and income protection policies (which may or may not be paid out your super), income protection and trauma insurance policies.
Action plan: On the trail
If you are paying trailing commissions, here are some points to ponder:
• Ensure that you are getting good value for your total fees – generally this means, at the very least, comprehensive annual reviews to ensure you understand and agree with the investment strategy your adviser is following;
• Switch the balance of your super into a fund which does not pay trailing commissions, such as any industry super fund to reduce the cost of your fund; while it may result in a greater super balance for when you retire, you should still pay for advice;
• To avoid switching superfunds, and have trailing commissions sent to you as a cash payment, arrange for a licensed rebate service firm to collect these commissions and refund them to you, less their own fixed fee.
Source: iRefund, Commission Rebates
Bernard Kellerman is an independent finance writer, bank-watcher and ex-accountant.