Working with a client (Rod) recently highlighted the variability of ethics in the finance industry and a reason the public is often sceptical towards large financial institutions.
Rod is planning to retire in the near future, and so part of our advice was conducting due diligence on his superannuation fund to confirm it remained suitable for him. Having contacted the fund provider (one of the largest in Australia) we were sent a copy of the Product Disclosure Statement which provided a breakdown of the fees that were applicable in percentage terms. We used these to calculate a dollar figure for Rod, so that he could understand what he was paying and what he was receiving for these fees. His fund was in fact quite an old product and wasn’t able to offer him a pension when he eventually retired so it was necessary for us to look at alternatives for him.
We recommended an alternate fund which would allow him to draw an income in retirement, and provided a comparison of the features and costs of the two. We advised him that according to our calculations he would be saving nearly 17.5% p.a. in fees, even after allowing for the costs of our advice!
Rod took one look at our calculations for his fund and pulled a recent statement from his bag that listed a very different dollar figure for the fees he had paid, one that was substantially lower than our estimates – a rather embarrassing situation to find ourselves in!
There were a number of other elements to the advice beyond price differences, but this issue threatened to overwhelm those and call into doubt all of the advice I was providing.
After the meeting concluded I started investigating, and contacted the existing provider to understand how they had calculated their figures.
It took six phone calls over the course of nearly a week, and required taking my question to the trustees of the fund before they could provide me with an explanation of how they had calculated the fees they had charged!.
It turns out that the percentage charges were correct. What they had done after these were calculated was to take into account the tax benefits available to the fund (because the fees are tax deductible to the superannuation fund) and only report the after tax costs which were substantially lower.
While technically correct it is certainly not transparent as there is no obvious relationship between the percentage charges to the fund and the dollar costs being reported. It was so confusing that even their own staff found it difficult to explain. Which makes me wonder what hope does an investor have of understanding it, and what are the ethics of this?
In situations like this I ask myself how I would feel if my mum was to be treated in this way? I think it’s a pretty reasonable test of fairness and ethics.
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This information is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial planner and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.
