Take Heron for conflict of interest headache

The flip side of financial services' perpetually evolutionary nature is, unfortunately for investors, the creation of unhealthy side effects or 'social ills', such as conflicts of interest and a lack of independence, says Christopher Butler, managing director and one of the founders of fledgling actuary and advisory firm The Heron Partnership.

Given these market imperfections Butler believes that it is the responsibility of the industry to take decisive voluntary action to counter such unhealthy situations - which arise primarily as a result of mergers, acquisitions and alliances - before regulators or the Government step in and force a company to act anyway.

"I don't think it's an issue for government and the regulators. It's a matter for the players in the industry to actually make decisions in an environment where it's not forced upon them... The industry has a responsibility, so why wait and then be forced to act?" says Butler.

Butler, who helped establish The Heron Partnership in mid-July this year with former NSP Buck executives John Smith and Wendy Barton, has identified three particular employer and trustee qualms about the state of the industry.

"Firstly, there is a perceived lack of independent advice available in the market... Secondly, there is criticism over the level of fees charged by traditional asset consultants and thirdly, the fact that most asset consultants tend to provide advice but walk away at the implementation stage is frustrating for many people," he says.

Lack of independence is the biggest concern of employers and trustees, he adds.

"There is a void of independent consulting in financial services and superannuation. People are concerned about bias and conflict of interest as most of the traditional consultancies are attached to global companies, and in particular organisations eager to increase their assets under management," he says.

Butler also stresses the need for stringent corporate governance standards to safeguard member investments.

"The major challenge going forward will be to focus on good corporate governance and risk management. I say this because the market aggregation taking place is creating fewer but much larger entities.

"If something goes wrong with a large master trust or industry fund a hundred thousand people will be affected, so there has to be stronger requirements on the separation of powers," Butler says.

Therefore, Heron advocates that funds (most of its clientele are corporate funds) appoint transparent service providers which don't have conflicting interests.

"Our view is that the group providing actuarial advice should be separate from the administrator, just as the group providing asset advice should be separate from the investment manager," he says.

Butler adds that the board of directors of master trusts and industry funds - given that these will be the main force going forward - must be 50 per cent independent as they cannot have directors that are all employees of the sponsor.

Heron, which recently expanded beyond its Melbourne base by opening its Sydney branch, offers advice to medium to large corporate funds and "a handful of institutions".

Recently, the Superannuation Trust of Australia announced that it had appointed Heron as its actuary, but besides that, Butler prefers not to reveal the names of its other clients.

"We don't do asset consulting. Essentially what we provide is advice for medium to large employers and superannuation trustee boards on their superannuation and financial employee benefits.

"We take very much a hands on approach to implementation and outcomes. We deliver advice, make strong recommendations as to how they should proceed, and then we work with them to implement that advice," Butler says.

Butler adds: "Groups responsible for running tender processes need to understand what an individual employer wants, and keep in mind that a company isn't just about super. Companies have HR requirements, finance requirements, and also strategies outlining their vision and business plans for the future."

Because of this, Butler says any outsourcing solution must take all the above into account to ensure a sustainable fit for companies going forward.

"We've won four to five tenders over the last few months and we're finding that there are different requirements for different employers - it's not just about super," he says.