Conflict of interest a superannuation "time bomb"

Like the accounting profession over audit and consulting

Australia is facing a "ticking time bomb" in superannuation, stemming from a conflict of interest that arises when a superannuation fund hands over its advisory services, administration and asset management to the one consulting firm.

This is the view of one of the superannuation industry leaders, Christopher Butler, who has just formed The Heron Partnership. "Superannuation could face the same outcry that has hit the accounting profession over the conflict involved in providing audit and consulting services to the one client," claims Mr Butler, Managing Director, Heron. "The equivalent thing is happening in super when one firm provides advice, administration and asset management.

â??We shouldnâ??t be exposing Australiaâ??s retirement savings to this kind of risk,â?? he said.

Employers and trustee boards are rightly concerned in the wake of major problems facing the accounting profession and the general business community over blurring between audit and consulting practices, according to Mr Butler.

He predicts that superannuation will shortly experience the same scrutiny regarding advisory firms who also provide asset management for the same client.

"There is emerging evidence that employer and trustee board directors, along with senior management, are concerned with conflict of interest through the provision of superannuation advice", he said.

He explains that it is common for services like fund administration, consulting and asset management to be provided through the same consulting company.

"Conflict arises when the consulting company starts recommending itself for asset management, or for fully packaged services under what is assumed to be an independent position", he said.

"Almost all such consultancies in this field are motivated to capture assets under management and therefore improve their organizations share or sale price.

"For every $100m of assets under management, the value of the consultantâ??s business increases by $3 to $6 million, thatâ??s the bottom line. Unfortunately, this will be a revelation to the Trustees and members of superannuation fundsâ??, Mr Butler said.

Mr Butler claims that advisers who are independent from the ultimate supplier of services are more likely to act in the clientâ??s best interest, and predicts that trustees and members will demand transparency once they get wind about a possible conflict of interest.

"Consumer demand for excellence in the management and supply of all services will mean that the 'one stop shop' approach will need to move to the next level", he said.

"There will be an increasing number of independent advisory firms emerging over the next few years. The Heron Partnership intends to be at the forefront of this trend."

One of the Heron Partnerships founding directors, John Smith, reiterated the point: "Boards are demanding not only independence but also the clear perception of independence. It is now essential for the superannuation industry to access uncompromised advice."

Another of the founding directors, Wendy Barton, suggested that the worldwide spotlight on audits made it less likely that trustees and members would accept conflict of interest or anything thatâ??s not in the funds best interest. "At the end of the day, what clients require but are rarely given is independent advice and accountability", she said.

The Heron Partnership is an independent consultancy to Australia's superannuation industry. It was launched in July 2002 and challenges existing consultancy practices through providing an alternative of independent advice, low fees and greater accountability for implementation.