Three Government reviews will have a big effect on the planning landscape, says Richard Weatherhead

Much has already been written about the various preliminary reports from the Cooper Review, the publication of the Henry Tax Review and the Government’s response to the Ripoll inquiry – The Future of Financial Advice.

Adviser groups and product providers are rapidly reassessing the strategic opportunities and challenges in a new environment. So perhaps now is the time to take out the crystal ball and speculate about the long-term impact on our industry if the proposed changes come to pass. Three of the main affected sectors are superannuation, managed investments and risk insurance, with the changes to advice transcending all of them.

Superannuation

The much feared attack on superannuation “perks” for the “wealthy” no longer appears likely to occur and the Government has found room to effectively eliminate contributions tax for those earning less than $37,000 per annum (helped by the proposed new resources tax).

Nevertheless, the $25,000 concessional contributions cap for those with balances above $500,000 (or $50,000 for those with assets below $500,000) from 2012 will lead to an increasing number of “dual investment strategies”, with part of the client’s investments being held in super and the remainder outside super. This will provide a long-term boost to wrap platform and separately managed account (SMA) providers. It will also tip the scales back towards risk insurance being written outside super rather than inside it, so that risk insurance premiums do not eat up part of the member’s available concessional contributions.

The three broad superannuation categories of MySuper, Choice and SMSFs will develop very differently.

MySuper

MySuper will become the default superannuation vehicle for many employees, particularly those who do not seek financial advice. Competition will drive MySuper fees down, perhaps significantly lower than the 1 per cent per annum overall fee threshold set as a target by the Federal Government.

Most award superannuation will flow to MySuper accounts and these will have deferred member sections, making Eligible Rollover Funds (ERFs) redundant. MySuper providers will offer intra-fund advice, either packaged into the base fee or for a nominal fee for each single piece of advice, in the range of $250 to $500. Some dealer groups may forge alliances with superannuation funds to provide advice services in this area. Full advice will be available to MySuper members on a fee-for-service basis, but in practice this will rarely be taken up.

The governance surrounding MySuper providers will be strengthened significantly as a result of the Cooper recommendations. Changes will include:

  • An annual review by the trustees to confirm that the fund has sufficient scale to provide optimal retirement savings for members; and
  • Avoidance of cross subsidies between members and a formal allocation of costs between MySuper and Choice super categories. This will accelerate the consolidation of superannuation funds, giving economies of scale across the industry, thus further driving down costs to members.

Choice super

Detailed proposals regarding the regulation of Choice superannuation funds have not yet been published. However, these are likely to be less stringent than those proposed for MySuper on the grounds that members in this category have, by definition, elected to join a Choice fund and can therefore be assumed to have carried out their own research or received professional advice before making that decision.

Nevertheless, the Future of Financial Advice proposals will mean that financial advice relating to Choice superannuation can only be provided on a fee-for-service basis with an annual opt-in for advice by members. Commissions will still be permitted for risk insurance but this will be the subject of further consultation.

We can expect significant changes to pricing structures for Choice superannuation. This is because members will be able to compare investment option costs with those available under MySuper products. Thus, competitive forces will drive down costs for members, and product providers will have to justify the additional cost of Choice products in terms of the additional services provided. In particular, the “flipping” of Choice members out of corporate sub-plans into retail superannuation products at higher fees and higher insurance charges is likely to cease, except to the extent that employer subsidies of administration costs are removed for those who have left their employment.

Choice superannuation will be a significant area of activity for advisers, and a key focus of advice will be on the additional services, investment options and insurance products available in a Choice environment. Advisers will develop ongoing relationships with clients through regular contact, providing annual review services for a modest fee.

Employer Super

Relationships between advisers and their employer clients will change radically. Many employers will conclude that their staff will be better served through a MySuper account and there will be significant conversion activity, reducing the impact of the grandfathering provisions under The Future of Financial Advice.

The opportunities in this sector will be to provide comprehensive advice to directors, managers and senior executives within employer firms; intra-fund advice services to employees within MySuper accounts; and overall strategic superannuation advice to the employers, on a fee-for-service basis.

SMSFs

The proposed changes to self-managed super funds (SMSFs) are relatively benign.

Accountants will lose their exemption from ASIC licensing. This may lead to further consolidation between advice practices and accounting firms, although many accountants will simply obtain their own licences.

Advisers will continue to be able to provide tax advice under an extension of the current exemption from registration under the tax agent regime.

The long-term evolution of the SMSF market is likely to be influenced more by demographic changes than regulatory changes. Many current SMSF holders are reaching their more mature years (55 per cent of SMSF members are aged 55 and over) and the initial attraction of running their own SMSF will wane, particularly if:

  • Superannuation platform providers launch cheaper products which provide comparable functionality; and
  • The ban on the “exotic” assets proposed by the Cooper Review comes into effect.

Overall, the SMSF market will be a fruitful ground for advisers who can demonstrate the value they add by taking the administrative burden away from members and recommending products with comparable benefits, often at a significantly lower cost.

Managed Investments

Managed investments will be significantly impacted by the Future of Financial Advice changes. Products will be redesigned to remove fees currently required to fund commission payments – this will affect both initial and ongoing product fees.

The recent increase in prominence of indexed funds, including exchange traded funds (ETFs), will continue, particularly through advisers who offer portfolio management services – essentially taking some of the margins currently enjoyed by fund managers through advice fees and using sector-based, including indexed investment vehicles, to implement recommended investment strategies.

In this way they will also be able to demonstrate that the overall cost of product fees and advice fees is reasonable relative to the overall service provided on an ongoing basis. For example, product fees for ASX300 ETFs are currently around 0.30 per cent per annum.

Risk Insurance

The longer-term impact of the changes for risk insurance will depend on the outcome of the promised consultation period under The Future of Financial Advice and the approach taken to commissions under Choice superannuation.

If a move to a fee-for-service regime were contemplated for risk insurance it would raise many issues that would need to be considered and resolved. For example, a key part of the overall service provided by the adviser occurs at the time of claim, which, thankfully, only happens for some, and not all, clients.

Richard Weatherhead is a director of Rice Warner Actuaries

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