Just before last Christmas a report was released by ASIC looking at why most Australians put off seeking financial advice.
In simple terms there is often a big gap between what the financial services market sells and what most people want. Many people want some factual single-issue advice; but typically the market only offers full-service, holistic financial plans. As a consequence, there is a gap between the cost of advice and what people are prepared to pay. While a full financial plan can cost thousands of dollars, consumers are only prepared to pay $200 to $300 at the most.
The study also identified mistrust in the advice people received, because of the role of commission selling, compounded by low levels of financial literacy, which make it difficult for consumers to assess the quality of the advice they are receiving.
The Future of Financial Advice (FoFA) reforms proposed by the Government recognise that financial advice comes in different forms and that the supply of advice must match demand.
A first step in recognising the importance of advice is acknowledging its different forms. One of the least recognised, yet greatest strengths of Australia’s retirement income framework is the in-built financial advice incorporated into the super system itself. We take this feature for granted, but it is absent in many overseas retirement incomes systems.
It is worth looking at the number of decisions an Australian employee has to make about saving for his or her retirement compared to a counterpart in the UK or US.
The decision to save for retirement is made for us, through compulsion. The minimum amount to save is set at 9 per cent of wages, but will increase to 12 per cent if Government reforms are successful. While most employees have the right to choose their own super fund, workplace free credit annual report can stand in for money, but it is not. default funds mean we do not need to choose. The vast majority of employees do not choose their own super fund but stick with the workplace default fund.
If no investment option is selected, our investment decisions are made for us, through default investment options. These are typically “balanced” funds designed by investment professionals and overseen by experienced trustee boards. Finally, almost all workers have a default level of life insurance through their super.
These defaults, including the built-in advice, do not make our system perfect, but they provide a very solid foundation. The recent MySuper proposals strengthen the rules about workplace default funds and implicitly acknowledge the importance of built-in financial advice.
However, the MySuper proposals could be further strengthened – and the ASIC report into financial advice points the way forward. Initially, the MySuper reforms will not require default funds to provide their members with basic financial advice about their super fund. So while millions of workers are unconsciously benefitting from the design of built-in advice, many are now seeking further advice about the basics of their super.
Members regularly contact their fund asking whether they are contributing enough to their super; whether they are eligible for the co-contribution scheme; whether they have enough insurance; whether they are in the right investment option.
Members are seeking advice about the basic structure of the superannuation system they are compelled to save in. It is part of the evolution that many will make from compulsory savers to informed investors.
This type of financial advice is called “intra-fund” advice. It is financial advice that relates only to a member’s existing interest in the fund.
For the eight in 10 workers who do not choose their own super fund, it makes sense that the workplace default fund should be required to offer this basic service. In return for the privilege of receiving the super savings, there should be an obligation for the super fund to provide, as a basic service, advice about the fund.
David Whiteley is chief executive of Industry Super Network.
