Fabian Ross says superannuation providers are recognising the growing importance of financial advisers in securing the retirement needs of their members in an increasingly complex world.
There are significant obstacles to community acceptance of the need for, and value of, professional financial advice. This paper addresses these issues, as well as the significance of appropriately structured education programs, which outline the importance and benefits of advice for superannuation fund members. Community perception Many Australians wait until they reach their mid-50s before seriously looking at their retirement prospects. They then realise they are not able to make up lost ground to fund their desired retirement lifestyle. A fundamental principle in superannuation savings is that early decisions pay off in the long run. Australians are waiting too long to make important decisions relating to their superannuation savings which, without expert advice, can lead to ad-hoc, ill-informed decisions. Research commissioned by GESB has identified many factors that stop fund members from accessing professional financial advice: 1. Family is the primary source of advice Australians are twice as likely to seek advice about superannuation from family members than from a professional financial adviser. Some 34 per cent of Australians preferred to seek advice from family, as against 16 per cent who said they would visit a professional financial adviser.
Of those who had never sought advice from a financial adviser to help them with their superannuation, one in three (30 per cent) said they preferred to make their own decisions. There is an inherent danger in seeking financial advice primarily from family members. Whilst sometimes they put savers on the right track, they often fail to have a detailed understanding of the member’s own personal situation, including the member’s wants and needs. It is rare for family members to have spent time putting a detailed plan in place, particularly in light of the increasing number of superannuation strategies; and any advice often reflects what the family member has done in his/ her own circumstances. A qualified and experienced financial planner will seek to understand a member’s unique individual circumstances and tailor a plan and strategy to meet those needs. 2. Lack of funds/earnings capacity seen as major obstacle Superannuation savers often believe they do not have enough wealth to justify hiring a professional financial adviser. Our research found that around one in five Australians (18 per cent) believe they do not earn (or have enough) money to warrant hiring a financial adviser.
One in six (16 per cent) said their financial situation was too simple to require an adviser. This creates a major psychological barrier and potentially starts a cycle where savers fail to move into higher brackets of wealth because they did not seek professional advice. 3. The public underestimates the true cost of financial advice Our research also found that nearly half (44 per cent) of Australians believed it was appropriate to pay less than $500 for a five-year financial plan. Fewer than a quarter (22 per cent) thought paying between $501 and $1500 was appropriate. Just 1 per cent thought $3001 to $4000 was a fair price to pay for a five-year financial plan. The Financial Planning Association of Australia (FPA) has said consumers can expect to pay, on average, $3600 for a complex financial plan (Note 1). A major factor in the disconnection between public perception of value and the actual cost of providing comprehensive financial advice is the widespread hidden commission payments to financial advisers by superannuation providers. This indicates that significantly more needs to be done to help consumers understand the true cost of financial advice. 4. Confusion over use of financial advice Of those surveyed, only two in five (40 per cent) expect to follow a financial plan precisely and update it each year. A further third (34 per cent) expect to follow only parts of the plan. One in ten (10 per cent) said they would not expect to get any useful guidance from a professional financial plan.
Risks are increasing Amidst the cultural and psychological barriers to consumers seeking professional financial help, there is actually a growing need for informed advice in superannuation. There are a number of reasons for this: 1. Increased life complexity The lives of Australians are becoming increasingly complex. A few decades ago, the typical lifecycle could be depicted as follows: • graduation from school; • further education; • marriage; • wealth accumulation; and • retirement. However, multiple marriages, children from those marriages and numerous careers are now increasingly common. This complexity flows through into superannuation planning. For example, divorce and remarriage can see a member move back to the start of the accumulation phase. The growing complexity of modern life increases the need for superannuation savers to become more educated about what phase of life they are in and what they need to do to maximise opportunities through superannuation.
2. Longevity risk One of the major issues facing superannuation savers and providers is longevity risk. People are living longer, which increases the level of superannuation needed to fund a longer retirement. It is also expected to increase the complexity of superannuation sought by members in the future, including a growing demand for annuity-style products that guarantee income flow through retirement. This poses additional challenges for super providers, but also members themselves in making decisions about what they need to do to provide for their longer retirements. 3. Legislative risk Superannuation savers also face growing regulatory and legislative risks. With governments moving into deficit in the wake of the global financial crisis (GFC), there is an increased likelihood that superannuation benefits will be pared back. This raises the risk of members implementing strategies, only to find they are no longer relevant shortly before their retirement due to legislative changes.
