There are a number of ways a financial adviser can educate their clients about how much money they may need to achieve their objectives in retirement. One such way is to conduct a superannuation forecast.
According to Australian Securities and Investments Commission (ASIC) Regulatory Guide 229, clients who receive some form of superannuation forecast are more likely to engage with their superannuation. Forecasting and identifying an achievable or realistic capital target is a key aspect in assisting a client to make an informed decision.
It is not unusual for a client to turn up to an adviser with:
• Little or no idea about how much they have in their superannuation;
• Multiple superannuation accounts, not including lost superannuation; and
• An expectation that they won’t have to make any changes to their standard of living in retirement.
Formulate a plan
Once a client’s objectives have been identified and quantified, the adviser can then formulate a plan to help the client achieve them.
When a client’s objective cannot be measured, it becomes difficult for the adviser to determine whether or not it is achievable and whether any other action will need to be taken. If a client cannot quantify an objective, then the adviser must help the client explore what they want or can achieve and over what timeframe.
The adviser has a duty of care to the client to ensure that the client is fully aware of how much money they will require in retirement, particularly if they wish to maintain a specific standard of living. The challenge for many advisers is how do they educate the client and tell them what they need to hear and not what they want to hear? Especially when the client’s expectations outstrip what the balance of their superannuation fund can realistically provide.
A superannuation forecast must have regard to fees, costs, earnings, inflation, taxation, the amount of contributions, salary increases, anticipated retirement date, life expectancy and any insurance coming out of the superannuation fund. All forecasts should be presented in both today’s and future dollars.
In ASIC Report 279, Shadow Shopping Study of Retirement Advice, the regulator is of the view that good quality advice provides information about cash-flow projections and how a strategy would help a client achieve their income and expenditure objectives, or how long their money would last in retirement.
Regular reviews
It is imperative that the adviser regularly reviews market conditions, the client’s circumstances and investments to determine whether or not the forecast requires updating. However, volatile market conditions may require more frequent reviews, particularly if a client has expressed concern about their investments.
Some advisers have expressed concern regarding liability and being held to a superannuation forecast when a forecast turns out to be wrong or a client incurs a loss. The reality is that a forecast can only ever produce a likely return, and this must be communicated to the client in language they can understand.
An adviser needs to have regard for the variables involved and the assumptions they have made about future conditions. They must warn their clients that any assumptions made are only assumptions and that forecasting relies on known factors and unknown factors. A file note should contain details about the warning provided, including the client’s response.
Reasonable basis
In the event that a forecast has turned out to be incorrect, an adviser should be able to demonstrate the reasonable basis for their assumption. For example, they should be able to produce the research they relied upon.
Decision 17379 from the Financial Ombudsman Service (FOS) found that the forecasting information and calculations provided to a client were of little or no use because they:
Failed to properly explain the discrepancies in the calculations about the initial investment and the target capital over a five-year period; and
Contained a calculation that was totally meaningless to the client. It contained information about an investment with an initial amount of $30,000 and how it would grow without contributions over five years. However, the amount the client wanted to invest was actually $39,787.
FOS found the advice misrepresented and overstated the returns the client could expect to receive. FOS opined that the adviser failed to exercise due care and skill and that the licensee should repay the client all the fees and commissions previously paid. FOS ordered that the client be compensated for her legal expenses as a result of the seriousness of the misstatements made by the adviser.
In summary, advisers who want to provide good quality superannuation advice must include forecasts as part of their advice. The forecasts must be based on client-specific information such as the amount to be invested, the objectives, inflation and taxation, if the forecast is going to have any real value to the client. Forecasts must continually be reviewed to ensure they are on track with a client’s stated objectives.
