Financial advisers shouldn’t feel that super funds moving into retirement advice will outflank them. Advisers will survive, and likely prosper, as they have all the ingredients to provide the crème de la crème of retirement advice.
In an earlier article we summarised a research report that set out the pathways through which retirees might find their way to a suitable retirement solution. The pathways included retirees choosing for themselves, paid personal financial advice and various types of ‘trustee direction’. The latter entails super funds either recommending or assigning members to a retirement solution. By ‘solution’, we mean a strategy that allocates a member’s balance between investments and perhaps a lifetime income stream plus a drawdown plan to generate income.
Trustee direction offers the potential to assist a substantial group of retirees who are currently receiving no advice or guidance. It is difficult to gauge the size of this cohort, but it is likely very large. Many self-directed retirees, whether through choice or because they see it as the only alternative, are applying simple strategies that are far from optimal.
There is understandable nervousness in the financial planning community over super funds getting involved in financial advice. Concerns include the dangers of vertical integration, misalignment, the risk of sub-standard advice that does not take into account all relevant personal circumstances, and loss of business.
Some advisers view trustee direction and personal financial advice provided by an adviser as competing channels. We suggest that they are better viewed as complementary. Each pathway plays a different role, and both are needed.
The Government is exploring how retirement advice can be provided by super funds under a collective charging framework. The advice will need to be cost effective to limit the degree of cross-subsidisation. This will motivate an advice process that is constrained in scope, and likely technology-driven to effect scalability. A difficult challenge as retirement is multi-faceted and complex.
We expect trustee direction to differ significantly in scope and intent from the retirement advice provided by a financial planner. It is more likely to operate as a mechanism to match members to tailored retirement solutions that the fund has on offer.
As an example, a trustee-directed approach based around member cohorts might look like this:
- Form member cohorts
- Design a range of solutions for these cohorts
- Collect personal information to identify the cohort to which a member belongs
- Recommend (or assign) member the solution for their identified cohort
The potential advantages of retirement advice provided by a financial adviser are clear when considered against the sort of approach outlined above:
- Closer relationship and a more detailed client fact find – A closer personal relationship with clients can enable collection of all necessary information and deeper understanding of their needs and preferences. Not all information will be readily and accurately supplied via an online process. “Is there anything else we need to know or on your mind?” is a question that an adviser can ask and address more effectively than a digital process.
- Comprehensive retirement plans – Advisers can go beyond the assets within the superannuation fund. This includes devising plans covering all members of the household, all financial assets, home equity release, and more. The plan can be tailored for areas like aged care and estate planning considerations. Super funds can at best take certain attributes into account in the solution they offer, e.g. different solutions depending on assets outside super, homeownership status, etc.
- Independence enables a best-of-breed opportunity – Advisers not tied to a super fund will have access to a broad and expanding universe of retirement products. This provides an opportunity (at least in theory) to direct the client to the ‘best’ combination of products for them.
- Engagement advantage – Advice clients are engaged … paying a fee effectively ensures that! This can engender better understanding of the client, their situation and their needs thus providing the foundation for a superior retirement plan. It can result in improved implementation and support through education and coaching. It does not surprise us to see surveys that advised clients feel more confident in their retirement finances.
There are some areas where the financial advice sector could follow the lead of fund trustees. One example is incorporating stochastic frameworks to account for uncertainties around investment returns and mortality. Another relates to the requirements of funds to demonstrate the benefits of their products and services, e.g. APRA Member Outcomes Assessments. Perhaps there is a way for advisers to embed similar cycles of measurement, self-assessment and process improvement within their operations.
Although we see a role for both advisers and funds in guiding retirees, we would like the financial adviser footprint to be as broad as possible. While financial advice comes at a cost, for many retirees it will represent money well spent. Moves to safely reduce red tape will only improve the cost-benefit equation while boosting supply.
We would also like to see fund trustees triaging members who would benefit towards financial advice. This could further widen the use of personal financial advice.
The policy direction is towards a broader spectrum of advice services to assist retirees, with super funds having a prominent role. But advisers have all the ingredients to be the crème de la crème providers of retirement advice.
David Bell is executive director of The Conexus Institute
Geoff Warren is research director of The Conexus Institute, and an Associate Professor at the Australian National University
