The maths and logistics of the coming retirement wave are fairly straightforward, but no less confronting. The Australian Bureau of Statistics says that 140,000 people retired in 2020, and that in FY21 another 673,000 people said they expected to retire in the coming five years.

That was up from 552,000 people who said in FY19 that they planned to retire in the coming five years. The number of people planning to retire continues to rise, year after year. The retirement wave is real, and massive.

Superannuation funds just can’t meet the likely demand for information, guidance and advice for retiring members from their own resources; inevitably they will rely on third-party advisers to fill the gap. The only question is: to what extent?

And while super funds consider their options for meeting members’ advice needs, financial advisers themselves are eying up the super funds as potential sources of new clients. It’s inevitable that some of these advisers will be looking to make a quick buck and don’t measure up to the standards expected of professional advisers.

When the interests of super funds, members and advisers align, the outcomes for members can be excellent. We don’t need to rehash here the financial and emotional benefits that come from truly great financial advice.

But when the interests are misaligned – and in particular where advice is faulty or misleading – the results for members can be financially and emotionally catastrophic. The trustees of super funds find themselves at the frontline of defending members against unscrupulous advisers.

ASIC Report 781, ‘Review of superannuation trustee practices: Protecting members from harmful advice charges’, raises some excellent points in relation to trustee responsibilities when it comes to authorising advisers to charge members’ accounts for the advice they provide.

It also appears to ask trustees to do something that’s close to impossible – namely, to determine whether advice given today will leave a member better off 20, 30 or even 40 years in the future.

But one of the issues it focuses in on is the cost of advice.

“This report provides insights into the extent to which superannuation trustees are acting to protect members’ superannuation balances from erosion by inappropriate advice charges,” it said. A key word there is “inappropriate”.

“In a small but serious number of cases, the superannuation balances of members are being reduced to pay for advice that instead of being helpful is destructive to their retirement outcomes.”

It’s tricky at times to assess the value of advice, and it’s something financial advisers themselves sometimes struggle to articulate. Looking only at the cost of advice doesn’t say anything at all about whether the advice is appropriate.

The value of advice is often realised in the future, and in some cases many years after the advice is provided. Assessing the future value of a service provided today requires a range of assumptions to be made about the path taken as a result of the advice, and the result that would have occurred had that path not been taken.

For example, a case study in the ASIC report looks at advice delivered to a member aged 25 at a cost of $3000.

“This fee reduces the member’s superannuation balance by $15,000 in today’s dollars when they reach retirement age,” it said. This is true, all other things being equal. But what if they’re not equal?

Professional Planner went to ASIC’s Moneysmart calculator, and using the assumptions that ASIC said it used for this case study we used the calculator to work out the likely future value of a member’s super with a starting balance of $10,000.

Then we used the same assumptions to work out the future balance of the same member’s super but with a starting balance of $7000 – that is, after $3000 of advice fees were deducted from the account.

We could not quite exactly replicate the $15,000 figure in the ASIC report. The detriment to the fund member came out as greater than ASIC said, at more than $18,000.

But we also found that by tweaking the return assumption by just 0.1 per cent a year (from 7.5 per cent to 7.6 per cent) that difference was wiped out.

By increasing the return assumption by another 0.1 per cent, to 7.7 per cent a year, the member well ahead of the cost of the advice.

These kind of changes in investment returns could easily be the result of advice to switch to a higher-performing investment option, for example. Would a trustee be prepared to argue that spending $3000 today isn’t worth close to an extra $20,000 at retirement (under the 7.7 per cent a year earning assumption)?

The point is not to criticise ASIC’s calculations, nor is it to suggest trustees shouldn’t be paying attention to the advisers and licensees giving their members advice. And it certainly is not to excuse poor or misleading advice.

Rather, it is to point out the complexity of assessing today whether advice delivered to the member will leave them better off or worse off 40 years later. A tiny tweak to the assumptions changes completely whether advice might be regarded as appropriate or not.

ASIC is right to put trustees on notice that they need to pay attention to the quality of the advisers giving advice to their members. But focusing on the cost of advice isn’t a great indicator of the quality or appropriateness of advice.

The responsibility of trustees relates to the scope of the advice, rather than to the substance. They should be undertaking due diligence on the advisers and licensees seeking to give advice to fund members, to protect members from out-and-out shonky “advisers”, cold-callers and other unscrupulous operators.

But these are operational issues, largely: does the adviser have adequate professional indemnity insurance? What’s the quality of the licensee’s internal dispute resolution scheme? Is it a member of an external dispute resolution scheme? What are the advisers’ qualifications; is the adviser’s disciplinary track record clean? And so on.

If a member finds the advice they’ve received is misleading or inappropriate, they have avenues of recourse available to them – but as we’ve seen too often in the past, that’s only an effective remedy if the adviser or licensee they’re dealing with is one of substance.