Helping more retirees to access suitable retirement advice is critical. It may also help prevent a repeat of the Shield and First Guardian catastrophe. All this can be achieved by progressing the Delivering Better Financial Outcomes reforms, which will enable super funds to provide a suitably framed level of retirement advice.
In the absence of readily available retirement advice, retirees are more vulnerable to being receptive to lead generators and other nefarious offers. The government should acknowledge the need to enable super funds to assist retirees is important to provide retirement advice to the masses who would otherwise get none and also to reduce the risk of catastrophic outcomes. We urge the government to press forward with DBFO Tranche 2.
It is important to view DBFO Tranche 2 as part of a suite of measures to address the Shield and First Guardian failings. Unfortunately, indications are that the government appears to be hesitating on DBFO Tranche 2. This tranche sets out well-consulted frameworks for super funds to provide limited-in-scope retirement advice to their members and prompts to nudge them towards better retirement decisions. Not implementing would be an opportunity lost to directly improve retirement outcomes while reducing the potential for catastrophic losses for millions of future retiring Australians.
The financial advice industry has an important role to play, but it can’t carry the entire load. The industry is capacity-constrained, especially in terms of servicing retirees of modest means. Capacity will hopefully increase: we look forward to seeing growth in the financial advice industry and the role that technology will play in expanding the supply and quality of advice through this sector. But we can’t rely on that happening within time to support the tsunami of new retirees over the next few years.
Super fund trustees are the most rational source of expanded advice supply, especially around the point of retirement. We acknowledge issues such as embedded vertical integration (whereby a super fund only recommends its own products) and concerns around the quality of the advice (issues such and breadth and depth).
We think these are necessary trade-offs to provide a huge pool of retirees access to a base level of financial advice that helps them determine how to allocate and draw down their retirement savings safely and with a degree of confidence.
Two factors serve to offset the majority of the risks:
- Super funds are subject to fiduciary and best interest duties and are heavily regulated, with APRA setting and monitoring prudential standards and ASIC monitoring conduct in areas such as trustee behaviour, disclosure, and consumer protection. Any advice process introduced by a super fund would be subject to substantial oversight.
- The key policy measure in Tranche 2 of DBFO, ‘Advice through superannuation’, is tightly defined in terms of the factors that can be considered and the nature of the advice recommendation (only the member’s interests in the fund). This will be suitable for many households with limited risk of harm.
A corollary that flows from the provision of limited-in-scope advice under the current legal and regulatory framework is that super funds will need to identify where a member may benefit from more specialised advice, and direct them to an appropriate pathway via a triaging process. Many funds are already thinking along these lines, which should help mitigate the risk of providing unsuitable advice.
Consider the scenario that DBFO progresses no further. Advice supply will remain tightly constrained, especially for some retiree cohorts. Some of these retirees may then find themselves inadvertently stepping into a ‘jungle’ of complex decisions, confusing products and uncertainty when distinguishing between advice and marketing. They will be exposed to being exploited by actors who do not have their best interests at heart.
There is a suite of activities being undertaken to reduce the potential for another event like the Shield and First Guardian collapse occurring. Examples include efforts to curtail lead generators, a review into managed investment schemes, and potentially lengthened cooling off periods for super fund switching. While these are all beneficial, increasing the availability of safe retirement advice might be the most impactful of all measures.
Much of the hard work has already been done on the DBFO reforms. Super funds have been developing strategic plans for a DBFO-enabled world. Funds are readying to invest and provide a baseline retirement advice offering to their members.
We implore the Government to progress DBFO Tranche 2 and not forgo such an important opportunity to uplift retirement outcomes and provide a safer retirement environment for Australians.
David Bell is executive director of The Conexus Institute and Geoff Warren is research fellow at the Conexus Institute. The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Professional Planner.
Before the introduction of the Single Responsible Entity (RE) model by the Managed Investments Act 1998 (which took effect in July 1998/1999), Australian legislation governing managed investments was based on a “prescribed interests” regime. Key characteristics of the legislation before the single responsible entity included ‘Dual Structure (Trustee/Manager)’: The regime required a separation of powers between a trustee (who held the assets) and a management company (who managed the scheme). STOP FOLLOWING TREASURY’s DBFO nonsense (beating around the bush), the current Single Responsible Entity system has failed like “putting the bear in charge of honey pot” or “putting an alcoholic in charge of the bottle shop”, to which TREASURY is evading responsibility. The Single RE is a legislated industry structural weakness for fiduciary failure then blame others like financial advisers who never handle clients’ funds. Ross Smith (ASIC AR 245218) is a financial adviser from 1983 when ‘Dual Structure (Trustee/Manager)’ system functioned properly at a fraction of the cost of current frauds. Secondly, Bert Van Manen (former MP) said the Government does not fund ASIC to do supervision. Therefore (the 2nd wrong), ASIC waits for something to go wrong, then finds someone to blame, eg, Macquarie MIML got blamed for $321 million, Netwealth got blamed for $101 million so their Senior Legal Counsels should seek compensation from TREASURY until such time that the pre-1998 ‘Dual Structure (Trustee/Manager)’ is reinstalled again. I remember pre-1998 asking clients to make their investment cheque payable to: “Permanent Trustee Co. Ltd – Heine Property Fund”. 30,000 tons of DBFO Legislation will not fix this structural weakness from reoccurring fiduciary frauds again. With the ‘Dual Structure (Trustee/Manager)’ structure, the Trustee should have avoided the Dixon Financial failure by limiting individual client exposure to the US Texas Residential Fund, by avoiding “all eggs in one basket” – simple Trustee responsibility, in line with APRA SPG530 guideline, which likely APRA does not supervise also either. Ross Smith (BEc, MBA, MCommFin, LLM(CFL), PhD thesis: Private Equity – Microprudential (Fiduciary) Governance Framework) WhatsApp +61419717780
PS: Australia does not have any Microprudential (Fiduciary) Governance Frameworks, it’s all vertical hierarchical, top down dysfunctional, black letter Law that breaches procedural justice and distributive fairness (punishing those who have done nothing wrong).