If super funds are concerned about offering financial advice to their members, they should be. The last of the baby boomers have turned 50, and as the great big pool of money heads for retirement, how super funds engage with members and help them improve financial outcomes through financial advice is again under the microscope.
According to the Association of Superannuation Funds of Australia, a couple needs about $58,000 a year to live a comfortable retirement, assuming they own their own home and are in reasonable health. Yet the average super balance for Australians aged from 50 to 54 years is around $115,500, a far cry from anything approaching adequacy.
And the adequacy gap is likely to get worse.
The Intergenerational Report released in 2015 shows an increase in the number of retirees, and predicts that people will live longer in retirement. At the same time, the government purse is under pressure. The age pension is already the federal government’s largest single welfare payment, amounting to 3.5 per cent of GDP, and there are serious questions about its sustainability over the long term.
Compulsory super goes a long way towards ensuring most working Australians have some money to retire on, but as the adequacy gap bears witness, it is so often not enough.
Crucial to member outcomes
That’s why quality, professional financial advice is so important, and so high on the agenda for many superannuation trustees.
By engaging with members who have never had financial advice, particularly as they enter their pre-retirement years, super funds can help improve retirement outcomes enormously.
And for the super funds themselves, good financial advice leads to more engaged members, more whole-of-life relationships and a higher probability of retaining member funds under management in the post-retirement phase.
Indeed, according to a report by Rice Warner, financial advice is a seriously under-utilised tool in the battle for member retention. The research finds that “quality, appropriate and engaging financial advice is looming as one of the most crucial and necessary requirements for Australia’s largest superannuation funds.”
But the question remains, how best to provide this advice?
Models for providing advice
“Robo-advice” has skyrocketed since 2012 and has been touted as the ultimate low-cost solution to providing financial advice. However, in our view, what the term refers to is not in fact financial advice.
Instead, robo-advice refers to the use of online, self-serve, algorithm-based portfolio management tools. Investors answer an online survey aimed at determining their risk level, time frame and investment objectives, and their responses are used to produce an “ideal” portfolio.
That’s not to say that robo-advice as a concept is completely without merit. Provided it is properly tailored to individual circumstances and remains low cost, it can be used to complement full-service, traditional financial advice. And if it serves to highlight the benefits of financial advice by allowing members to engage on their own terms and encouraging them to consider their financial future earlier, then it has a role to play.
However, relying solely on an algorithm to predict optimum outcomes is not without risk, and can never replace the human element of traditional advice. This is particularly true in the context of members approaching retirement, when personal circumstances must be taken into account.
Why? Because pre-retirement is the time when such circumstances can be complex, and requirements nuanced. Matching concerns about income security with growth, understanding when capital may need to be accessed and identifying strategies to maximise Centrelink benefits will all require tailored, comprehensive financial advice from a specialist.
And as investors age, the stakes are too high to risk anything other than a tailored solution. Those moving from accumulation to decumulation simply can’t afford to take a long-term view and ride out fluctuations in investment markets. A few years of successive negative returns can leave them unable to support themselves, and unable to recover financially.
The bottom line
All Australians will achieve better outcomes in retirement if they seek financial advice and start saving early.
However, for those heading into pre-retirement, the imperatives become stronger, because the consequences of poor financial decisions can be dire. Superannuation funds, as keepers of many Australians’ largest asset, have a serious responsibility to help members access financial advice, particularly as they move towards retirement.
|What is the best way for trustees to provide tailored financial advice to members? Is there one model that guarantees professional, high-quality advice but also makes sense commercially?The three approaches to delivering comprehensive adviceSelf-provideThis means the super fund creates advice capability in-house, often from scratch.The upsides are that the fund is able to control quality of the advice as well as the process. Also, the information gleaned from members allows the fund to identify opportunities where it can reach out proactively to other members.On the downside, there are a number of significant risks to this approach. Compliance risk, reputational risk and commercial risk are chief among them.
Providing the highest-quality financial advice means employing significant expertise, enforcing strict procedures and exerting tight controls. And this comes at a high cost. Salaries, license fees and other costs may outweigh the benefits, particularly if the in-house team is not large enough to cater to all members.
Outsource to a panel of financial advice firms
Under this model, the superannuation fund chooses a panel of financial advice firms and refers members.
This model is a simple way of providing access to experienced professionals with the necessary expertise and scale, in a cost-effective way.
The downside is the lack of control that the super fund has over the services provided, including over the quality. And the larger the panel of external providers, the greater the reputational risk to the super fund should something go wrong.
Also, under this model, the super fund is less likely to engage proactively with members. The relationship becomes reactive, in part negating the member-retention benefits of closer engagement.
For the member, this model has challenges as well. Comparing like with like in terms of different advice providers and service propositions can be difficult and confusing.
In our view, a partnership arrangement with a trusted financial advice firm is the best option, because it optimises outcomes for both members and super funds.
A close relationship with a specialist financial advice firm capable of servicing the increased demand for advice from members means a better understanding of the service proposition, the quality of the advice and the member experience.
This is especially the case where external independent accreditation or validation of the quality is part of the mix. In our case, we’ve opted for the FPA Professional Practice program to give this assurance to our members. Currently, 17 of our regional offices have the designation, which requires a high standard of financial advice and ethics.
With appropriate commitment to objective standards, the partnership model translates into greater control, lower reputational and compliance risk and the ability to engage proactively with members. It also increases the likelihood of retaining funds under management post retirement, and a professional advice firm will achieve better financial outcomes for members.