The superannuation and broader wealth industries have been slow to recognise the fundamental changes introduced by the Future of Financial Advice laws in 2012. Exposure of unlawful practices by the Hayne Royal Commission have been supplemented by huge remedial payments for fees that were charged when there was no advice service delivered.
New advice education standards set by the Financial Adviser Standards and Ethics Authority (FASEA), and the destruction of traditional vertically integrated models of advice will see the industry shrink.
The number of active advisers in client facing roles has been forecast by Adviser Ratings to plummet from 21,500 in 2018 to 15,000 in 2024.
The fall in supply of advisers will create a dilemma for those seeking financial advice. Rice Warner’s projections show that demand for advice will increase substantially, to the point where one in seven employed people are likely to require regulated financial advice each year. Indeed, a recent study published by the Australian Securities Investment Commission (ASIC) showed that 41 per cent of Australians intend to get advice in the future, and 25 per cent intend to do so in the next year – if the price is right.
The contrasting fall in supply and increase in demand should – all things being equal – push up the price of advice. However, overwhelmingly, consumers do not want to pay a high price for advice, with the majority wanting to pay no more than $500 (even for a comprehensive financial plan).
To address this superannuation funds have been able to develop intra-fund advice models. These are simple single-issue pieces of advice which are given free to members or provided at a nominal cost. As more members approach retirement, where the circumstances are far more complex, the demand for personal advice will grow. Yet, no fund has yet been able to marry the needs of members approaching retirement cost-effectively.
Technology offers one avenue for satiating the tidal wave of incoming demand. The same research by ASIC showed that, although take up of digital advice is still low, 37 per cent of those who didn’t go ahead with their plan to receive advice, would consider digital channels instead.
Not only can digital tools provide an alternative for members seeking advice at scale, but they can also increase engagement. Research by CEPAR in association with Cbus has shown that just providing members with a retirement income estimate on their annual statement increased both the proportion making voluntary contributions and value of those contributions by a third or more.
One can only imagine the cascading effect that digital delivery of such estimates could provide, with the option to take it further through online tools that can provide personal advice, with pre-filled information from the fund registry and the option to implement on the spot.
This increased sophistication and use of technology and data analytics has paved the way for:
- Increased provision of targeted, goals-based advice which allows tailored advice for clients;
- Increased ability to access clients in remote locations;
- Sophisticated advice and tailored advice strategies (using online tools accessing mathematical engines and algorithms);
- Scalable advice models which reduce the marginal cost of providing financial advice; and
- Pre-population of data using arising technologies such as open banking APIs.
Advanced machine learning and AI allowing the targeting of specific members and ‘nudging’ members towards better financial outcomes.
Despite these potential benefits a third of funds still don’t have a superannuation projection calculator on their public website. Of the funds that do, about one fifth of those redirect the member to ASIC’s MoneySmart calculator instead, losing the opportunity to engage their members. Many calculators are very simple – only accommodating an individual (rather than couples), ignoring the Age Pension, or being deterministic without showing the range of outcomes of a stochastic model.
Rice Warner’s own experience working with funds on digital engagement and advice shows that there is a fine balance required to deliver complexity (through the scope of calculations which are accurate and compliant) in a simple way that consumers understand (through human centred design).
The fallout of the last 12 months puts forward an opportunity for funds to do better. A targeted campaign to members as they think about ceasing full-time employment is a chance to help all Australians achieve a dignified retirement. But the sheer volume of members in superannuation funds will require this advice to be delivered at scale.
Until the industry achieves this, funds will be failing in their duty to support their members in achieving the best retirement outcomes. There are implications for how funds incorporate the requirements of SPS515 for member outcomes in relation to the retention of members entering retirement (recognising that ultimately, retirement incomes is the goal of the superannuation system). This retention could be low if engagement does not start well before members are planning retire. There is an opportunity for funds to take a lead in this area.
With potential upcoming changes to default models and stapling of superannuation accounts funds will need to get both advice models and digital engagement right to retain members through retirement. Both as an opportunity to growth the fund through better retention, but also as a hedge to further disruption in the default space.
Nathan Bonarius is head of fintech and market insights at Rice Warner.
