Superannuation: A changing tide

It wasn’t so many years ago that a large number of Australian superannuation fund members had little or no access to any kind of financial planning. But according to Paul Murphy, executive manager, marketing and business development for UniSuper, times have changed; baby boomer account balances have grown and so too has the average understanding of financial needs. Financial planning has become integral to the superannuation equation.

“The main motivators for the increased focus that financial planning has been receiving has been people increasing their education and the balance of money in their accounts,” he said. “More and more people in the baby boomer generation are confronting the reality of a looming retirement and that, coupled with recent regulatory change, means a need for guidance in navigating the minefield.”

Financial Planning Association (FPA) chief executive officer Jo-Anne Bloch said much of the increased interest in financial planning was due to Australians taking an interest in their superannuation as an asset base.

“Compulsory super has increased super coverage for Australians,” she said. “And people are building a nest egg for the future, an asset that isn’t the family home. Worldwide, we have people becoming more interested in money and making sure they have enough to retire on.”

Yet superannuation fund members are not the only ones to benefit from access to quality financial advice. From a fund perspective, and with a commercial rationale, Murphy said offering good financial planning services aided in member retention.

“More broadly though, financial planning is about looking after our members and equipping them with tools to make financial decisions that make sense to them,” he said. “It gives tax environment guidance and makes a real difference when on the doorstep of retirement.”

The executive chair and founder of Industry Fund Services, Garry Weaven, said there was a substantial need for Australians to make plans for their retirement and to start making them early on.

“Planning for retirement means interfacing with tax regulations and the pension systems regarding superannuation,” he said. “And super funds are in a great position to deliver this kind of advice.

“However, funds do need to be careful about the resources they commit to advice when compared to administration and investment requirements,” Weaven continued. “There obviously needs to be a balance.”

Weaven stated that it was a necessity for funds to provide their members with basic information and advice on a low cost basis.

“Funds need to step up to the mark when it comes to basic financial advice,” he said. “And what that means is provision of written information, perhaps the running of seminars, call centres and increasing the overall quality of fund publications. This is all frontline information and advice and it needs to be improved before more sophisticated services are even looked at.

“It would be a terrible thing if the only way for a fund member to get advice was through a whole financial plan,” added Weaven.

However, despite unanimous agreement that fund member access to financial planning services cannot be a bad thing, some fund executives, particularly those within industry funds, remain concerned about some financial planners’ understanding of more unique fund options, particularly when those funds are part of a switching equation.

According to Murphy, the issue is particularly pertinent to UniSuper.

“We are a fund that offers many of our own unique retirement options,” he said. “Like, for example, indexed pensions. We’ve found, many times, that some financial planners haven’t understood these kinds of options.”

Murphy said, most of the time, planners worked off approved lists that didn’t always include industry funds.

“Our response to this concern has been to offer our members two levels of advice,” he said. “Firstly, we have product-specific advice, but then, if more detail is required, UniSuper refers members to a panel of financial planners offering independent advice, each of whom have passed a competence exam testing their knowledge of our fund options.

“The big focus for us is to help our members avoid the need for financial planners through self-help tools like calculators and other planning tools,” continued Murphy. “We want our members to be able to help themselves before contacting a financial planner.”

The chief executive officer of industry fund HESTA, Anne-Marie Corboy, agrees there is still a concern that some financial planners do not understand the more specific retirement options available within industry funds.

“Many financial planners do operate off predetermined lists of superannuation funds,” she said. “That fact came out of the Australian Securities and Investments Commission’s (ASIC) shadow shopping exercises, and it is a basic problem with some planning firms. At this point, there has been a lot of talk with respect to fixing this kind of thing, but I haven’t seen much movement yet.”

Corboy also stated that providing financial advice to members better enabled a fund to keep members.

“But I think this revolves around offering more services to our members,” she said. “When it comes to advice, it has to be the right advice at the right time. Most HESTA members don’t need full financial plans, they just need super specific advice on salary sacrifices, investment options and so on.”

Corboy said full financial plans were often only applicable for people with a large range of assets.

“Different people will always have different needs,” she said. “But what people call financial advice may not always be what members need.”

Very few Australians would be unaware of the issues that have troubled the financial planning industry in recent years. Between media coverage of the Westpoint scandal and ASIC’s ongoing shadow shopping exercises, financial planners have been struggling to improve a public image that has been seriously tarnished. However, according to Weaven, there is still a lot more work to be done.

“Industry Funds Services was recently involved with a survey conducted by Newspoll,” he said. “The poll looked specifically at financial advice and found that only 16 per cent of those surveyed believed financial planners were giving advice in the best interests of their clients. So, clearly, there is still much to be done here.”

Weaven said, to date, he didn’t believe the financial planning industry had taken that key step towards becoming a profession and acting in the best interests of its clients.

“The whole industry still seems to be directed at selling certain products,” he said. “Its image cannot improve until some kind of separation between the profession and the sales force occurs.”

For Murphy, poor public perception of financial planners relates to a lack of transparency.

“Inevitably, there needs to be more transparency around the advice that is given and why,” he said. “I don’t want to tar all financial planners with same brush by any means, because there are good ones out there, but clearly much of the industry is about selling products and not necessarily about the client.

“Having said that, I think it needs to be pointed out that many consumers are happy with a commission based model because of the price advantage of that kind of approach,” Murphy added. “I don’t think you can be too dogmatic about it.”

From the financial planning side, Bloch admitted there did exist a perception gap relating to the level of professionalism that was present within the planning community.

“That gap has been promoted in some quarters to differentiate product,” she said. “And in some cases it has been a little misleading. But the profession has come a long way, and in just the last six years alone we have seen the introduction of Financial Services Reform (FSR), a soft dollar code, a rebates code, new FPA conflicts of interest principles and an increase in competency based standards.”

Bloch said becoming a financial planner was about a lot more than just hanging up a shingle nowadays.

“Financial planners are required to put their clients’ interests first,” she said. “It’s about engaging in a long-term relationship with your client to help them achieve their goals. It is not about product and a quick solution.”

But with what seems to be such a divide between financial advice offered through commission-based models and those that are provided through fee-for-service, how is a fund looking to establish a financial planning relationship to sort the good from the bad?

Weaven suggests that it is as easy as looking at a firm’s track record and motivation.

“Look at what relationships are already set up with the financial planning firm,” he said. “But most importantly, look at what determines their final reward.”

Bloch points out that the FPA has guidelines on how to choose a financial planner, what questions to ask, what to expect and what sort of fees you might be up for.

“But it is most important that you feel comfortable,” she said. “And you must ask questions. Taking responsibility is just as important because you simply cannot hand something as important as your financial future entirely over to someone else.”

Murphy stated that UniSuper’s approach was to put emphasis on a planner’s credentials.

“We deal with the dealer groups and not the planners individually,” he said. “We examine qualitative criteria carefully. All our planners must be certified financial planners, have at least five years experience and be subject to the assessment process I mentioned before.”

Murphy said UniSuper chose to place the onus firmly back on the dealer groups.

Moving forward, it seems important to realise that the public image problems surrounding the financial planning industry affect all involved parties to some extent. ASIC, the FPA and the Association of Financial Planners (AFA) have all made efforts to increase protection for both planners and consumers, but for many, more safeguards are required.

Admitting it sounds glib, Murphy said he thought the answer to improving industry policing and consumer protection lay in disclosure and transparency.

“ASIC is doing the right thing when it examines the reasons behind advice to a member to change their super fund,” he said. “I think it will always be necessary to scrutinise advice when it comes to the sale of a product and the research behind that advice.”

And to those within the financial planning industry seeing a divide between the industry and its regulator, Murphy’s suggestion is simply increased dialogue.

“It’s always going to be hard to conduct the talk that is required if both parties are in the trenches throwing bombs at each other,” he said. “The industry has simply got to satisfy its regulator that professional standards are being policed.”

From within HESTA, Corboy said she had seen a lot of effort go into getting financial planning protection systems right.

“But clearly there is a need to go further,” she said. “Ultimately, there is a need for the Government to legislate the requirement that planners advise in the best interests of the client. Advice appropriate to the client’s needs is not sufficient. They are different concepts.”

Weaven said that when it came to policing and protection, ASIC tried, but current legislation made the job difficult.

“As things currently stand, there is no legal requirement for planners to act in the best interests of their clients,” he said. “It’s one of the industry’s fundamental deficiencies and it means ASIC can only do so much. Resources are limited, and they certainly can’t force the planner to act in a client’s best interests.

“That said, there certainly are good planners out there,” added Weaven. “But the fact is, the arrangements and practices are such a problem that no regulator is going to be happy to be seen as at one with the industry. Clearly, there is a divide between what the industry is and what it should be.”

Bloch also admitted resources were limited and that there was only so much ASIC and other industry bodies could do.

“I think ASIC’s surveillance and enforcement actions indicate that they are doing their job,” she said. “Like ASIC, however, the FPA has limited resources, so we focus on areas of concern.”

Bloch said the industry and its regulator would always have differences.

“We are still getting used to principles-based legislation and a not always perfect interpretation on both sides,” she said. “We must persist. There is too much invested. We will battle on with service-oriented architectures and continue to make improvements, and will continue to work with the Government on FSR refinements.

“But most importantly, we will be looking to close the perception gap to demonstrate that FPA members are professional; they sign up to a professional code and rules, and if they transgress, we will take action,” Bloch said.

So what, when it comes to financial planning and advice, is the answer?

Weaven believes the financial planning industry must better define its roles.

“If someone wants to pay you to sell a product, don’t call yourself an independent adviser,” he said. “You’re a salesperson. Independent advice revolves around a fee-for-service structure and not commission based sales. But, having said that, people have got to realise that if they want good and detailed advice, then they are going to have to pay for it.”

For superannuation funds, Murphy said that it was about making advice accessible through mass customisation and self help tools.

“Funds need to look at how to avoid the small and inefficient interactions with financial planners,” he said. “And they do this through providing self education and self help.”