Source: The Conversation (Au and NZ) – By Di Johnson, Senior Lecturer, Griffith University
This week, the government announced details of planned reforms to allow more Australians to access free or low-cost financial advice through their super funds or advice firms.
The reforms will create a new class of financial adviser, who will only need a diploma. They’ll be allowed to provide personalised advice on a targeted range of financial decisions, particularly regarding retirement planning and life insurance.
Some groups have already raised concerns in the wake of the announcement. These include that lowering the required qualification level to a diploma could lead to lower quality advice, and that some funds could find ways to charge new fees for no service.
For the reforms to succeed, the government will need to ensure quality regulation – and importantly, that the underserved customers it is targeting end up getting true value for money.
A new class of adviser
Currently, superannuation funds can offer free advice to their own members. But this is very limited in scope and restricted to the offerings within a fund.
They can also refer members to receive more comprehensive paid advice, either from within the fund or an external provider.
Traditional financial advisers need at least a bachelor’s degree. The new class of advisers will be a kind of “para-professional” in the advice space, expected to have diploma-level qualifications.
They’ll only be allowed to provide advice on products issued by “prudentially regulated entities”. These include superannuation, life insurance and retirement income products.
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For example, a young person could get personalised advice on whether opting into selected life insurances would be a better choice than having no life insurance. That decision could be especially significant for someone early in their career or with a super balance under $6,000.
Superannuation investment choices made at age 21 can also make a huge difference to retirement income at 71.
Funds will be able to charge for this advice individually, or else by collectively spreading costs across all members.
The ability to charge individual, one-off fees (not ongoing and no commissions allowed) could open up a path for this new class of adviser to work within traditional advice firms – within limits.
That may be a useful strategy to boost the numbers of graduates choosing financial advice roles more broadly as a career.
The problem to solve
Navigating Australia’s financial system is complex – not least when it comes to planning for retirement. Personal financial advice is important at all stages of life to increase inclusion and fairness, and improve financial outcomes.
Superannuation funds have an obligation under the Retirement Income Covenant to help members choose retirement income products, but have been without affordable advice options.
At an average annual fee of $5,500, comprehensive financial advice is simply out of reach for many.
Even if this cost was somehow brought down, affordability isn’t the only issue.
Many Australians are reluctant to approach traditional financial advice firms. Some find themselves turned away at first contact, with firms giving preference to higher-income, higher-net-worth clients.
The practice of denying service to some clients can be especially frustrating for those who are willing and able to pay the asking price.
But it makes sense when you consider the incentives many financial advice firms face. These include making competitive profits in a relatively highly regulated emerging profession, faced with a tight labour market.
Without an alternative trustworthy advice option, many Australians will end up financially excluded.
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So what are we willing to pay for advice?
One report commissioned by the Financial Services Council found most Australians don’t want to pay more than $500 a year for financial advice, but that willingness to pay depends on the scope.
However, some recent trials offering more detailed retirement advice below the level of comprehensive advice, suggest there may be willingness to pay at around the $900 mark.
But both of these figures fall well short of the current estimated average cost of financial advice of $5,500.
The other option, using superannuation balances to pay advice fees up to a cap, has been problematic, with some advisers charging up to $20,000 from members’ super funds.
What are the risks?
One criticism is that having a lower qualification requirement risks leaving Australians with lower quality advice.
It’s true the diploma-level qualification is lower than the bachelor-level or higher required for professional financial advisers. But it is proportionate to the new targeted scope of advice offered.
It will be up to the government to carefully regulate the industry to ensure the new class of adviser only provides advice within their expertise and authorisation, complies with the best interests duty and meets other obligations.
Another criticism is that charging advice fees collectively across a super fund could mean some members subsidise others and effectively pay “fees for no service”.
But it’s important to note that collective charging is already in place for a number of services that only selected members utilise at any point in time. This includes switching asset allocations, providing advice within a fund and operating call centre services.
It also has some established guardrails to protect members.
The details of charging arrangements would fall into the Australian Securities and Investments Commission’s remit as regulatory guidance.
Value for money
If they proceed, the true test of these reforms will lie in whether Australians feel they are getting trustworthy service at the right price point.
What will that value for money look like? My analysis suggests advice for $300 to $500 a year that gets the basics right – superannuation asset allocations, life insurances, beneficiary forms and basic retirement planning.
If costs can be kept under $1,000 for more detailed retirement planning, it will put pressure on traditional advice firms to justify charging more for a similarly restricted scope of advice.
If well priced and well implemented, the new class of adviser could serve many more Australians, helping to normalise accessible, affordable advice.
Dr Di Johnson is a Senior Lecturer at Griffith University, including in the Financial Planning discipline; a Fellow of the Higher Education Academy, an academic member of the Financial Advice Association of Australia (FAAA), a member of the Academy of Financial Services (AFS), and the Economic Society of Australia (ESA) including the Women in Economics Network (WEN). Dr Johnson has received research funding in the past from the Financial Planning Education Council (FPEC), and contributed to projects partly funded or supported by financial planning industry partners.
– ref. The government wants to create a new class of financial adviser for super fund members. Here’s why – and how it might work – https://theconversation.com/the-government-wants-to-create-a-new-class-of-financial-adviser-for-super-fund-members-heres-why-and-how-it-might-work-245289
