In the next few weeks the Federal Government is in the process of finalising terms and identifying the person or persons who will advise on new rules for financial advice in the wake of the damning recommendations from the 2019 Royal Commission.
The report, due in by the end of the year, will be yet another change in the regulations for superannuation funds and indeed to the rules governing financial advice.
In establishing the review superannuation minister Senator Jane Hume said: “the Government is committed to ensuring that Australians have access to high quality, affordable and accessible financial advice”.
Sounds simple.
But as Financial Planning Association policy chief Ben Marshan notes: “the problem is we have had layer on layer of often inconsistent regulation ”.
The trouble is a raft of many other measures impact on advice or raise new questions and underlining the whole subject is the premise that everyone needs financial advice.
Value in advice
Insignia’s Renato Mota agrees saying: “we know there is value in advice. Our ‘The True Value of Advice’ report (2020) showed 90 percent of advised clients feel accessing financial advice left them in a better position financially.”
In terms of changes he wants to break the nexus between product and advice. “This would be a great outcome for clients,” he said.
The key according to Mota is making the industry more sustainable which means simpler rules and better support for the profession.
“We therefore support a simplified advice process and clarity around advice definitions which will assist consumers,” he said. “We also believe technology has a role to play and would like to see the review pay particular attention to how technology and digital advice might enable broader availability of low-cost advice.”
An entire industry has grown up with myriad rules when, in reality for most people, financial advice is only needed two or three times in their life: if they are left money, retire and maybe when they start work.
Rules are simple
For most the rules are simply payoff your mortgage and other debts and put the rest into superannuation.
Venerable iconic companies like AMP were built on a financial advice complete with every commission known to humankind and relative newcomers like Insignia were built around the advice model.
Overtime, the perks have gone, with the Future of Financial Advice rules slicing commissions and the Royal Commission turning the spotlight on abuses like charging fees for no service.
As Senator Hume readies to release the final guidelines the reality is the old dividing line between retail and industry funds isn’t evident on just what should be included in the guidelines and the final outcome.
Principle-based regulation
The bottom line is to treat the industry as a profession governed by principle-based regulation. There are differences and the FPA is keen to ensure any new regulations don’t come with any carve outs for the superannuation funds. The retirement income covenant mandates some advice on what is the best retirement product. If trustees are required to provide guidance then how do they do that?
The danger going forward is, as the new behemoths of the financial services industry, the superannuation funds bring more conflicts to the table just as the banks and others have in the past.
The FPA’s Marshan argues financial planners offer more holistic advice when the super funds will be more concerned about what you put into your super.
The superannuation funds say they are best placed to provide asset allocation advice but the planners want to meddle in this space.
Exodus of planners
Much is made of the exodus of planners from the industry but it may ironically be a result of regulatory overreach.
Three years ago when the Government imposed minimum education standards, existing planners were given a reprieve for a few years so industry numbers swelled from around 18,000 to 30,000 but have since fallen to around 17,000. In round terms the numbers are roughly the same.
The timing of the review again raises issues on education, given the focus on quality, but surely having already caused so much mayhem in the industry there will be no plans to change the education rules.
By pushing the issue of “affordable” advice, the Government necessarily raises the spectre of robo advice and other techniques which some say consumers don’t want.
Others say there is a need to think about new delivery systems and the benefits of digital versus human services. An analogy is the video safety messages airlines like to use now rather than using staff to speak through the steps with demonstrations.
Is the same message delivered by both? And which one is better? Because the first is definitely cheaper.
Streamline regulations
Industry Super also noted concern “that the focus on reducing costs of advice might streamline regulations without regard to the impact on quality”.
Cath Bowtell at Industry Funds Services runs a team of around 100 planners who are made available to the respective industry funds.
She noted: “the banks effectively walked away from the industry which left a big gap for someone to fill”.
The regulatory hurdles start with the definition around general and personal advice, then, for superannuation funds, on who they can advise and on what. This can prove problematic, for example, because the moment a spouse is in the room it becomes personal advice which can’t be covered by the general superannuation fees .
Then there are question marks over how far you can into intentions and how many issues can be covered in the one conversation and whether the conversation can get into products or just choices within the product being used.
Confusing definitions
If you take your money out of the bank and put it into your super fund you are talking about a product and there is confusion between the definition of general and personal advice .
At what point is an adviser hawking a product, which is not allowed, and simply giving you advice?
The IFS advice model tends to be based on specific event advice which doesn’t attract the ongoing fees planners love to collect but for a couple with say $500,000 in their account the fees run easily to $3,000 to advise on retirement options .
AIST’s (Australian Institute of Superannuation Trustees) David Haynes wants the definition of intra-fund advice (superannuation advice provided at no extra cost by super funds to their members) widened, and for the process of transition to retirement to be made simpler.
The ISA (Industry Super Australia) agrees: “it is unrealistic to expect every superannuation fund member to pay for personal advice to achieve good outcomes”.
“Members should be able to rely on default settings or guidance from their funds,” it said.
The problems with the present rules is they work on a one size fits all model which requires too much regulation. This is why everyone wants more flexibility and a principle-based system.
