Superannuation funds are not only under regulatory and government pressure to develop effective retirement income solutions for members, they’re also being watched closely by financial advisers. Funds that fall short may see members leaving for funds with better solutions, on the recommendation of advisers. This is an emerging risk to funds, and it puts them on notice that they can’t afford to fall behind.
A new competitive battleground is set to open up between superannuation funds as financial advisers become more familiar with and critical of the retirement income solutions offered by funds.
Super funds are also likely to find themselves increasingly at loggerheads with financial advisers, as advisers begin to shop around for the best retirement solutions for clients.
The development of retirement income products by super funds is in its infancy and pressure from regulators and government has them scrambling to bring solutions to market. Some have plans on the drawing board to develop quite elegant and sophisticated solutions that effectively address the major risks that members face when they retire – including inflation, market risk and longevity risk.
But others are less well developed in their thinking and planning. As funds roll out solutions and the differentiation between the best and the worst on offer becomes clearer, the choice facing those who advise members on the best way forward also becomes clearer.
As advisers assess retirement income solutions, they are beginning to contemplate switching clients from the fund they have been in for the accumulation phase into a new fund, with a better retirement income solution for the retirement phase.
Funds with better retirement income solutions may see members rolling into the fund on the recommendation of financial advisers, while funds with poor retirement income solutions may begin to lose members as they approach retirement – which is when they can least afford to lose them, because the departing members’ account balances are generally at a peak and subsidising the provision of services to members with lower account balances.
This sort of advice is likely to become more prevalent as clarity emerges over how members can pay from their superannuation accounts for advice.
The Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill tabled in Parliament before Easter sought to provide that clarity by amending section 99FA of the Superannuation Industry Supervision Act but has been criticised for (among other things) placing too great an onus on fund trustees to approve every piece of advice delivered to members.
Senate inquiry
The legislation has been referred to the Senate Economics Legislation Committee for inquiry, which is due to report by June 20, and the industry is expected to push for amendments before it passes the Senate.
However, fund trustees are expected to retain considerable discretion over whether advice fees can be deducted from members’ accounts, and advisers are reporting running into conflicts with trustees when the advice provided to clients is to roll out of a fund.
A financial adviser’s duty under the industry-wide code of ethics is to provide advice that is in the best interests of the client, and which is appropriate to the client’s individual circumstances.
If an adviser judges one fund’s retirement solution to be better for their client than the solution provided by the fund the client is currently in, the adviser has a sound basis to make a switching recommendation. But there are both reports by advisers and growing concerns raised elsewhere of trustees denying payment of advice fees when the advice the member receives is to leave the fund.
However, advisers are nothing if not resourceful, and they will doubtless develop mechanisms for recouping fees that do not require the consent of the trustee of the fund the member is leaving.
For example, when a member is in retirement, they can draw down on their account any time they want to and pay the adviser directly. Or the advice fee might be debited to the account set up at the new fund – trustees are thought less likely to deny payment because the advice not wholly or partly related to the member’s interest in the fund when the member is rolling into the new fund.
There are factors that may dampen the propensity or ability of advisers to switch members out of unsuitable funds, including the ability to make detailed like-for-like comparisons between solutions due to a lack of data or research.
‘Best interests’
In addition, a client’s “best interests” can encompass more than just financial issues. Particularly in superannuation, where a member may in the past have joined a fund by virtue of their belonging to, for example, an industry or trade group, a desire to remain connected to that community may form a valid part of the goals and objectives an adviser is retained to help them achieve.
Funds that can successfully play on that sense of member loyalty have some protection against having a substandard retirement income solution and the risk of advisers recommending members leave the fund. But super funds ought not to rely on market failures of this type as a strategy.
The proportion of super fund members who receive financial advice from outside their fund may currently be quite small, but it may grow, particularly if it becomes easier to pay for advice from the member’s account.
When convicted US bank robber Willie Sutton was asked why he robbed banks he is reported to have replied: “Because that’s where the money is”. Today, when you ask a financial adviser why they want to provide advice to members of super funds, the answer is the same.
