The escalating debate over Tranche 2 of the Delivering Better Financial Outcomes reforms has raised an important question. Could collectively charged financial advice provided by super fund trustees (“advice through super”) deliver worse outcomes than no advice? We can’t see it. Rather than make advice through super a battleground issue, the focus should be on making it work well.
First of all, let’s address the elephant in the room: DBFO Tranche 2 transforms super funds into vertically integrated structures. It is important to understand why government chose this pathway. Super funds are highly regulated entities operating under prudential regulation and transparency provisions. They also have obligations to their members including fiduciary and best financial interests duties, and to assist them with their retirement needs under the Retirement Income Covenant.
There is a huge cohort of people (around 3.5 million) entering retirement over the next ten years, nearly all of whom would benefit from some form of financial advice recommendation. This doesn’t match up well against supply constraints in the financial advice industry and a price level that many members will view as too high.
The government has identified super funds as highly regulated fiduciaries to be the most appropriate group to provide a limited advice service at scale. We think this makes sense, hence our support for DBFO Tranche 2 reforms. To effectively address the retirement needs of Australians, super funds will need to transform from being product-biased to more service-oriented entities.
Arguments against advice through super
We address two arguments pitched against advice through super. We summarise how we view each, and outline the likely counterfactual for retirees if advice through super did not exist.
- Super funds will be directing members into their own products. True. However, the degree of danger is reasonably limited due to the regulatory frameworks and reporting requirements in place. While the products offered by each super fund may not the ‘best’ product (within category) for the member (a pretty subjective concept), the risk of sizable detriment is modest.
Counterfactual: The majority of the retirement cohort being targeted by DBFO Tranche 2 would likely remain with the super fund they used in accumulation. But the decisions they make under the fund’s umbrella may be worse.
- The quality of the advice may be poor because it is too narrow in scope. We view the proposed scope for funds to understand the financial circumstances of members as sufficiently broad to result in appropriate advice for many retirees. However, super fund trustees also need to understand the objectives and preferences of their retiring members. This is something that Treasury is silent on but should be addressed to support development of reasonable advice processes. We agree that the risk of poor outcomes increases as complexity of circumstances and needs arise. This matter requires attention, and is discussed further below.
Counterfactual: In the absence of recommendations from trustees, many members will be left to make their own choices. Many will try to self-direct their way through a range of information sources, general advice, limited tools and calculators, while drawing on informal views (e.g. family, social media). Many will struggle to make sense of it all. Others may fail to take appropriate steps, with some remaining in accumulation and being slow to apply for the Age Pension, while a number of retirees with complex needs not seeking financial advice.
No advice through super would mean poorer outcomes
Our counterfactuals where advice through super did not exist amount to many super fund members self-navigating retirement while remaining with the fund they used in accumulation. The types of poor outcomes we worry about for the cohort of retirees targeted by this policy (i.e. modest-to-middle balance members with limited financial complexities) include the following:
- Product – remaining in an accumulation account and paying tax on earnings
- Drawdowns – mostly drawing too little, sometimes too much
- Investments – often not taking enough risk, but sometimes too much
- Lifetime income streams – failure to allocate anything, even where there is clear benefit
- Age Pension and related benefits – some missing out on entitlements, e.g. by delaying an application
It is almost certain that advice through super will not be entirely optimal for most members. However, we expect it to be substantially better than what many retirees would experience if required to navigate their own way through. There is no perfect solution. The issue is the degree to which advice through super improves the status quo.
Some important next steps would significantly improve outcomes
Three things need to happen to maximise the opportunity created by advice through super:
- Policymakers extending the scope of the allowed circumstances to permit (preferably require) funds to consider the objectives and preferences of their retiring members.
- Members should be clearly informed of what any trustee-provided advice covers and what it does not, and any key assumptions made about the member in providing the advice.
- Create the ‘off ramp’ for members with complex advice needs. This entails developing the criteria, identification processes and next steps when members should be referred to a financial adviser.
Advice through super should turn out well
Through the most important lens of potential member outcomes, many retirees will benefit from advice through super. Funds have the responsibility and are well-positioned to assist their members who would otherwise receive no advice as they approach and enter retirement. Further, as complex advice needs become clearer this may increase demand for comprehensive financial advice over the medium-longer term.
We look forward to the advice through super reforms being enacted. Then it will be up to the super industry to acknowledge their role as increasingly service-led entities and implement well.
