- On November 22, 2018
- advice, retirement, superannuation
The Royal Commission’s interim report was highly critical of the delivery of financial advice. One question raised in its interim report relates to the remuneration of financial advisers:
“Should any part of the remuneration of financial advisers be dependent on value or volume of sales?”¹
Grandfathered commissions and asset-based fees for providing advice are common examples of fees based on value. Value based fees also includes those based on the size of the benefit for an investment, the level of premiums for life insurance or the size of the contract for stockbrokers or mortgage brokers.
Should legislation ban value or volume-based advice fees, the impact on financial markets would be profound. It would mean disruption in the mortgage broking industry, the retail life insurance market and a significant part of the retail investment and superannuation markets.
Moving all financial advice to fee for service, expressed in dollars and not a percentage of assets could drastically reduce the demand for advice. Previous research by Rice Warner² has shown that there is a gap between the amount that consumers are willing to pay for advice against the cost of delivering a quality financial plan. Most consumers state they would only be prepared to pay an average of $300 to $400 a year for face to face annual comprehensive advice. However, our complex regulatory regime means that it is difficult to deliver a compliant basic financial plan under the comprehensive advice regime for under $1,500.
Further to this, there are distortions to the market arising from differences in rules for different categories of advice. Within a superannuation fund, intra-fund advice can be subsidised across a broad member base. However, the service can only address single issues of advice that relate to a member’s interest in the fund, so would not address their overall financial position nor how it combines with the financial plans of any partner. Further, paying little or nothing for intra-fund advice may have created a perception that financial advice does not cost much to deliver.
On the other hand, comprehensive (personal) advice which considers the personal circumstances of the member (and potentially their spouse), is treated differently. The consumer must pay the full cost of the advice and ASIC has made it clear that a service must be given in any year a fee for advice is charged. So it is not possible to have an annual retainer unless the member has a regular annual review.
In practice, there are many thousands of customers who pay significant fees for financial advice. Previous Rice Warner research has shown the value delivered by acting on good advice can range from 1.8 to 6 times the cost of the advice delivered³. This suggests that the gap between what consumers are willing to pay and the cost of delivery is at least partly due to a lack of understanding about the value of financial advice.
However, if value-based fees are banned, how will we bridge this perception gap? How will advice be delivered to middle Australia?
Problems will arise in the market with the introduction of new products. For example, the Government’s proposed Comprehensive Income Products for Retirement (CIPR) position paper put forward that:
“The Government would require trustees to provide guidance (which may or may not be financial advice) or intra-fund advice tools to help members navigate between the retirement income products offered by the fund.”4
The reality is that most retirees need comprehensive financial advice to develop a retirement strategy and select an appropriate product. However, we have a conundrum – the volume of money flowing to retirement is growing rapidly as the population ages (see Graph 1) while at the same time we have an exodus of financial advisers from the industry, with nearly 6,000 advisers leaving the industry in 2017 alone5
Graph 1. Volume of funds moving into retirement phase
Source: Rice Warner’s Superannuation Market Projections Report (2017)
It is difficult to plan retirement using intra-fund advice. In addition to setting an appropriate investment strategy, and determining the amount of monthly pension payments, members will need to know about Centrelink (for the means-tested the Age Pension). All this requires knowledge of assets held outside superannuation or held by their spouse. Further, the two-thirds of Australians who are married at retirement will want to plan their retirement together.
Advisers and superannuation funds will need to look to innovative models for advice using technology to improve value and reduce costs. Otherwise the wave of baby-boomers heading into retirement will be underserviced as they grapple with one of life’s most complex and important decisions.
² Rice Warner, Generational research and insights, commissioned by ING, September 2018
³ Rice Warner, Value of Advice, 2007
5 Rice Warner analysis of ASIC register data