With the limelight completely faded on the financial services royal commission, a chorus of self-interest has emerged to try to undermine its consumer protections.
Financial advice was the villain of the show after revelations that financial firms, including superannuation funds, were charging dead people fees for services they clearly couldn't use. It painted a picture of a commission- and conflict-fuelled nightmare for Australian consumers, leaving them rightfully nervous about whom they could trust to manage their retirement savings.
Superannuation funds were charging dead people fees for services they clearly couldn't use
The Commissioner wasn't convinced we'd solve all of the problems on the first go, so ordered a quality of financial advice review to occur three years later. The intent of the review was to look at whether the quality of financial advice had changed in that time, with a view to getting rid of any remaining conflicts of interest that were leading to bad advice. The past three years have been long, but not so long that you'd forgive anyone for forgetting the lessons of the royal commission.
Consumer protections under threat
The super funds are lobbying to remove consumer protections from 'intra-fund' advice. Intra-fund advice is like other financial advice, but the cost of providing it to an individual is recouped from all members of the fund, and regardless of whether that individual uses it. To make sure the cost of this advice doesn't spiral out of control and put a dent in people's retirement savings, super funds are limited to only providing advice on certain topics. The limit also protects people from paying for advice that is inherently conflicted.
There are serious questions about the value of getting advice from a super fund with inherent conflicts. For example, someone retiring with a mortgage might want to know if they should use their super to pay off their remaining loan or keep it invested. Super funds charge fees based on a percentage of your savings, so they stand to make more if you keep your money in super and don't use it to pay off your loan.
Consumers are rightly sceptical of conflicted advice, but with no alternatives they don't know where to turn. This isn't a time to take the easy option and tinker around the edges of a conflicted system – it's time for a long-term fix.
Quality of Advice Review crucial to maintaining and improving protections
The government has committed to an independent review of the quality of financial advice in Australia, with a report due in December this year. The Quality of Advice Review is an opportunity to reimagine the advice market and make it deliver what consumers actually need.
When we asked people through a nationally representative survey, we got a clear response: two thirds of respondents thought it was important the information they received was independent and free from conflicts.
The Review is an opportunity to reimagine the advice market and make it deliver what consumers actually need
The problem is that the businesses producing super products are often also the ones advising consumers about whether that product is any good.
For example, a super fund isn't going to tell you to leave it for a fund with better investment performance. But not getting the advice to switch super funds if it's in your best interest can have a serious impact on your standard of living in retirement. The Productivity Commission found that across a lifetime, the difference between your super being in a top performer versus a bottom performer is $501,000.
Better system needed for all types of retiree
Besides wanting advice to be independent and free from conflicts, people have very different approaches to how they want to plan financially. We asked people nearing retirement how they want to manage their savings, and found they engaged in one of three main ways.
1. Seeking expert help
A quarter of the population wanted experts to help them make financial decisions. This is the segment for whom the traditional financial advice sector is really important.
This segment of people skews to higher wealth and is therefore in a better position to pay for one-on-one comprehensive advice. This is worth keeping in mind when you hear the advice industry present cuts to consumer protections as 'necessary' to make advice more affordable – or, even more worryingly, when it calls for tax breaks on advice to give this higher wealth group a leg up.
The biggest group (38%) was disengaged from financial decision-making. This group tended to have lower wealth. Their lower levels of engagement may have been rational given the relatively limited amount of money they have to manage.
For this group, the retirement system needs to do the heavy lifting. These people need safe default options to overcome their gaps in expertise, time and interest. During people's working lives, they get defaulted into relatively good superannuation products, with consumer protections to help them avoid the worst of the worst. When people hit retirement, these defaults disappear and they're forced to navigate the complexity on their own. Defaults need to be back on the agenda if we're going to make super work for everyone, regardless of their level of wealth.
3. Want to do it themselves
More than a third (37%) of people wanted to take a DIY approach to financial planning, as they prefer to rely on themselves to manage their money. This group tended to spend its time poring over government websites and any other resources they could find to cobble together answers. For them, retirement planning could be like DIY home improvement: with the right tools, they can make their retirement look as sparkling as a freshly painted room.
This group is poorly served by the current system. There is limited independent information on risks such as managing market volatility or avoiding outliving their savings. There are no tools to help people assess the quality of different retirement products. Any information that does exist is scattered across various government websites, magazines and podcasts, which means people are likely to miss crucial pieces.
UK government shows how to support and guide
The UK government faced a similar challenge when it gave its citizens the same freedoms to manage retirement savings that we have in Australia. But rather than letting people flounder, the UK government developed an independent service to help guide people through the complexity.
The service combines free telephone and in-person financial advice to help people understand the risks they need to manage. It backs this up with product comparison tools and guidance to help them avoid inappropriate products.
Rather than letting people flounder, the UK government developed an independent service to help guide people through the complexity
People are pushed towards this guidance with nudges and 'wake-up packs' in their 50s, when they are most engaged with retirement planning. This is also a time when people are in a good position to make decisions that could still improve their standard of living in retirement.
UK model 'costs peanuts'
How do we pay for this in the context of budget restraint? The UK model costs peanuts for the number of people it can reach. It's funded via a tiny levy on each person's retirement savings, which works out to a little over a dollar per UK resident a year. It is a far more efficient and better-quality solution than the alternative, which is to let 140 super funds hamstrung by financial conflicts of interest all go and reproduce the same guidance as each other.
These debates are too often crowded out by self-interest. If we want to move beyond the current impasse, we need to focus on the needs of the people these systems are set up to support – the Australian people.
Stock images: Getty unless otherwise stated.