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Financial advice provided by super funds to their members is “generally appropriate’’ but could be better. That’s the gist of a recent review of the sector by the regulator, the Australian Securities and Investments Commission (ASIC).
The report, Financial Advice by Superannuation Funds (December 2019) examined different types of advice provided to members of 25 super funds, including industry, retail, corporate and public sector funds. It then reviewed 233 personal advice files and found:
- 49% demonstrated full compliance with the adviser’s duty to act in their client’s best interests and related obligations
- 36% didn’t fully comply but there was no indication that members were at risk of suffering financial or non-financial detriment as a result of following the advice
- 15% didn’t fully comply, putting the member at risk of suffering financial or non-financial detriment as a result of following the advice.
On releasing the report, ASIC Commissioner Danielle Press said, “Superannuation funds have a very important role to play in meeting the financial advice needs of members wanting to build their retirement income. It was pleasing to see that the personal advice reviewed was generally appropriate for members.
“We recognise that inappropriate superannuation advice can have a significant detrimental impact on members’ future financial security. Where we did see some risk of detriment, we will be following up with the advice provider and requiring that they review and re-mediate the affected member,” she said.
So where are funds going wrong?
On the surface, 49% full compliance doesn’t seem like much to crow about. However, the sample size was small – 25 funds out of 190 APRA-regulated super funds as at 30 June 2019. Also, comprehensive financial advice is complex these days and advisers need to tick a lot of boxes to satisfy their compliance obligations.
That said, 51% of advice sampled did not comply fully with the adviser’s duty to act in the client’s best interests. “They should be doing better,” says Chant West head of research, Ian Fryer.
ASIC found two main reasons for non-compliance. The client files of some advisers failed to identify the subject of the advice and the member’s objectives, financial situation and needs. Others failed to conduct a reasonable investigation into financial products or to base judgements on a member’s relevant circumstances.
In 27% of advice files the adviser appeared to prioritise their own interests or those of a related party over the member’s interests. This included things such as switching members into a super fund provided by a related party without checking to see if it was better than the fund they were already in or addressing their personal needs and circumstances.
This is especially troubling as the file reviews were carried out between March and May 2019, after the banking Royal Commission had unearthed practices such as fees for no advice and widespread conflicts of interest.
Conflicts of interest are still prevalent. According to ASIC, the main culprits are the vertical integration of funds with product providers, relationships with third-party advice providers and bonuses paid to advisers.
Who is seeking advice?
ASIC’s review of 233 advice files revealed most people seeking advice were aged 60–64. No surprises here as this is the age where many Australians are on the brink of retirement and stepping up their planning.
The youngest member was 23 and the oldest 85, with an average member balance of $375,982. More than a third had a balance below $250,000, which is heartening as it’s often assumed that Australians with relatively low super balances think financial advice is not for them.
How do funds charge for personal advice?
The report also gave some insight into the type and range of fees charged for personal financial advice.
- Intra-fund advice is generally free and collectively charged to all fund members. This type of advice is non-ongoing personal advice provided by a fund to its members. It can be personal or general, but the report examined personal advice only.
- Scaled advice – personal advice that’s limited in scope – generally provided on a fixed or hourly fee basis.
- Comprehensive advice generally provided on a fixed or hourly fee basis.
Not all funds offer personal advice, which represents just 25% of all advice given by super funds. General advice, which doesn’t take account of your financial circumstances outside your super balance, accounts for 75% of the advice currently accessed by members.
Funds deliver personal advice via three main channels: internally employed staff, advisers employed by a related party and third-party providers. It’s common to deduct fees for advice from member accounts, even where third-party service providers are used. This is potentially an area of concern given some of the findings of the banking Royal Commission relating to fees for no service.
“Proper oversight of advice fee deductions from superannuation accounts for all advice, not just advice provided by superannuation trustees, is an area of ongoing focus for ASIC working with APRA,” Ms Press said.
The report found 62% of funds can or do charge members ongoing fees for advice. This might be a flat/fixed fee, a fee for service or an annual review fee for comprehensive advice.
How much does advice cost?
It’s next to impossible for members to find out what funds charge for advice up front because fees will depend on the extent and complexity of advice they receive. Even though ASIC’s review of advice files is limited in number, any guidance about the fees currently being charged is welcome.
ASIC found 68% of fund members who sought personal financial advice were charged a fee, with fees ranging from $200 to $5,500. The median fee was $2,200. As the table below shows, advice by internally employed staff is cheapest on average.
Cost of advice by delivery channel
|Internally employed staff||$0–$2,500||$356|
|Advice providers employed by related party||$0–$4,600||$1,509|
|Third-party advice provider||$0–$5,500||$1,797|
Source: ASIC (Note: Table does not include intra-fund advice)
Interestingly, in-house advisers weren’t just the cheapest on average, but they also had the highest rate of compliance at 57%. Third-party advisers had the lowest rate of compliance (46%).
Commissioner Press said, “I know there will be general interest in whether retail or industry funds provided better quality advice. We found the quality of advice to be similar across retail and industry funds.
“Due to the different sample sizes we used in our work, it’s not possible to properly compare the overall quality of advice based on all four fund types, and our findings are presented on an aggregate basis.”
Where to from here?
There is a growing trend towards in-house advisers, with 44% of funds saying they intend increasing their numbers. This is welcome given ASIC found in-house advisers were cheaper on average and more likely to comply with members’ best interests.
But with the number of adviser groups and face-to-face advisers shrinking, super funds are looking at alternative ways to deliver advice.
A majority of funds (61%) also said they intend increasing their use of digital tools for members in the coming year.
Fryer says that with many more members needing advice than there are face-to-face advisers available to deliver it, digital advice is scalable and more cost effective for funds and members.