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One of the reasons people cite for choosing to run their own self-managed super fund (SMSF) is control over their own financial destiny. But that doesn’t mean they don’t need or value professional advice. They do.
The problem is, they can’t always get what they want.
During a period of unprecedented economic and financial market uncertainty, the number of SMSFs with unmet advice needs has increased by more than 6% from 315,000 in 2019 to 335,000 in 2020.
This was the finding of the Vanguard/Investment Trends SMSF Planner report that surveyed 3,156 SMSF trustees and 193 financial planners/advisers (the terms are used interchangeably).
At the same time, SMSFs using financial advisers has fallen from 215,000 to 190,000. This might seem contradictory given the unmet demand for advice, so what’s going on?
While the use of financial advisers has fallen, the number of SMSFs accessing some form of financial advice – including accountants, brokers and SMSF service providers – has remained largely steady. Some SMSF trustees may also be turning to alternative, less-costly, sources of advice.
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Demand for low cost (or free) advice
Investment Trends analyst Calvin Yap says when SMSF trustees were asked if they had the option of professional or free/non-personalised advice from sources such as government bodies and investment newsletters, 61% were open to free advice while only 39% preferred to rely on professional advice.
The areas where SMSFs say they have unmet advice needs are in areas such as investment strategy, retirement planning and tax planning. These are areas where an independent financial adviser ought to be able to add value.
Indeed, 70% of SMSFs with a financial adviser reported being satisfied with the service they provided. But for SMSFs with unmet advice needs, the key barriers are cost and confidence in advice.
Confidence in advisers has taken a hit in recent years due to revelations of wrongdoing brought to light at the Banking Royal Commission. While many of the commission’s recommendations have been adopted, the remedy has hampered the cure in unintended ways. Namely, the increased cost of compliance with the new rules.
According to Investment Trends, financial advisers say their biggest challenges are compliance obligations (67%) and providing affordable advice. And it seems the government and financial services industry regulator, the Australian Securities and Investments Commission (ASIC), are finally listening.
Calls for more affordable advice
COVID-19 has been a game-changer in many ways, but one of the more positive outcomes is a greater sense of urgency in calls for access to more affordable financial advice.
This follows a surge in demand for financial advice on issues such as the loss of a job, uncertainty over retirement plans, life insurance and early access to super on the one hand; and an exodus of financial advisers from the industry on the other.
According to ASIC, there were around 22,200 financial advisers on its register in June 2020, down 11% on the long-term average of 24,930 prior to June 2019 when much of the Professional Standards Reforms came into effect.
An increase in the compliance burden on advisers comes at a time when many large institutions are winding back their financial advice businesses or withdrawing from the market altogether.
Demand for cut-price, timely advice
In June, ASIC told a House of Representatives Standing Committee on Financial Services and Economics that its own research shows consumers want access to scaled and affordable personal advice. By scaled, it means less complicated advice on single issues rather than a full-scale financial plan referred to as a statement of advice (SOA).
In April, ASIC set the template for cheaper, one-off advice following the government’s decision to allow people suffering financial hardship due to COVID to access up to $20,000 of their super early.
As a temporary measure, ASIC allowed advisers to provide simple advice relating to early access of super for a reduced fee capped at $300. Clients were to be given a shorter, simpler record of advice (ROA), rather than the usual requirement for a full SOA.
To put this in perspective, the median cost of up-front financial advice is currently about $3,600 and rising due to regulatory changes. Although they were well-intentioned, advisers complain these changes have resulted in more time wasted on box-ticking and red tape.
Government, industry support for simple advice
The government has also boarded the piecemeal advice train. In a recent interview, Assistant Minister for Superannuation, Financial Services and Financial Technology, Jane Hume said the government wants to embed ROAs into the advice process. She argues this will help to reduce costs, cut red tape and help get the industry “back off life support” after the pandemic.
The Financial Services Council (FSC), the peak body for the financial services industry including retail super funds, is also warming to ROAs. It wants the government to extend ASIC’s temporary measure to two years so Australians can access advice on a specific subject such as redundancy or a hardship withdrawal from super.
According to the FSC, providing scaled advice will have economic and social benefits including:
- Improved financial decisions that benefit personal wealth and the economy, such as debt management
- Reduced likelihood of individuals making poor investment choices that could cost their life savings
- Reduced pressure on public financial counsellors and the voluntary sector who can prioritise higher needs individuals in financial distress
- Improved access to financial advice by lowering its overall cost.
A shift to scaled and more affordable advice in the wake of COVID may also hasten another trend – growing numbers of independent advisers enabled by new technology.
More financial advisers seeking independence
Whether by choice, shifting consumer preferences in the wake of the Banking Royal Commission or structural changes in the industry, more financial advisers are cutting ties to the banks and big institutions such as AMP and IOOF.
According to the Investment Trends 2020 Planner Business Model Report, 30% of advisers now hold their own AFSL (Australian Financial Services Licence) or operate in a boutique AFSL. This number has doubled since 2016 with a further one in ten advisers considering becoming self-licensed.
That’s good news for consumers who are increasingly wary of conflicted financial advice, but it does present challenges for boutique advisers. Without the support of a big head office, 92% of self-licensed advisers currently outsource services such as compliance/audits, research, professional development and paraplanning.
The role of technology
Interestingly, Investment Trends found that the practices with the strongest profit and client growth in 2020 were more adept at using technology. This trend accelerated during the COVID-related disruptions as more successful practices were able to use technology to reach clients and streamline operations.
Recognising the potential role of technology in lowering costs, Jane Hume has urged ASIC to be more proactive in rolling out fintech solutions that reduce red tape for advisers.
Right on cue, ASIC announced an ‘enhanced regulatory sandbox’ for two years from September 2020. This will allow companies or individuals to test innovative financial technology solutions – or metaphorically play in the financial services sandpit – without the usual AFS or credit licences.
COVID has had many unexpected consequences but some – such as the increased use of technology and access to single-issue, affordable advice – may have positive long-term consequences for consumers.