Big super funds face tricky path in offering financial advice

A potential breakthrough in the shortage of advisers is laced with problems. And the industry is growing increasingly wary.

Super funds could flood the financial advice market under a proposal from a Treasury review. Illustration: John Tiedemann

Michelle Levy’s proposals to overhaul financial advice laws lay a path for super funds to flood the advice market. But any move by the booming sector to broaden its scope of advice will prompt fresh scrutiny on how funds charge for it.

The Quality of Advice Review consultation paper, released by Treasury this week, outlined Levy’s bold plans to slash red tape and make financial advice more affordable.

Alongside a proposal to scrap the best interests duty and broaden the definition of personal advice, the paper argued for changes that would make it easier for super funds to provide personal advice to members, including in the transition to retirement.

But the proposal has raised concerns across the advice sector. Speaking at a press conference this week, Sarah Abood, the CEO of the Financial Planning Association, warned: “Super funds collectively charge members for the limited advice they currently give.”

“That is not expensive advice, but if they move to full advice we would be concerned if they were to offer such services as a loss leader – people need to understand the true cost of advice and staff at big super funds would have to be properly qualified,” she said.

It is clear that Levy wants to fully examine an expanded role for industry super funds in advice.

“Superannuation trustees, like other product issuers, can be an important source of financial information and helpful personal advice for their customers,” she wrote in the paper.

And super funds offering cross-subsidised advice have already attracted criticism from those seeing parallels with the banking fee-for-no-service scandal that was exposed in the financial services royal commission.

Funds will now face fresh pressure from industry and consumer groups if they start charging their collective membership for more in-depth advice only given to a few.

“There’s a level of discomfort about the idea that all members will be paying for potentially more comprehensive advice when only some will benefit from that advice,” Abood told The Australian. (The FPA has also announced a merger with the Association of Financial Advisers in order to strengthen the sector’s lobbying efforts).

“When you’re transitioning to retirement, you need to give consideration to social security matters, estate planning, and, in some cases, the interests of someone’s partner if they’re in a partner arrangement need to be considered as well. So it does go somewhat beyond the scope of the current intra-fund advice rules,” Abood said.

The transition to retirement is often a trigger point for people to get financial advice for the first time, and with its complexities such advice does not come cheap. Abood estimates the average cost of initial retirement planning advice sits at more than $5000.

“This (proposed change) is potentially increasing the cost that all members of that fund would be bearing but not all members would be availing themselves of that advice.”

Super funds are already on high alert over the fee-for-no service risks. The financial services business of one of the nation’s largest funds, the $130bn Aware Super, was earlier this year slapped with a $20m fine for charging 25,000 customers some $50m in advice fees over a four-year period without providing any service.

Peter Johnston, executive director of the Association of Independently Owned Financial Professionals, criticised the move by Levy, saying she was trying to appeal not only to super funds, but also the banks, as they look for a pathway back into the advice sector.

“She’s being very clever the way she’s appealing to everyone. For the advisers, she wants to get rid of all these compliance costs that the previous government put in. She’s also keeping (banks and super funds) on side politically,” Johnston said.

“But at the end of the day, we just don’t agree that they should get rid of the best interest, that’s taking protection away from consumers … and with the (super fund) advice, this is more fluid and ambiguous … and it’s not a good outcome for consumers.”

At this stage there’s no signal from the government that it will adopt Levy’s 12 proposals, with consultation open until September 23 before a final report is handed down in December.

Labor this week said it would focus on the needs of consumers in the financial advice market, with Financial Services Minister Stephen Jones describing the current regime as “cooked” and “working for nobody”.

“Consumers have never been retiring with more income, never been confronted with more investment options and never been bombarded – through social media and other channels – with more opaque forms of so-called information,” Jones said.

Johnston suggested the government would cherrypick a few of the proposals to bring down the cost of advice and ditch the rest. But he called for the best interests duty to be retained and warned against opening up a pathway for banks to get back into advice services.

“Consumers need independent advice that is free from conflict. And what Ms Levy is proposing is not suitable for consumers, in our view,” he said.