Financial advice not just a job for the super funds, says Michelle Levy

The shortage of financial advice still an issue for government, says the lawyer who ran the Quality of Advice Review.

Michelle Levy. Picture: Nick Cubbin

I have been invited to discuss the federal government’s response to the recommendations in the Quality of Advice Review. In doing so, I remembered something an adviser said to me: “I thought the Quality of Advice Review was going to make all my dreams come true, but now I am worried it is my worst nightmare.” While I hope the adviser is sleeping well, the review was not undertaken for the benefit of financial advisers, or banks, insurers or super funds.

The Treasury paper containing the government’s response is called “Delivering Better Financial Outcomes”. The title expresses nicely the purpose of the review, my recommendations and any changes the government makes to the regulation of financial advice. They are, to adopt the government’s phrase, intended to deliver better financial outcomes to consumers by making good quality financial advice widely accessible and affordable. You might say that is ambitious and I would agree, but frequent, personal and good financial advice can make a big difference.

The paper outlines a three-phased response: removing regulatory red tape that adds to the cost of advice without benefiting consumers (phase 1); expanding access to retirement income advice (phase 2) and exploring new channels for advice (phase 3).

While changes made in phase 1 might not make anyone’s dreams come true, they will provide some benefit to advisers and, more importantly, to their clients. Red tape does not only affect advisers. No one wants a lengthy statement of advice outlining the strategies and products their adviser did not recommend and no one wants to pay their adviser to prepare it. And so in phase 1 there might be a happy coincidence between the interests of the adviser and their client. But these are modest changes to the law, and phase 1 will not do a great deal to make financial advice broadly available. Phase 2 is quite a different kettle of fish. The changes may not be modest and they will place a heavy responsibility on trustees of superannuation funds.

The government is looking to superannuation trustees to meet the very real need for financial advice at retirement. The paper says that access to retirement income advice will be expanded by amending (relaxing) the restrictions on collective charging for advice by superannuation funds so they can provide more retirement advice to their members. The paper says the government will consider whether advice could be provided by their staff who are not financial advisers and whether the good advice duty could be adopted.

There are three things I would like to say about phase 2. The first is that the government does not propose to require trustees to give their members financial advice and so they will be left to their own devices in deciding whether they can or should.

The second is that there are many people, in the main financial advisers, who are worried about financial advice being given by people who are not financial advisers. I worry that their worry is misplaced and I worry that prescribed education standards will create a sort of halfway house with teams of paraplanners providing financial advice to members of superannuation funds. That would not in my view be a good outcome.

The licensee responsible for the advice – in phase 2, the trustees of the superannuation funds – is best placed to decide what training staff needs and how advice should be provided. In some cases the nature of the advice may mean the advice should be given by a financial adviser. But in other cases the nature of the advice may mean it can be given by a person who is trained to follow a script. Increasingly, advice might be given by a digital advice tool and not by a person.

Even where a person is involved, they might be merely an intermediary between the client and the algorithm. In that case, a degree in psychology or social work might be more valuable than a degree in financial planning. In any case, in 2023 the law should not continue to assume that financial advice is given by a person.

The third thing is related to the first, and that is about the role of superannuation funds. Superannuation funds are not financial institutions in the same way that banks and insurers are. They are trusts which hold assets for the benefit of their members. The trustees are responsible for accepting contributions, investing the assets and paying benefits to members on their retirement or disablement or to members’ dependants on their death. A trust deed for a superannuation fund might include a very long list of investment powers, but not a power to give financial advice. Indeed, back in 2001 the Productivity Commission queried whether a superannuation fund trustee could give financial advice to their members under the law. While the question was sound, that horse has long since bolted.

The authors of the Retirement Income Review Final Report concluded in July 2020 that: “People need better information, guidance and good, affordable advice tailored to their needs.” They said superannuation funds were well-placed to give this information, guidance and advice. I am not so sure. The retirement income covenant was introduced in 2022 and it requires trustees to assist members approaching or in retirement. However, trustees are struggling to do so. A few weeks ago ASIC and APRA issued a report about how funds were implementing the covenant. They said: “Overall, there was a lack of progress and insufficient urgency from RSE (registrable superannuation entities) licensees in embracing the retirement income covenant to improve members’ retirement outcomes.”

It is unusual to refer to a regulated person “embracing” a legal obligation. But so is a legal obligation to provide assistance. The covenant does not expressly require trustees to give members advice and the law does not make it easy for them to do so. Both create risks for trustees. There is a risk that they are not providing assistance if they do not provide advice or the right kind of advice, and there is a risk in providing advice.

We have seen some very large remediations and a number of class actions against trustees relating to financial advice and, while I am not saying trustees will give poor advice (I expect in the main they will give good advice), there remains a risk and ultimately that risk might become a liability shared by members of the fund.

That brings me to phase 3 – expanding the channels through which financial advice is provided. In my view, the responsibility for giving consumers financial advice should be shared among all financial institutions and not fall solely on superannuation trustees. But more importantly, it is this phase which provides the greatest opportunity for financial advice to flourish and with it financial outcomes for consumers.

Michelle Levy is a partner at Allens.

---

This article appears in The Deal/Barron’s Top 100 Financial Advisers 2023 magazine, online and in The Australian on Thursday.