The new financial advice regime puts big super in the top spot but raises potential problems

An industry fund is never going to suggest you quit theirs and start a self managed super fund.

Every single Australian would benefit from independent and cheaply available financial advice. Let’s take that to be self-evident.

Some might assume that the more money you have, the more advice you need, although in fact the opposite might be true. You may have less money because you did not get the advice you needed when it mattered.

This week the government finally released a widely anticipated financial advice reform package. The plan sets the agenda for financial advice over the next decade.

But before we take a look at it, keep in mind this is what Minister Stephen Jones, said when he announced the package: “Most Australians don’t have complex financial affairs that require a comprehensive advice plan from an adviser.

“They just want to know how to make their super work for them.”

Perhaps it’s been a while since the minister witnessed someone doing their tax returns, or anyone trying to find an uncomplicated bank term deposit.

This assumption that comprehensive advice is not needed is plain wrong. Most Australians, whether they like it or not, have complex financial affairs because the system – from Centrelink to the top end of the tax tables – is woefully complex.

Perhaps it’s not a surprise then that the reform package announced by the government disappoints in so many ways.

At its best it makes some pragmatic advances against red tape in financial advice by cutting documentation.

Unfortunately, it also rolls out the red carpet for one section of financial services above all others: Big super – and namely industry super funds.

What’s changed?

The original plan for reform put forward by lawyer Michelle Levy was ambitious and risky. It smacked of deregulation and as a result it was never going to be taken up in full.

As it turned out, the government picked up 14 of the 22 proposals put forward in the initial review. Remember, there was no attempt here to tackle behaviour or ethical standards inside the industry so that was never going to be fixed.

What has happened though is a sea change in the financial advice business. There are now only about 16,000 professionals in financial advice, which is down from 30,000 a few years ago.

Hopefully, the reduction in red tape regulations – especially the removal of the ludicrous Statement of Advice rule – will stabilise the sector.

Until very recently, the numbers of new recruits to financial advice had shrunk to the point that many advisory firms had closed their doors to new clients. (The Australian publishes the

Top Financial Advisers list each year).

14 of Michelle Levy’s 22 proposals have been picked up by the government.

The reduction in regulations should also stabilise fees which are now close to $3500 a year.

However, the single outstanding development is that the giant $3.5 trillion super sector, which has already won big time with the escalation of compulsory super to 11 per cent (from July 1) now gets another win. Under planned amendments the big funds are going to be allowed to continue and expand their provision of financial advice.

Moreover, they are going to get to do so while competing financial institutions, such as life insurers or banks, must wait for the government to further consult on their role.

My colleague, Glenda Korporaal, this week reported that the Council of Australian Life Insurers is actively requesting life insurance institutions be treated like super funds but they have been refused so far.

Is there anything wrong with big super – Australian Super, Australian Retirement Trust, Cbus or Hostplus – giving more advice to their clients? The answer is perhaps those who have chosen to allow a fund to run their life savings will be sufficiently served letting the same fund offer selected advice.

The demographics of big super is such that their client base is ageing and millions will need retirement advice soon. The fund managers know they can lose many of their wealthier members at the point of retirement but now they get the chance to keep them on the books forever.

Dressed up product selling?

In the months ahead we will see the government knuckle down and come to legal arrangements that allow the big super funds to become mass market financial advisers.

The reality is that financial planners at the top end of town generally don’t care a fig about this development because they would never have bothered with this cohort anyway.

It’s the everyday investor, the type who is not quite satisfied with the “we’ll do it all for you” mindset of big super and who can’t afford $3500 a year for an independent adviser, who is short-changed.

Cut to the chase: Will big super ever offer independent advice?

An industry fund is never going to suggest you quit and start a self managed super fund. Nor will they want you ever to have high levels of cash. They need those publicly reported performance results to be competitive.

In effect it means the idea of independent advice is highly unlikely in the context of a big fund.

Are we to believe a big super could never fall into the slack practices we saw among the banks at the time of the Hayne royal commission?

Here’s what Super Consumers Australia had to say after this week’s announcement: Suggesting the government had to tread a careful path in how it allows big super to expand, the group specifically raised the risk of “harm from super funds dressing up product selling and retention strategies as ‘retirement advice’.”

Financial Services Minister Stephen Jones. Picture: Gary Ramage

Behind the scenes there are a spectrum of issues that are only beginning to see the light of day. Big super is powerful, yet opaque. Most of the major funds presented great results over the past decade with 10-year annualised returns at 8.1 per cent.

But they were not so good recently; last year the funds returned minus 3.3 per cent.

History suggests that once funds report slower numbers, active investors get itchy feet.

Inside industry funds, “collective charging” is a common arrangement where everyone pays a fee for advice each year, but only some members use the service. It’s cross subsidisation and it is going to go through the roof when the government signs off on a wider range of advice services for big super.

Industry funds lack transparency especially in unlisted assets. Moreover, they can regularly surprise with unexpected moves such as Hostplus this week closing down its property stand-alone fund.

All of these issues are going to be magnified once big super gets to offer more advice.

Some people in some funds will pick up limited advice at a reasonable price.

But for most investors the move ensures the prospect of independent and cheaply available financial advice is more remote than ever.