FOFA and Super: the challenges ahead

The Future of Financial Advice changes have tested the financial planning industry and, as Damon Taylor reports, they have generated just as many challenges for superannuation funds.

As Australia’s Future of Financial Advice (FoFA) reforms approach their one-year anniversary, many within the financial services industry continue to grapple with what these reforms mean for both their business and the wider financial planning profession. 

Of course, financial planners are not alone in this struggle. In many ways, FoFA has been just as meaningful for the super industry and for Mark Rantall, Chief Executive Officer of the Financial Planning Association of Australia (FPA), the balance between intra-fund advice and the more personal full service financial plan is something many executives are still coming to terms with. 

“At this stage, I think its early days in terms of where the line crosses over between personal advice and intra-fund advice,” he said. “I think the reality is that advice is evolving into general information, the simple implementation of that information at a personal advice level, staged or scaled advice on a particular topic matter, and then finally into a full service advice function.” 

“So I think there are four quadrants in there and in terms of general information, that’s being coped with quite well,” Rantall explained. “That piece has always been there and most super funds have been providing it all along but my major concern is what happens when general information transitions into simple advice in relation to a person’s specific circumstances.” 

“I think that’s when it becomes a little more problematic.” 

According to Rantall, the simple advice being offered by super funds could not help but be limited in scope. 

“So as an example, you might be talking about increasing your superannuation contributions and on the face of it, that would seem a good idea,” he said. “But you might not be thinking about the other circumstances that could exist around that member - so does that member have large credit card debt, for instance?” 

“If they do, then they might be well advised to get rid of that debt before they start increasing their superannuation contributions,” Rantall continued. “So I can’t even make that kind of broad, seemingly obvious generalisation without knowing that individual’s personal circumstances.” 

“And that’s probably one of the most simple examples that these call centres would come across but it certainly highlights how difficult these issues can become.” 

Alternatively, Michael Monaghan, Managing Director of State Super Financial Services (SSFS), said that while funds were still working on the interplay between intra-fund advice and full service financial planning, intra-fund advice had already proven popular with any number of memberships. 

“The relationships and transitions between different levels of advice are still developing,” he said. “But typically what the research shows is that most people need intra-fund and perhaps also scaled advice, single-issue advice, when they’re younger.” 

“Then further down the track, particularly as they approach retirement, they tend to need more comprehensive advice,” Monaghan continued. “And unfortunately, that’s the component that is still relatively underdeveloped in the super fund arena.” 

Indeed, while it seems the popularity of intra-fund advice could give rise to funds’ full service financial planning services being compromised, Monaghan said that the need for personalised advice was both well understood and appreciated. 

“Look, intra-fund advice is a very logical place for super funds to start delving into advice,” he said. “Many funds, particularly the public offer, industry funds and so forth, have lots of younger members and, by and large, they’re the people who need that simple advice.” 

“They’re asking questions like ‘should I change my insurance because I’ve got married or had a baby? Am I contributing enough? Where should I invest my money?’” Monaghan continued. “But with the baby boomers heading into retirement now, people are hitting their 50s with bigger and bigger balances and I think that’s where funds will naturally move more into full service financial planning.” 

“In both the lead-up to retirement and then again in post-retirement, that’s when members not only need but demand that more complete financial planning relationship.” 

Offering a similar perspective, Michelle Smith, Regional Leader, Financial Advice for Mercer, said that rather than compromising personalised advice, the intra-fund developments being made by the super industry were actually leading to greater financial advice take-up overall. 

“So one of the things we’ve done at Mercer for both our own master trust as well as other super fund trustees is to take education and intra-fund advice out into the workplace,” she said. “So we traditionally did education as all super funds do but we measured our efforts through surveys and found that only 11 per cent of people were actually going on to the website, increasing their contributions, increasing their insurance through super, actively doing something.”  

“So we made a decision to move away from education to what we call work place advice,” Smith explained. “We have advisors that go out on site and talk to members about their super and they have live data and technology that allows them to give advice on the spot.” 

“And from our perspective, this is all about turning good intent into action.” 

In fact for Smith, such programs were a great example of exactly how much could be achieved through intra-fund advice. 

“You can engage with someone well before they’re even thinking of retirement in a cost effective and simple way and open up advice to more people,” she said. “And to be honest, I think a full service financial plan is a natural extension (to intra-fund advice) because in most instances these are people who probably wouldn’t pick up the phone to make a booking with a full financial service planner in the first place.” 

“It’s tapping into a new market,” Smith added. “It might only be 20 per cent of your membership that actually goes on to further advice but that’s 20 per cent that you probably wouldn’t have spoken to otherwise.”  

Of course, where super funds have almost universally adopted some form of intra-fund advice, funds’ approaches are distinctly different when it comes to more holistic financial planning.  

Indeed, where full service financial planning is offered, the decision seems to be one of outsourcing versus bringing financial planners in-house but according to Monaghan, both approaches have merit. 

“Clearly both approaches can work because both approaches are working already,” he said. “Having it in-house gives the fund tighter control over the relationship with the member and that’s definitely a positive for doing it in-house.” 

“On the other hand, financial planning is very much a scale game, particularly at the comprehensive end of the spectrum,” Monaghan continued. “You need significant resources to be able to do it, particularly if a fund wants to be able to provide full service, holistic financial advice to all those members who need it.” 

“So that’s the decisions super funds are faced with because whether planners are brought in-house or the advice is outsourced on some sort of license-for-hire basis, its still an economic issue as to how many resources they can actually afford.” 

Talking through the decision in greater detail, Rantall said that while control over the financial advice relationship was undoubtedly advantageous, there were any number of issues that funds needed to work through carefully. 

“Clearly if you’ve got an in-house planning group, they still have to meet the best interests test,” he said. “So you might find yourself having to refer people out for advice that you can’t give simply because its not in the best interests of the client.” 

“You’re also paying a cost, obviously a fixed cost, to have the planning service in-house so that’s another significant overhead that the fund needs to commit to,” Rantall explained. “And then there’s the issue around intra-fund advice versus personal advice and who pays for that - do members pay in an aggregated sense and, if not, how do you charge for the personal advice service that’s being offered?”  

“Add to that issues around retention and training and maintaining that in-house capability in terms of both management and skill and you quickly realise that the decision isn’t any easy one.” 

Yet for Smith, it should not be surprising that the choices around financial advice are difficult for super funds. It is, however, hard to overlook the value in what many super funds may perceive to be looking after their members in the best possible way - in-house. 

“If the financial advice being offered by a fund is full service and you do it well, the member experience is enhanced because there is no handover,” she said. “You can take that member, you can triage them in the beginning, understand if they do need a full service financial plan, direct them straight through to a planner and take them right the way through.” 

“They work through your fund, they buy into the brand, they know the product already and you aren’t moving them from one product to another,” Smith explained. “There’s a lot of benefit in that.” 

Alternatively, Smith said that in many financial advice outsourcing arrangements, a warm referral from intra-fund advice to full service advice would take place and for many members, the experience would be identical. 

“It’s a difficult one,” she admitted. “I’m sure from the super fund’s perspective, if you’re referring someone to an external advisor, then you have to think that they will be acting in your members best interests.” 

“But there simply isn’t the same level of control over what they’re doing with your members and how that advice relationship evolves.” 

Of course, whether super funds provide financial advice to their members internally or through some external means, the consensus seems to be that advice delivery and innovation remains a work in progress. 

In fact for Rantall, where nothing beats a face-to-face discussion with a financial planner, the reality was that those seeking advice wanted more than that. 

“Our experience and research has shown that nothing quite beats the face-to-face interaction and when people are talking about their life savings and their livelihoods and they’re wanting to plan out what their future looks like, they want that personal interaction,” he said. “But having moved through that personal interaction, then they’re happy to have different mediums, whether it be email, internet, video conferencing to continue that contact.” 

“And to be honest, I think we’ve only scratched the surface in terms of innovation and evolution in financial advice,” Rantall continued. “People are increasingly going to want to scope the advice that they want at the time that’s relevant to them so whether its via the internet, Skype or whatever else, I think its clear that this is the direction that advice is heading.” 

“And as that sort of technology becomes easier and more affordable, they will inevitably become the mechanisms people use most often.” 

Offering a similar perspective, Monaghan said that both the superannuation and financial planning industries had a long way to go when it came to financial advice technology. 

“All of the stuff that’s out there right now is kind of useful for knowledgable people but I think that the full integration of education and information and advice across online, mobile and through self service to co-browsing and phone and then eventually face-to-face needs to be seamlessly integrated from the perspective of the client,” he said. “Let me give you an example from banking.” 

“I’ve got a private banker with the bank that I bank with and its probably about four years since I’ve had a face-to-face meeting with her,” Monaghan explained. “But if I needed to, I could call up and have a face-to-face meeting with her anytime I liked.” 

“In the meantime, I do all my banking online as almost everybody does and if I’ve got an issue - I need to close an account or open an account or something similar - I just call her up.” 

And while Monaghan admitted that his banker wasn’t always available to take his call, any concern he had was almost always handled quickly and easily by another bank employee. 

“And I think that kind of model is the sort of thing that we need to morph into within the advice world,” he said. “We need people, particularly as they approach retirement, to have someone that they know they can talk to and yet they don’t have to talk to that person all the time.” 

“Its not efficient for them to do so and its certainly not efficient for the financial planner,” Monaghan continued. “But throughout, they’ve got self service tools, they’ve got mobile tools, they’ve got a number they can call up and they can talk to someone who’s knowledgable about their situation and get their issues dealt with quickly.” 

“That, I think, is the model of the future but its one we’re still a long way away from achieving.” 

Yet if Australia’s superannuation industry is not yet where its needs to be when it comes to the provision of financial advice, it is also abundantly clear that the value of advice is well recognised. 

Indeed for Smith, the super industry understands all too well how much financial advice can empower people. 

“It encourages them to seek security within their financial assets and superannuation is a big part of that,” she said. “Generally speaking, people are disengaged with their super but advice and support can change that.” 

“It can give people confidence and peace of mind that they can control their own financial future.” 

Similarly, Rantall said that there were three key things that a financial planner could do to improve a member’s retirement savings and lifestyle. 

“They start by looking at the estate planning issues that a person might have, they work through protecting their income and their assets and then they work through growing and maintaining a person’s wealth,” he said. “So if you look at those three things, they’re probably done almost in that order and that helps to bullet proof the individual from the things that life throws at them.” 

“So as combined industries, we know that people are hopelessly underinsured so when life throws them a curve ball, they’re ill-equipped to navigate through,” Rantall continued. “We also know that financial hardship and the lack of financial independence is a major contributor to peoples’ stress levels.” 

“And if they haven’t got a plan and they don’t know where they’re heading with their finances, they flounder when disaster strikes.” 

And while the value of financial advice might be quite obvious to both the superannuation and financial planning industries, Rantall said that it was still something members needed to be encouraged to seek. 

“Its something we should be encouraging it in any way, shape or form that we can,” he said. “And we have to make sure that when a person does seek advice, they’re getting that advice from a competent, accredited and trusted professional.” 

“That’s why we’re committed to increasing professionalism, increasing standards and increasing education - we want to ensure that that happens.” 

Taking a slightly different tack, Monaghan said that there were two sides to financial advice as it was currently being delivered through super. 

“At a macro level, I think it can make a huge difference to the efficiency of the whole system,” he said. “And that’s about making sure that when people join a super fund, when they’re 18 or 19 or 20, that they’re given advice as to the most efficient thing they should do.” 

“So at that age, they probably don’t need a heck of a lot of insurance but they should be in relatively high growth investment options,” Monaghan explained. “And making sure that people actually do those sorts of simple things can make a huge difference to their end outcome 30 or 40 years down the track.” 

However Monaghan was quick to add that advice’s value was no less significant from a super fund’s perspective. 

“It can make a huge difference in the way that members relate to the fund,” he said. “Its helping people to engage with their super but its also their relationship with the fund.” 

“And if the fund is providing good quality advice, it gives the opportunity to maintain that member relationship throughout life which, I’m sure, is what all funds want to do,” Monaghan continued. “So if retirement outcomes are improved, if engagement is improved and if the member relationship is improved, how can we not value advice?” 

“Its an underrated service and something we should be promoting as much as humanly possible.”

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