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The Financial Advice Solution That Cuts Out Advisers

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23 November, 2021 by Aleks Vickovich, Australian Financial Review

Article link: https://www.afr.com/companies/financial-services/the-financial-advice-solution-that-cuts-out-advisers-20211123-p59bc0

Actuaries and academics are frantically working up plans to help “Middle Australians” get access to critical advice about retirement, which could replace the troubled financial advice industry with a software algorithm.

UNSW law professor and former ASIC Commissioner Pamela Hanrahan is promoting a “standardised” tool that collects personal data about people transitioning to retirement and makes automated recommendations to buy products such as an annuity or account-based pension.

Professor Pamela Hanrahan has co-developed a radical proposal to boost access to retirement product advice.  Wolter Peeters

The radical new proposal, co-developed by Conexus Institute director and former super fund executive David Bell, would allow the 89 per cent of consumers who don’t have a financial adviser to get guidance on how to maximise their share of the record $3.4 trillion superannuation savings once they stop working – a key need identified by last year’s Retirement Income Review. It would make “assumptions” about their personal preferences based on the financial data.

But controversially, it would also permit super funds, retail banks and insurers to implement the tool, rather than only financial advisers, in effect carving out pre-retirees from the Corporations Act edict that only licensed advisers can recommend financial products.

“Retirees who ask for help are usually offered a self-service tool that is too generic, or directed to seek personal financial advice that feels over-engineered and unaffordable,” Dr Hanrahan and Dr Bell write in The Australian Financial Review on Wednesday. “We think it’s time to disrupt the model with a third option.”

The academics said the proposal was a better way to help retirees access much-needed retirement solutions than removing red tape mounting on financial advisers since the Hayne royal commission, as has been proposed by the Financial Services Council and others.

“Personal financial product advice provided by traditional financial planners is not the answer for most people,” they write. “Even if it were, and people could be persuaded to pay what it currently costs, there are supply constraints in the industry. Twenty years of fiddling with the regulatory
settings has failed to produce a safe and scalable solution for advice.”

Legal sources said the proposal would require changes to regulation in the form of a ministerial edict or no-action letter from the Australian Securities and Investments Commission before becoming a reality. Otherwise, it may need actual changes to the law via Parliament.

Covenant coming

It follows business leaders telling the Financial Review Wealth & Super Summit on Monday that financial advice had become a “luxury good” out of reach to most consumers. The median price of advice has skyrocketed 30 per cent over the past two years, while the number of advised Australians has shrunk to 11.2 per cent, according to researcher Adviser Ratings.

Deloitte partner Andrew Boal said the standardised retirement tool proposal is an example of the innovation underway as researchers and financial firms race to respond to the Retirement Income Review and prepare for the imminent Retirement Income Covenant, which will force super funds to better protect members from inflation and market risks once they start drawing down from their nest eggs.

Deloitte is building a new retirement calculator and other firms are devising new annuity-style products that could be implemented by super trustees to help them meet their obligations under the new covenant, draft legislation for which was tabled in September.

“We are working with financial product providers on online tools that will help their customers to better understand the risks they face in retirement,” said Mr Boal, who is convenor of the Actuaries Institute’s retirement strategy group and a consultant at the Rice Warner consultancy acquired by Deloitte in April.

While 10-20 per cent of Australians will be funded in retirement by the means-tested age pension, and another 10-20 per cent will be self-funded and able to live off investment income and personal wealth, there was a dearth of options for the majority of Australian workers, he said.

But the innovation efforts risk running into the same Draconian financial advice laws that the corporate regulator has admitted are too “complex” and wealth management firms say have forced them to abandon regular investors to exclusively service the wealthy.

Mr Boal said the strict definition of personal financial advice under the Corporations Act – under which any investment recommendations must take into account an investor’s entire financial circumstances — was a problem for super trustees once the covenant was implemented.

“Superannuation funds don’t have actually a lot of data [about members], they don’t know whether you own your own home or not, they will have to make assumptions,” the actuarial partner said.

“The industry is fearful that any time you help someone enter a financial product they may need, based on information received, it will be caught by the financial advice laws. The laws need to change. We have to start again.”

Westpac woes

Those fears have been fanned by the High Court’s finding in favour of ASIC in its dispute against Westpac over the definition of “general financial advice”.

The court ruled that Westpac’s “Super Activation Team” strayed into personal financial advice when they recommended customers roll their retirement savings into bank-owned products in a telephone sales campaign in 2014 and 2015.

The case has spooked financial services clients from attempting to provide cost-effective forms of digital or scaled advice that do not take personal circumstances into account.

Financial services minister Jane Hume has said digital forms of financial advice could be a solution to the industry’s affordability crisis but that no technology provider had yet “cracked that nut”.

The government will next year hold a review of the quality of financial advice regulations, as recommended by Commissioner Hayne. The Australian Law Reform Commission is also considering calls to amend the rules governing financial product advice.


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