Research tells us that those retirees who seek and receive advice feel in more control of their money and have better financial outcomes. But those who might benefit the most often aren’t seeking it.
The number of planners is shrinking, the price is increasing (now around $3,500- $4,000 for a comprehensive plan) and trust, in the wake of the Royal Commission into Banking and Finance, is still low. With increasing numbers of Baby Boomers heading into retirement, the need for advice has arguably never been greater.
Retirement income rules are complex. The mix of age pension entitlement and super drawdown is hard to understand. Then layer in all possible options and strategies (Bring Forward, Carry Forward, Downsizing, Younger Spouse, etc.) and it remains difficult for the average retiree to maximise wealth without professional support. A $4,000 investment with no guarantee of a return on this money is a hard sell.
And then there’s fintech …
Let’s explore this dilemma. To test the proposition that the advice offering available to retirees is not delivering, I shared the following question with three experienced industry experts. Here’s how they responded.
Q1. How would you describe the state of Australia’s advice industry?
David Orford (founder Financial Synergy, Optimum Pensions):
“It’s adversary and unfair. We need more advisers, not fewer, and more efficiency.”
Jeremy Duffield (founder SuperEd, Retirement Essentials):
“It’s clearly not currently up to the task. Sure, the affluent can buy good service through talented financial planners – if they can find them. But the bulk of the population struggles to get the help it needs at an affordable cost.”
Mark Hoven (Consultant, Adviser Ratings):
“It’s at a turning point for the better after an extraordinary period of sustained regulation, over-regulation and multiple changes in direction.”
It’s no secret that the adviser sector has been through a hard time, but it’s fair to assume that by now remedies would have been put in place. The spike in decumulation due to retiring Baby Boomers (called a ‘silver tsunami’ by ASIC’s Danielle Press) should hardly have come as a surprise. This has been projected for decades.
Why we haven’t found a better advice model
The Royal Commission into Banking and Finance delivered its report in February 2019 just as we were about to enter a global pandemic. There have been four years to address problems.
And along the way, fintech has been hailed as a possible ‘saviour’ to truly scale advice. But where is this at? Why have we yet to move towards a better advice model that suits the needs of a majority of Australians?
There are a few reasons.
As the number of potential clients increases rapidly, supply has gone backwards. The post-Royal Commission divestment of advice divisions by banks and other organisations is a factor. This has resulted in a reduction in the number of advisers and type of advice that it is commercially feasible to deliver. Most advisers admit their service is not really viable unless they are dealing with a high net worth individual. They are probably right. For retirees who will be on a full age pension, the average price of advice is almost 10% of their combined annual income. Will they really risk this amount?
The most recent thorough investigation into retirement income, the Retirement Income Review (2020) noted the need for more support for those hitting the decumulation phase of super. The consequence was the Retirement Income Covenant (1 July 2022) which required super fund trustees to take a more active role in the explanation of decumulation to their members. They were also expected to take responsibility for guiding members during their retirement transition.
On 18 July 2023, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) shared a damning report on the job that super funds have done in the first 12 months in assisting retirees to transition. According to the report there had been an overall lack of progress, coupled with insufficient urgency.
And then there’s the overblown and sometimes unrealistic expectations of fintech. We’re still waiting for fintech solutions to come galloping over the horizon. Yes, technology probably can deliver easier, cost-effective answers. But the theory of ‘build it and they will come’ hasn’t quite worked. T
here are probably a few reasons for this. Trust remains a factor, whether it’s trust in humans or algorithms. Complexity is another issue. Retiree needs are so nuanced that there needs to be at least a part-human component to fully understand and explain options for individuals and their family situation.
Industry experts believe that regulatory uncertainty has also played a role.
Orford says that:
“there is a large role for fintech, but it needs the appropriate regulation.”
Duffield notes that:
“… the investment in tech has been stymied by the regulatory uncertainty.”
And Hoven believes that:
“…a significant additional level of spending is required in the advice technology sector.”
So here we are with far too few qualified advisers to serve the ballooning needs of the 800 people who are entering retirement every day.
David Orford offers a back of envelope calculation:
“Let’s say there are 15,000 advisers now, with say 100 clients, that’s 1.5 million availability to support 26 million people. Yes, clients who are couples will mean that the need for appointments is slightly reduced, but not by that much.”
Who can step up to help retirees?
So who (or what) is ready to service the needs of the three million superannuants who will retire over the next 10 years?
Despite their poor performance in implementing the Retirement Income Covenant, super funds seem to be confident that they are up to this challenge. In a recent article (in the The Australian Financial Review), Paul Schroder, Head of Australia’s largest fund, Australian Super, discussed the possibility of funds (alongside government) delivering a ‘retirement salary’; a mix of age pension, super drawdowns and household equity.
But are super funds really up to this much more sophisticated solution delivered at scale, if they haven’t got the basics of better ‘information, advice and offerings’ under control yet? And will retail funds, banks and other industry providers sit quietly by while industry super funds secure an even bigger slice of the retirement income cake? It doesn’t seem likely.
Some possible solutions
To return to the question posed in the title of this article, along with Jeremy Duffield, David Orford and Mark Hoven, I agree that our current advice model is not working well. And I doubt it will be solved by offering more of the same just for those who can afford it.
The solution is probably a hybrid model, allowing fintech to do a lot of the preliminary work and a ‘human’ component for specific, episodic general advice consultations to cover the basics of retirement income planning, including pension eligibility, decumulation options, mortgage management and tax implications.
Mark Hoven emphasises the importance of the need for intervention at preservation age.
“If’s there’s one time above others for the need for advice, it’s around age 55, at the beginning of the Transition to Retirement strategy period. For those already in retirement, it’s arguably too late.”
I don’t agree that it’s too late for retirees as there are many trigger points post-55 that require knowledge of the rules and support to help retirees properly compare the pros and cons of their various options. But whenever advice is most needed is not the point.
The cost issue
The burning issue is the huge gap between the $4,000 personal advice offering available from too few advisers to a limited number of wealthy upper quintile clients … and a more affordable, say $500, single issue consultation which could serve hundreds of thousands more Australians in need.
The ultimate irony is that the majority of those who have sought advice are extremely positive about it. They typically report higher confidence and better outcomes. Surely it’s up to everyone in the industry to ensure that this experience is available to the majority of (non) wealthy individuals.
Many who enter retirement funded by a mix of age pension and super, but who are so overwhelmed by the complexity of rules, are frozen in the headlights, wondering what to do next.
Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.