Why getting simple super advice has become an expensive nightmare

If you walk into a financial adviser’s office at the age of 58, approaching retirement with about $700,000 in superannuation, a mortgage, a few hundred thousand dollars invested outside, what should happen next?

And if you walked into a super fund advice appointment, with the same amount of money, and the same mixed picture, what can they do to help you? What can they advise you on, and more importantly, what can’t they?

Most Australians would expect broadly the same thing from both: help understanding whether they have enough, what sort of retirement they can afford, what to do about the remaining mortgage and whether their super and investments are in the right place, and taking the right amount of risk, and, ultimately, a clear plan for what steps they should take next.

But what happens next can really surprise people because, despite starting with the same problem, the two advice models can’t offer the same help.

A comprehensive financial adviser is legally allowed to look across your broader financial life, including your super, investments, mortgage, tax position and retirement goals. But increasingly, many advice businesses are also built around providing ongoing investment management.

Part of the reason is that the regulatory burden and the cost of providing comprehensive advice has made smaller, one-off pieces of advice difficult to provide profitably. So what begins as a request for retirement advice can become the start of a much longer commercial relationship, with the client’s super and investments moved onto a platform and managed on an ongoing basis by the advice business or an investment manager connected to it.

[Everyday consumers] just want to understand their choices and get trustworthy advice about their retirement.

A super fund comes at the same retirement problem from the opposite direction. It already has your money and increasingly, it wants to keep looking after it throughout your retirement.

Funds are building retirement products, guidance and advice services to help members make that transition to retirement with them. This could make retirement advice vastly more accessible and affordable for millions of Australians.

But the advice a fund can offer its members has some significant boundaries. It is largely limited to advising on the money invested within the fund rather than the bigger picture of your financial life or the alternatives available to you.

That can significantly limit how far they can go in considering things like the age pension, or even your broader retirement picture, to make the journey easier for you.

Some funds hold separate financial advice licences that allow them to provide comprehensive advice, charging you personally for that at a higher rate. But that’s not what every member should expect when they contact their funds.

These two faces of advice are increasingly colliding with each other. Financial advisers build their businesses by targeting new clients, often from people whose money is currently sitting in a super fund.

Super funds are meanwhile trying to build more sophisticated retirement and advice offerings, to serve their members well enough that they think twice about leaving.

There’s nothing particularly surprising about either strategy. They are rational commercial business goals. But somewhere in the middle is the everyday consumer, who doesn’t want to be fought over, and isn’t particularly interested in who wins this battle. They just want to understand their choices and get trustworthy advice about their retirement.

They should be able to get help working out whether they have enough, what their choices are and what they should do next, without having to sign up for investment management as part of the deal.

Investment management and financial advice are not the same thing. They can work brilliantly together – and for many consumers, they should. But investment management should be a separate proposition that follows on from the advice when it is genuinely the right solution for that person or couple, rather than being assumed as the destination for the advice.

For years, following the Hayne royal commission, the direction of the industry was towards separating advice from the products and investment services sitting behind it. Now increasingly, these things are being bundled back together.

Not in the same way as before Hayne, and not necessarily with the same conflicts, but the principle is worth watching right across the industry. When the person giving the advice benefits from where your money ends up, the incentives matter.

And there’s one incentive Financial Services Minister Daniel Mulino should look very closely at: how much of our super can be used to pay for financial advice and how much should be used.

The differences are striking. Australian Super allows for an advice fee deduction of up to $7700 or 2.5 per cent of a member’s balance, whichever is lower.

Australian Retirement Trust allows up to 2.5 per cent capped at $8800 with an additional $1500 for a new advice relationship. Unisuper allows for $8800 or 2.5 per cent, too. Hostplus caps advice fees at 2.5 per cent of balance or $8000 and HESTA caps them at $5500, or 3 per cent.

Compare that with the platform end of the market, where permitted advice fees can be much higher. And in some cases, there is no fixed dollar cap on ongoing advice fees. HUB24, for example, allows ongoing adviser service fees of up to 4.4 per cent of a member’s total account balance. Higher amounts are possible subject to approval. On a $700,000 super balance, 4.4 per cent is $30,800 per year.

ASIC itself is worried about where these limits are heading. Its platform review released in June found one trustee had a dollar-based cap of $25,000 while another was planning to introduce a $30,000 cap. And three of the six platforms it examined had no upper limit on what could be deducted.

These aren’t necessarily the fees people are actually paying, but they are the amounts the different systems permit to be deducted from someone’s retirement savings. An adviser may be able to deduct, with the client’s consent, substantially more in advice fees after moving a client from a traditional super fund onto a platform.

And because those fees come directly out of retirement savings, rather than the household bank account, consumers may not feel them hitting their hip pocket nearly as hard.

The Super Members Council says regulators should take the incentive seriously. It found that platforms that had higher advice fee caps were attracting stronger flows of money from people switching funds, even after accounting for costs, performance and size.

The Financial Services Council offers a different explanation for the strong advice-led outflows from super funds to platforms, saying platforms can provide greater investment choice, tailored portfolios and the ability for advisers to manage super and investments outside super in one place.

Both arguments can be true. A platform can be entirely appropriate for someone who wants or needs that level of investment management. But the SMC data has to raise some legitimate questions about the way advice is paid for influencing where advisers recommend their money goes.

And then, alongside this, we have to mention the consumer who’s simply stuck in a pretty ordinary super fund, who’s looking across the market and saying, ‘there must be another fund with better retirement products and services for what I need’ but who can’t find an adviser to help them review their super and move to another fund.

That kind of advice should be easy to provide and find on a one-off basis. Instead, the regulatory burden and the cost of providing advice can make it unattractive for advisers unless it leads to a broader ongoing relationship.

There are so few advisers offering this kind of help these days that when I asked the Financial Advice Association Australia to help me find some, even it struggled. That’s an advice gap of a different kind – another one that needs addressing. And that’s the mess that Mulino needs to confront this week, head on.

On Tuesday, he is expected to outline the next phase of the government’s financial advice reforms, known as Delivering Better Financial Outcomes. Most people won’t watch. Most don’t even know or care what DBFO is. But they should care about the outcome because these new rules could shape how everyday Australians get financial advice for decades to come.

It’s time to finish the job. Australia needs more affordable and accessible financial advice. Super funds need greater scope to help members navigate retirement. Advisers need to be able to provide useful advice without unnecessary cost and complexity. And we must make room for simpler forms of digital advice.

But getting more advice to people is only half the job. I’d like to see the government put the purpose of advice properly at the heart of these reforms: helping consumers understand their choices and make informed decisions that help them achieve their real goals.

Mulino is going to upset somebody whatever he does. Advisers are worried about super funds moving further into advice; super funds want greater freedom to help members and retain them.

Platforms have billions of dollars flowing in that they don’t want to see slow. The lobbying in the back rooms has been fierce. But that’s precisely why the government needs to stop refereeing the industry’s turf war and tell us what it thinks a trustworthy consumer advice system should look like, because this isn’t it.

Please, for the whole industry’s sake and the sake of the consumers, finish DBFO. Give Australians more places to get affordable help. Make the choices, limitations and commercial incentives behind advice transparent.

And give advice a clear purpose – for both financial advice businesses and super funds – that puts the consumer at the heart.

Bec Wilson is author of the bestseller How to Have an Epic Retirement and the newly released Prime Time: 27 Lessons for the New Midlife. She writes a weekly newsletter at epicretirement.net and hosts the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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