INDUSTRY FUND ADVICE SUPER FUNDS LEAD ON INTRA INTRA FUND ADVICE ISN BRIEFING NOTE

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1 ISN BRIEFING NOTE INDUSTRY SUPER FUNDS LEAD ON INTRA FUND ADVICE INTRA FUND ADVICE Provision of Intra Fund Advice Services by Not for Profit Super Funds By Robbie Campo

2 Provision of Intra Fund Advice Services by Not for Profit Super Funds Contents About Industry Super Network Summary 1. Background 2. What is Intra Fund Advice? 3. Members Advice Needs 4. Impact of RG200 and issuing of Class Order Relief 5. Provision of Intra Fund Advice Services by Funds Significant growth in intra fund advice expected over next 5 years Intra fund advice offered within full spectrum of financial planning services Who do funds use to deliver intra fund advice? Cost/Charging Topics of Intra Fund Advice Channels of Advice Delivery 6. Future Trends in Intra Fund Advice 7. Conclusion

3 About Industry Super Network Industry Super Network (ISN) is an umbrella organisation for the industry super movement. ISN manages collective policies on behalf of a number of industry super funds with the objective of maximising the retirement savings of five million industry super fund members. This paper was written by Robbie Campo, ISN Manager - Strategy with the assistance of Dr Matthew Steen, ISN Economist, who provided some research assistance in writing this Briefing Note. Inquiries: rcampo@industrysuper.com 3

4 EXECUTIVE SUMMARY This Briefing Note provides an update on superannuation related financial advice services by industry superannuation funds to their members. This Briefing Note will document observable trends in the adoption of intra fund advice including results of a survey of 9 large industry super funds and will identify future likely developments in the area of simple financial advice. In summary: The publication of RG200 and issuing of class order relief by ASIC has resulted in a considerable strategic shift in super funds approaches to delivery of financial advice services to their members. Nearly all super funds are building or expanding their financial advice services, with bulk of services focusing on providing simple single issue advice to accumulation members via efficient channels such as phone based advice. However, simple or intra fund advice services are still in their infancy and growth in delivery and take-up will be exponential in the next decade. The models used by super funds to deliver single issue are divergent and tend to reflect the demographic and needs of the funds memberships. Further likely reforms, including those announced in the Future of Financial Advice (FOFA) reform package and in the Final Report of the Cooper Review will increase the role of simple advice services further. While industry super funds have been the first to embrace and implement intra fund advice services, over time all super funds including commercially operated funds, will offer these services to members. The emergence of intra fund advice services will contribute, along with the FOFA reforms, to increasing stratification of the financial advice industry. 1. Background In July 2009, ASIC released guidance (RG200 Advice to Super Fund Members) and Class Order Relief (CO 09/210) the purpose of which was to facilitate the provision of simple single issue financial advice services to the existing members of superannuation funds. RG200 offered superannuation funds guidance on providing factual information, general advice and personal financial advice to their existing members on the topics of making additional superannuation contributions, additional insurance offered within the superannuation product and member investment choice within the trustee directed investment options. RG200 offered funds a couple of avenues for providing this advice: Class Order Relief from having to comply with s945a of the Corporations Act ( the reasonable basis test ) was offered to super funds who held their own AFSL authorising provision of personal advice. However, use of this Relief was reasonably conditional as funds were precluded from outsourcing the provision of this advice and had to provide members with a mandatory warning. 4

5 Alternatively, RG200 provided detailed demonstrations for funds in providing single issue personal advice on contributions, investment choice and contributions to existing members in a scalable manner within the existing framework of the Corporations Act. RG200 has resulted in the significant expansion and development of advice services, however, it should be noted that there were a number of funds which had already developed large scale advice services prior to July What is Intra Fund Advice? There is often confusion associated with the use of the term intra fund advice as it can be used to describe different types of advice, including: Advice delivered pursuant to the class order relief associated with RG200 that is, advice delivered on insurance, member investment choice and contributions by a super trustee relying on the relief (which requires a fund trustee to deliver the personal advice under its own AFSL). Advice delivered on insurance, contributions and member investment choice in a manner consistent with the approach demonstrated in RG200, provided either by the super trustee directly or by outsourced AFSL/planners (but working within the existing requirements of s945a of the Corporations Act). Any personal advice delivered by a super fund relating to the member s account in the fund, either using its own AFSL or through outsourced providers, which utilises a scalable and/or single issue approach to providing the advice. For the purposes of clarity in this Briefing Note, references to intra fund advice will relate only to the first two definitions. The third broader definition will be referred to as simple superannuation advice. A key conceptual precondition to the regulatory relief and interpretations of intra fund advice is the fact that the advice is provided to a member about their existing interest in the superannuation fund. Central to the public policy goals of ASIC s relief and guidance is recognition that superannuation is a compulsory investment and a desire to improve the access of working Australians to advice about their super fund. It should also be noted that the limitations around intra fund advice means that the reforms could be undertaken without reducing important consumer protections in the FSR provisions of the Corporations Act, because the advice is limited to a member considering the options available within their existing fund. Intra fund advice therefore precludes any sales or switching advice. ASIC noted through the reform process that super funds already had a special relationship with their members, in particular the fact that super funds were already subject to a fiduciary duty to their members pursuant to s52(2) of the SIS Act. 5

6 3. Members Advice Needs ISN has long advocated the development of single issue financial advice services based on a strong belief that the existing commercial model for delivering financial advice was too expensive and unnecessarily sophisticated and tailored having regard to the financial position and advice needs of much of the population. ABS statistics reveal that outside property and super, the investable assets of most Australian households are negligible 1. The average balance of a superannuation account in industry super funds is $16, While industry super funds are very cognisant of the positive role which financial advice can play in bettering the financial outcomes for their members, the needs of most members especially in the earlier stages of accumulation are reasonably straightforward and generic in nature. To test our understanding of the level of demand for financial advice, Industry Super Network commissioned Forethought Research to undertake an important study into the attitudes of Australians with respect to financial advice in late Forethought Research surveyed 804 adult Australians with superannuation about their demand for financial advice in the two years to November 2009, and the results were as follows: Two-thirds of all respondents sought no advice at all in the two years between November 2007 and November Less than 20 per cent of workers earning under $100,000 sought ongoing complex financial advice in the two years to November Less than half of those seeking financial advice (13.8 per cent of all respondents) obtained ongoing complex advice from a financial planner. The two most popular matters of advice tax/entitlements from government and mortgages/loans are not regulated matters and were overwhelmingly delivered by tax agents and mortgage brokers. The next most popular matter of advice was investment choices within superannuation, with superannuation funds being the preferred provider. Forethought s survey also confirmed that the major consumers of full financial advice are high wealth individuals and those close to retirement. In the two years to November 2009, 82 per cent of respondents with an annual gross personal income less than $100,000 did not seek ongoing complex financial advice. Moreover, over half of all respondents (of any income) who sought ongoing complex financial advice were aged 55 and over. The Forethought Research confirmed the view long advocated by ISN, that only a small proportion of Australians seek financial advice and they tend to be higher net worth and close to or already in retirement, and that the vast majority of the population s financial advice needs are currently not being met by the mainstream financial planning industry. 1 Australian Bureau of Statistics, Household Wealth & Wealth Distribution , issued 9 November APRAAnnual Superannuation Bulletin, June 2009, see 6

7 4. Impact of RG200 and Issuing of Class Order Relief While there were several large funds which were early movers in the provision of intra fund advice, prior to the publication of RG200 by ASIC, most super funds provided their members with only factual information, general advice and full financial planning services. Full financial planning services were generally taken up by members (pre or post retirement) with higher balances, and was provided typically on a one-off fee for service, user pays basis. There existed a significant advice gap, in that while it was recognised that the bulk of members would benefit from some limited personal advice on the key aspects of their membership of the fund, it was not cost effective for the member or the fund to provide full financial planning services to meet their advice needs. Funds were very conservative about creating limited or single issue financial advice services due to the prevailing interpretations of legal and professional obligations when providing financial advice. To use an analogy, there was a gap in the provision of public transport advice as the only services available were limousine advice services. The publication of RG 200 was very significant in signalling to the market that ASIC would adopt a facilitative approach to intra fund advice to achieve the public policy goals of increasing access to financial advice services, particularly around superannuation. Remaining conservatism within super funds around the legitimacy of creating modularised units of financial advice to meet members advice needs have largely evaporated. All large industry super funds are building or expanding on key offerings within superannuation products. 5. Provision of Intra Fund Advice Services by Funds For the purposes of documenting the take up of intra fund advice in this Briefing Note, ISN interviewed 9 large industry superannuation funds regarding their financial advice services 3. These funds represent a significant portion of the industry superannuation sector, having a total membership of around 7.13 million members and total funds under management of $118B. The average balance of these funds is just under $25,000. ISN undertook a brief survey of these funds to investigate the take up of intra fund advice, and the following paragraphs provide a summary of the outcomes of that survey. 3 ISN would like to thank the following funds for agreeing to participate in this survey: AustralianSuper, CBus, HESTA Super Fund, HOSTPlus, LUCRF, MTAA Super Fund, REST, Sunsuper, Telstra Super Financial Planning 7

8 5.1 Significant growth in intra fund advice expected over next 5 years All funds involved in the ISN study provided the full spectrum of advice services to their members, with limited advice services intended to plug the gap between factual information and general advice on the one hand and full financial services on the other. Funds interviewed were at different stages in the development of intra fund and limited advice services, however most reported that they would expect very significant growth in their demand and supply of these services over the next 5 10 years. Funds have invested significant amounts of money into projects to research, plan, build and deliver these services to their members. 5.2 Intra Fund Advice offered within full spectrum of financial planning services All funds also saw limited financial advice services as fitting within a spectrum of member engagement and financial advice. In order to ensure that members advice needs are being properly addressed and that they have fulfilled their fiduciary obligations to members, funds have designed their advice models incorporate effective triage processes so that members with more complex circumstances or needs are referred to a planner for more traditional holistic financial advice. 5.3 Who do funds use to deliver Intra Fund Advice? In relation to use of in-house or outsourced providers, there are a variety of models in use by funds. Some fully outsource all their financial advice services including their intra fund advice services. Others outsource full financial planning services but provide the more limited or intra fund services in-house. Other funds outsource financial advice to a wholly owned subsidiary. Only one fund interviewed had made use of the class order relief. However, a number of the funds interviewed were clearly of the view that there was no distinction between the process of providing advice in a scalable manner under the existing s945a requirements and advice provided pursuant to the relief. All funds interviewed reported that their limited or intra fund advice services were provided by staff who were fully qualified planners (DFP or CFP), with a combination of qualifications and experience as would be found in a traditional planning practice. 8

9 5.4 Cost/Charging Funds approach the charging of advice services in a variety of ways. Most funds provide intra fund advice to members on the main topics of contributions, member investment choice and insurance within the fund at no direct charge to the member. These services are funded from the fund s administration charge (although some funds have an annual cap on members access to free advice). However, there are some funds which charge a one off fee (between $200-$500) for simple advice on other super related topics such as transition to retirement. It is fair to conclude that most funds are still in the process of developing or piloting their intra fund advice services and are not yet in a position to make a final decision on charging and funding of their services. Nearly all funds charge members on a fee for service basis for full financial planning services, ranging from $1,200 to $3,000 depending on the complexity of the advice. Most funds facilitate the deduction of advice costs from the member s super account, where the advice is super related and falls within the sole purpose test. None of the funds pay or receive any commissions or volume based payments in relation to the advice services provided. 5.5 Topics of Intra Fund Advice The focus of intra fund advice services are focused primarily on the three topics demonstrated in RG200 making additional contributions to the fund, advice on insurance options which are available through the fund and member investment choice. Funds are increasingly also providing simple superannuation advice to members with straightforward circumstances on transition to retirement and retirement planning issues. 5.6 Channels of Advice Delivery Most intra fund advice is delivered over the phone, with members sent a SoA following the phone based interview. The advice is generally modularised, although some members will elect to receive advice on more than one topic. One fund surveyed had a primarily workplace based model for delivering intra fund advice, where advisers attend workplaces to hold scheduled appointments with members. Some funds also offered members the opportunity to meet a planner in a more traditional face to face interview but this would certainly not be typical for intra fund advice delivery. Currently most intra fund advice is initiated by the member, who typically calls the fund s call centre and is identified as having needs which cannot be satisfied by the type of information and general advice provided by the call centre staff. Transfers to the advice teams are a seamless process for members. While there are no funds currently delivering advice through web based tools accessed directly by the member, one fund interviewed for this survey was in the process of developing such a tool. Several other funds are considering the use of such tools within their suite of advice services. 9

10 6. Future Trends in Intra Fund Advice While there was considerable resistance to the publication of RG200 by financial planners and super retail funds, it seems that retail super funds are beginning to recognise that the delivery of intra fund advice services has the capacity to offer considerable efficiencies in addressing simple member advice needs within their commercial model. A number of large retail super funds are reported to be exploring or building intra fund advice services for existing members. Intra fund advice will ultimately be used across the entire superannuation sector. Increasing acceptance of the validity of intra fund advice to efficiently and sustainably deliver advice services to members will be enhanced if further regulatory changes are made to specifically facilitate the provision of intra fund advice on retirement planning issues as announced in the Future of Financial Advice Reforms on 26 April It is also likely that if the My Super reforms recommended in the Final Report of the Cooper Review are implemented the provision of effective intra fund advice services will be a key differentiating factor for funds. However, both these reform measures are dependent on the re-election of a Labor Government. Many funds surveyed for this Paper have the ambition to use intra fund advice to attempt to engage, educate and advise all members at various points throughout their accumulation. In order to sustainably deliver intra fund advice on this ambitious scale, ISN believes that all funds will ultimately move to delivery of self help advice tools as a key channel of delivery of simple personal advice. As mentioned earlier, some funds are already actively exploring the development of such tools, which use guided logic to lead members to a recommended course of action with an automatically generated SoA. Intra fund advice services will also increasingly dovetail with the provision of member forecasting tools and personalised calculators, and will become the logical first destination for a member becoming engaged with their fund and their superannuation. Intra fund advice services will be a critical component of member engagement and will assist funds in progressing members, over their membership and lifetime, along the engagement/advice continuum (see diagram A). The financial planning industry is already changing very rapidly in the face of the FOFA reforms. If a Labor government is re-elected and implements in full the announced package of FOFA reforms, the minimum professional obligations of financial planners will be increased and most forms of conflicted remuneration will be banned. Financial advice will be disaggregated from the selling/distribution channel of product manufacturers. The predominance of advice paid for by commission and ongoing advice fees currently means that there is no pressure on the industry to find efficiencies in their practices. The introduction of more transparent fee for service financial advice will hasten the stratification of the industry, as has been seen in the legal and accounting professions, where for instance consumers with more straightforward needs can consult a conveyancing business rather than a solicitor, or get their tax done by a HR Block type provider rather than see an accountant. While these services may not suit consumers with more complex circumstances, they provide a cost effective alternative utilised by many consumers. 10

11 Diagram A The Advice Continuum General Advice and Factual Information Member Statements Annual Report Fund Website Call Centre Free Member is more likely to move along the continuum as they age and accumulate more in their super Personalised General Advice Personalised forecasts and Pre-populated calculator tools Other web-based engagement tools Free Intrafund Advice Personal financial advice offered using efficient channels such as web tools, phone and workplace services Free or very low cost Full Financial Planning Most likely to be taken up by members who are approaching or are in retirement Fee for service cost Modelling undertaken by Rice Warner Actuaries on behalf of ISN suggests that the proposed prospective ban on commissions will stimulate the provision of many more pieces of advice at a lower average cost, with minimal long-term impact on the income and employment of financial advisers. Rice Warner estimates that by 2024, consumers will receive nearly 910,000 additional pieces of advice than would have been the case with no regulatory change. This increase would largely be driven by a rapid expansion in the supply of inexpensive simple advice, which would be taken up by low-to-middle income Australians who currently receive little or no advice, or who pay for full advice that they do not use. 11

12 In addition, Rice Warner expects that by 2024, there will be 3,405 advisers supplying simple advice, an increase of 124 per cent. The market for this growth will come chiefly from industry fund members and bank customers. However, it is ISN s view that intra fund services will continue to build even if Labor is not re-elected, although the pace of growth may be slightly slower. Another trend which is likely to result from the expansion of intra fund advice offerings is that over the longer term, it will lead to an increase in demand for more traditional financial planning services. ISN strongly believes that members having a positive experience of intra fund services and benefitting from the additional wealth they may accumulate will be more likely to appreciate the value of financial advice and be more likely to seek out further financial advice services. So reform measures to increase the professional obligations of financial planners, increased member engagement and financial literacy in addition to a positive experience of intra fund advice is going to increase the perceived value and thus take up of financial advice in the future. 7. Conclusion Industry super funds have long been criticised for being anti-advice because of their long running campaign against commissions and other forms of conflicted remuneration which are typical in most financial planning businesses. However, in the next decade it is likely that superannuation funds will become major players in the provision of financial advice through the provision of intra fund advice services. Members of funds stand to significantly benefit through the receipt of advice on their super which is very low cost and delivered in their best interests, particularly where they are engaged at a younger age. A year since the publication of RG200, there has been a significant strategic shift in the positioning of financial advice services by industry super funds. With funds working towards providing simple and cost effective limited financial advice services to members to assist them to take full advantage of their retirement savings, it would seem that the policy objectives which led to the production of RG200 are likely to be realised. 12