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Building a thriving financial advice business

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Lifespan Live: Episode 2 – Building a thriving advice business of the future

In the latest podcast episode of Lifespan Live, Michael Gershkov, Lifespan National Practice Manager, has an engaging conversation with Kris Meuwissen, owner and adviser at Wealtheon, a financial planning practice based in north-western Victoria.

Kris shares his insights into how the past 12-18 months has shaped his advice business to thrive, through embracing technology, and seeking the counsel of others, to help deliver a quality advice experience for Wealtheon clients.

“We’re really trying to roll with the punches… We’re trying to make the client experience as amazing as possible with the tools and resources that we have.”, Kris says.

Embracing technology prior to the latest COVID-19 disruption, Kris has found that clients have also adapted well to interacting virtually over the past 12-18 months. It also has helped to streamline the advice experience for clients. Kris remarks, “We can utilise some of the best technology in the market, put it in front of clients, without having to send documents and wait for their return.”

The success and growth of Wealtheon, however hasn’t just come down to choosing the right technology solutions. As a small business owner, Kris has ensured that he has a good network from which to bounce ideas off and gain insights both personally and professionally.

“You’re one of my first points of call Michael. You’ve been a mentor of mine for a long, long time, but I seek advice from a lot of different people.

I’ve actually been focusing quite a lot around seeking some counsel from people like psychologists… trying to understand, a little bit more how my client thinks. How I can actually get them to communicate what they value out of life to make the advice process better for them.”

We would like to thank Kris for joining us for this episode of the Lifespan Live Podcast series.

You can listen to this podcast here. (21 minutes duration).

Lifespan Live: Episode 2 – Building a thriving advice business of the future

Growing your financial advice practice in 2021

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The changing financial advice landscape

In 2020, COVID-19 reshaped everything for financial advisers; from the way you do business to the financial landscape. The crisis highlighted the value you can add in helping clients to navigate turbulent markets, providing reassurance, compassion and understanding.

One of Investopedia’s Top 100 Advisers, Brittney Castro, CEO and Founder of Financially Wise shared her predictions for 2021. “With more and more people left with so much uncertainty with the markets, I think more people will devote time and energy toward their finances by taking personal finance courses, reading books, or hiring a financial planner to help them make smart money decisions in this new world that is emerging.”[1]

In Australia, demand for financial advice has doubled in the last five years

According to Investment Trends 2020 Financial Advice Report, an in-depth survey of the appetite and use of financial advice among Australians, 2.6 million non-advised Australians intend to seek help from a financial planner in the next two years. This figure is double the demand from 2015 (1.3 million), and significantly higher than the 2.1 million in 2019[2]. King Loong Choi, Senior Analyst at Investment Trends commented, “A record number of non-advised Australians realise they need professional financial advice. The pandemic has been a major catalyst, with 44% saying the COVID-19 situation had increased their likelihood of seeking advice.”

Currently, around 20 per cent of Australians are advised in some fashion. By tapping into the 40 per cent of the population who plan to seek advice[3], the opportunity to service clients increases significantly[4].

The number of advisers is shrinking

The opportunities are highlighted even more in light of the current reduction in the number and size of institutional players and the number of experienced advisers exiting the market. As educational pre-requisites are ramped up, adviser numbers are declining. According to Rainmaker Information’s Financial Adviser Report, adviser numbers shrunk 16% in the 12 months to June 2020, on top of a 14% drop in the 12 months to June 2019.[5]

Optimise your business model in 2021

With the market for advice shifting, 2021 is the perfect opportunity for you to take some time to reshape your business model, examining your cost and time spent per client. Many haven’t spent time analysing costs, due in part to the mixed income stream model many have grown accustomed to.

Changes brought about by COVID have helped advisers take advantage of technologies such as video conferencing, digital documents and e-signatures to streamline their practices, and gain back valuable time. In a user pays, fee-for-service world, it is crucial for you to understand how you can maximise the efficiency of your practice, including finding the right technological solutions to both suit and highlight the advice you give your clients[6].

Developing and expanding your practice in 2021

As the experience with COVID has shown, engaging in proactive communications with clients contributes significantly to higher client satisfaction (almost 30% higher, 56% compared to 73% satisfaction[7]). However, during this time many temporarily halted business development activities to focus on existing customers. For those wishing to expand your practice, optimising branding and marketing efforts is an important next step.

While 2021 will bring its own set of challenges, the year ahead is a unique opportunity for you to set yourself up for future success. We’re here to help.

What are you waiting for?

[1] https://www.investopedia.com/how-to-grow-your-advisory-practice-in-2021-5094698

[2] https://www.adviservoice.com.au/2020/09/demand-for-financial-advice-doubled-in-the-last-five-years-investment-trends-2020-financial-advice-report/

[3] https://www.coredata.com.au/pdf/Post-Pandemic_Australian_Advice_Landscape.pdf

[4] https://www.ifa.com.au/opinion/29008-the-challenges-and-opportunities-for-financial-advisers-in-2021

[5] https://www.rainmaker.com.au/media-release/financial-adviser-numbers-decline

[6] https://www.ifa.com.au/opinion/29008-the-challenges-and-opportunities-for-financial-advisers-in-2021

[7] https://www.adviservoice.com.au/2020/09/demand-for-financial-advice-doubled-in-the-last-five-years-investment-trends-2020-financial-advice-report/

Challenges and opportunities for financial advisers in 2021

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Challenges and opportunities for financial advisers

After a year of challenge, advisers might be hesitant to acknowledge that 2021 might prove to be more of a mirage rather than the promised land of calm that many had hoped for.

In 2020, advisers were asked to bear perhaps more than their fair share of challenges. Extreme market movements, ongoing regulatory pressure and uncertainty, and the need to quickly adapt to distanced client servicing as anxieties mounted over the market’s volatility, placed advisers in an almost impossible position.

Yet despite all of 2020’s trials and tribulations, the financial planning community triumphed. Advisers continue to do their many varied jobs, and now find themselves on the cusp of a year which they hope will provide some much-needed relief.

However, 2021 looms as a time in which advisers will again find themselves challenged by circumstances beyond their control, but not their capabilities. As ever, with great challenges come great opportunities.

Challenges

For advisers, the next 12 months will in large part be typified by a handful of ongoing challenges, particularly the difficulties associated with meeting the sector’s educational requirements and the provision of life insurance advice.

As advisers attempt to guide their clients through the economic recovery from COVID-19, the additional effort necessary to meet the education requirements is likely to push many dedicated practitioners out of the industry.

A lot of advisers are taking it personally. I don’t blame them. Having decades of experience and still needing to prove your worth with additional study – which may not be relevant to your specialisation – would be frustrating. As a result, we’re seeing an enormous amount of knowledge and capability exit the industry, robbing us of a generation of mentors to those just entering the profession.

Some of our industry’s most experienced hands are finding the hurdle just too high to jump, forcing years of nuanced understanding of portfolio construction out of the pool of advisers serving Australians.

For advisers who have made the decision to stick it out, 2021 will see them spend a large portion of their personal time on additional education, rather than with their families.

In the wake of the Royal Commission, the other major challenge for advisers in 2021 will be the provision of life insurance advice as commissions dry up. Younger clients with families and mortgages can’t afford to pay for life insurance premiums out of their own pockets, and many are turning to their superannuation balance as a funding mechanism. As we know, this has a profoundly negative impact on clients’ long-term balances, which means that it isn’t a sustainable exercise. But with clients not willing to pay out of their own pocket, it begs the question: how do we avoid a mass underinsurance problem?

My fear is that we are exacerbating an already sizeable issue. According to Rice Warner, Australia’s underinsurance gap is growing[1], and by cutting commissions in half – and close to zero – the only people who will be able to attain insurance advice will be those with the will and capacity to be able to pay for it. The reality of life is, people aren’t naturally interested in insurance, the case has to be made for its benefits.

Advisers can restructure their business to ensure that they only service clients who can afford to pay a fee, but the real loser at the end of the day is the Australian consumer and their dependents.

Opportunities

On the flip side, challenges often present opportunities. In 2020, advisers took the challenges before them and found ways to streamline their businesses and service clients more effectively, using adversity as an opportunity to re-orient their business around more efficient investment products such as managed discretionary accounts.

In much the same way, the challenges facing advisers in 2021 may yet prove to be significant opportunities for growth.

For instance, while it is true that overall the educational requirements are pushing many experienced advisers out of the profession, those who remain are the first in line to add orphaned clients to their book.

As a result, advisers will soon have a choice of clients to take on, which will ensure they serve those who are suitable for the advice they offer.

Recently released research[2] shows about four out of 10 Australians will seek financial advice over the next 12 months. While some of these opportunities may be small – and related to COVID-19 – some may be engagements with clients who hold a significant superannuation balance and are new to financial planning.

Currently, around 20 percent of Australians are advised in some fashion. By tapping into the 40 percent of the population who plan to seek advice, the breadth of opportunity to service clients widens by a significant margin, particularly in light of the industry’s shrinking pool of advisers.

As the industry professionalises, the new entrants to its ranks will come highly qualified, and hopefully with a greater skillset from the beginning of their careers. As a result, the public perception of advisers should improve to that of a professional consultant engaged to assist people in their financial affairs, in much the same way that a doctor is respected for the positive influence they can have on a person’s health.

With the market for advice shifting, 2021 may prove to be another strong opportunity for advisers to take some time to reshape their business model, examining their cost and time spent per client. Many advisers don’t spend time putting their business under the microscope in this way because of the mixed income stream model many have grown accustomed to.

In a user pays, fee-for-service world, it is crucial for advisers to understand how they can maximise the efficiency of their practice, including finding the right technological solutions to both suit and highlight the advice they give their clients.

While 2021 will bring its own unique set of challenges to advisers, the year ahead is also a valuable opportunity for those remaining in the industry to set themselves up for future success. Far from being concerned by the challenges in the year ahead, advisers should be energised by the opportunities for the sector – and their practice – to grow. Perhaps, after years of struggle, the coming year might finally bring some relief.

[1] Underinsurance in Australia 2020 – https://www.ricewarner.com/new-research-shows-a-larger-underinsurance-gap/

[2] CoreData Q4 2020 Trust in Financial Services survey

25 years and beyond with Lifespan Financial Planning

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For more than 25 years Lifespan Financial Planning has helped advisers and their clients build a better future for themselves. This is the story of Lifespan’s first quarter of a century, and its plan to grow into the future.

When John Ardino started Lifespan Financial Planning in 1994, he wanted to be independent of the big institutions which dominated the wealth management industry.

“The catalyst was the desire to have my own advice firm and to service advisers and accountants who wanted to enter the field. I wanted to control my own destiny,” he says.

At the time, financial advisers would provide their clients with financial plans governed by what the Lifespan Chairman says were “fairly rudimentary” disclosure rules, instead of the robust and heavily regulated statements of advice handed to clients today.

For Lifespan Chief Executive Eugene Ardino, John’s son, the firm’s birth meant everybody in the family needed to do their part as the business got off the ground.

“I remember the family conversation, being told that we all needed to tighten our belts because we were starting a business, and I was probably old enough to understand it,” he says.

“Perhaps it was a few years later but I also remember helping out with some photocopying as Dad wrote Lifespan’s first compliance manual.”

As the firm grew and its initial band of a handful of advisers quickly became hundreds, the support team also needed to expand.

“There was a need for us suddenly to do marketing, which I’ve never been great at. I actually remember the kids helping me with emails and databases and stuffing letters into envelopes,” he says.

“But we needed help with other things like software and brokerage management. So, we brought people in. One of the first people we recruited was a brokerage manager who in fact only left us just recently.”

Eugene says that even now the firm is still experiencing growing pains, pointing to the planning industry’s constant change and the increasing influence of technology-based solutions.

But as the industry has changed, so too has Lifespan, John explains.

“We have far more servicing staff now. For many years we had about 20 staff, but the team is now substantially larger in order to deal with the many additional compliance requirements and the need to monitor compliance and advice documentation,” he says.

“For many years we might have only checked 1000 to 1500 plans a year, now we’re doing between 7000 and 8000 plans in a 12-month period. Some days we have 30 to 40 new Statements of Advice to check, so the number of in-house compliance and technical staff that are monitoring and checking plans and files has escalated dramatically in the last few years.”

For John, that increased compliance staffing is one of the major differences between Lifespan and other licensee groups.

“Some people don’t like compliance, and that’s a reason why some advisers don’t join us. But the way I look at it is that most advisers would rather be with a dealer group that ensures every adviser in the group maintains the best standards and quality,” he says.

“Our number of clients now reaches into the tens of thousands and our ability to attract these wonderfully substantial, highly committed practices that employ quality staff and look for the best available technology is very pleasing.”

For Eugene, rolling out the firm’s constantly growing Managed Discretionary Account (MDA) service in 2011 has proved key to the business’ success and serves as a key milestone.

“That helped the business transform,” he says.

The MDA service now manages more than $500 million in client funds and recently joined the Australian retail platform with the largest annual net flow[1], BT Panorama.

In a year that for many advisers was in part typified by market volatility, Eugene says Lifespan has received extremely positive feedback for its MDA service, which helped advisers by ensuring their investment decisions were more quickly implemented across the entirety of their client base to protect portfolios or take advantage of buying opportunities.

He adds that he was “quite proud” of the firm’s 20th annual conference in Darwin in 2018 and has revelled in seeing some of Lifespan’s adviser businesses grow into very successful, award-winning firms, such as Finnacle, CBD Risk Management and Endorphin Wealth Management, who all took out IFA Excellence Awards in 2020.

“It’s nice to have been able to share in that journey with some of our advisers,” he adds.

John says it’s Lifespan’s strong reputation as a trustworthy and straightforward dealer group that should take much of the credit for its continued growth despite the financial planning industry’s ongoing contraction.

“At the end of the day, we’ve still got advisers that have been with us for 25 years. I believe that our growth is explained by the quality and experience of our people, our realistic approach and the respect we have for our advisers and their professionalism and independence,” John says.

Eugene adds that Lifespan’s team has strong connections with its adviser group, which has helped ensure advisers stay with the firm for the long haul.

“Having the right governance and compliance frameworks in place and attracting the right advisers who fit our culture has been key for us. There’s a clear expectation when people join, so they know what they’re going to get from us and our client-centric, pro-compliance culture. There aren’t too many surprises and we treat our advisers like family,” Eugene says.

He adds that maintaining those core values of integrity and a human touch will be key to the firm’s success over the next 25 years.

“But also, we need to continue to evolve and be aware of all the things that need to be done to adapt with the industry and our clients as their lives change,” he says.

Eugene adds that the ability to have scale and the firm’s privately-owned structure – which he says is important to advisers – will figure heavily.

“With the cost of advice continuing to go up and the level of compliance continuing to increase, having scale and good technology to be able to offset some of those increases is really important,” he adds.

John points out that Lifespan has successfully managed to avoid the issues which have derailed larger advice organisations, such as numerous complaints and professional indemnity claims which cause PI excess and total costs to skyrocket. The firm has already announced that its recently renewed PI insurance agreement didn’t cause it to increase its PI levy for advisers, unlike others in the market.

In an industry of constant change, Eugene says technology will be key for Lifespan’s ongoing success.

“Technology is going to be a very important part of the puzzle that all businesses need to get right, so enhancing our information technology systems is key. But so too is the ongoing improvement of our managed discretionary account solution, because that is a great way that advisers can add efficiencies to their business, and continue to achieve great outcomes for their clients and themselves,” he says.

“We want to continue to grow but maintain our soul and ability to really be a caring organisation that listens to its staff, advisers and service providers, and fosters an environment for great outcomes.”

[1] Plan For Life, Platform Wrap Report March 2020 data (net flow comparison performed excluding corporate super and on an individual platform basis) for the 12 months to March 2020. BT Panorama had the largest rolling annual net flow.

Eugene Ardino
Eugene Serravalle

IFA Excellence Awards 2020

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There is no doubt that 2020 has been challenging, however at Lifespan we have continued to grow and support quality advice businesses, and this was recognised last Thursday night, with Eugene Ardino, Lifespan Financial Planning Chief Executive winning the Dealer Group Executive of the Year at the IFA Excellence Awards 2020. This is the second year in a row that we have won this award. This award was recognition of everything that Lifespan has achieved over the past year. We were also a finalist for the Dealer Group of the Year Award for the second year running.

Demonstrating the quality of the Lifespan adviser network, three Lifespan practices were also winners on the night. Congratulations to Finnacle – Transformation – Company of the Year, Lyndon Holland from CBD Risk Management, Client Outcome of the Year, and Glenn Malkiewicz, Endorphin Wealth Management awarded Goals-Based Adviser of the Year.

What an amazing result!

Trustees of SMSFs need to be on guard as ASIC monitoring continues

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The number of Australians establishing SMSFs has been rising consistently since an amendment to the Superannuation Industry (Supervision) Act 1993 in 1999 allowed for SMSFs to be controlled by trustees rather than the federal government.

The Australian Prudential Regulation Authority’s recent statistics on SMSF funds showed there were 595,840 SMSFs operating in Australia, holding $712 billion in assets. The recent revelations from the banking royal commission around the lack of transparency of retail funds’ investments and their tendency to focus on profit rather than the interests of members is likely to only drive more people to set up their own funds.

But how well equipped are SMSF trustees to be managing their own retirement investments?

As part of further investigations in recent years, the Australian Securities and Investments Commission (ASIC) conducted an online survey of 457 SMSF members who had set up their own fund in the preceding five years. The results were published in two reports, “Report 575: SMSFs: Improving the quality of advice and member experiences” and “Report 576: Member experiences with self-managed superannuation funds”. The reports make for sobering reading.

The main reason for setting up an SMSF is greater control over investment decisions. According to ASIC, around one-third of SMSF trustees are naïve about what is required to run their own fund and the benefits of diversification.

In one case, an SMSF member, believing the property market was “over-inflated” and the stock market was too “risky”, held 100 per cent of their SMSF balance in cash with a view to investing in property “in maybe three or four years”.

Survey respondents reported misalignment of their expectations and actual experiences as SMSF members in a number of key areas, including:

  • costs to set up and run an SMSF,
  • time spent on administering an SMSF,
  • the unexpected complexity of running an SMSF, and
  • member understanding of SMSFs and their legal responsibilities as SMSF trustees.

 Costs of setting up and running an SMSF

Individuals looking to set up an SMSF need to factor in all costs to establish and run their SMSF including amounts to cover any initial and/or ongoing advice, as well as establishment costs, including the appointment of the trustee and registration of the fund.

Once established, there will also be the annual cost of running the fund, including accounting, auditing and reporting costs associated with ensuring the fund is compliant, and the ability for members to extract relevant information during any period of the financial year if needed.

What is the ideal starting balance for an SMSF?

At the heart of this question should be an examination of the client’s needs, goals and objectives: why does the client need an SMSF and would they be better served by a retail fund or even an industry fund?

Advisers should start with an exploration of the client’s ability to act as a responsible trustee. Do they understand their obligations as a trustee and do they have the time, interest and ability to ensure the fund is adequately serviced and remains compliant?

Cash-flow analysis, on both the fund’s proposed underlying investment assets and the overall fund itself (particularly where direct property may be part of the fund’s investment strategy), will also influence the suggested starting balance.

Time to spend on SMSF administration

The time required to manage and administer an SMSF will often depend on what type of investor the client is and how active they are when managing their SMSF investment portfolio. Having said that, 38 per cent of respondents in the ASIC survey said running an SMSF was more time consuming than they expected.

All SMSF trustees will need to undertake some level of regular investment research on their investment options. Hand in hand with this is the ongoing monitoring of the investment strategy and the performance of current and future investments. This may include the need to organise annual valuations of assets such as direct property investments.

Trustees also need to be mindful of the need to meet their regular reporting obligations, ensure the fund remains compliant and keep abreast of changes in regulation or super laws that may affect trustee responsibilities.

They need to appreciate that they remain responsible, and will be held accountable, for the compliance of their SMSF at all times.

Dealing with the complexity of running an SMSF

The main arguments against SMSFs relate to the complexity of running the fund and in meeting compliance obligations.

Trustees can certainly outsource many aspects of running a fund, but are obligated to ensure the investments selected for the fund remain appropriate. The ASIC survey revealed 6 per cent of SMSF members had not made any investments since setting up their SMSFs, with the most common reason being they had not yet found the right property to buy.

The ATO can conduct a random audit of an SMSF at any time. The penalties for non- compliance are high and receiving a notice of non-compliance from the ATO usually has devastating tax consequences.

Understanding of SMSF concepts and legal responsibilities as a trustee

SMSF trustees are required to have a sufficient level of financial literacy to make investment decisions that are consistent with their fund’s investment strategy. However, ASIC’s advice review revealed 33 per cent of members did not know their SMSF was legally required to have an investment strategy. Even fewer than that (28 per cent) were aware SMSF trustees are required to consider the insurance needs of all members when drafting an investment strategy.

Clients should also be made aware they – not their financial adviser, accountant or lawyer –are legally responsible for their SMSF. A few simple questions during the initial interview will quickly determine whether a person has the requisite financial literacy to carry out the legal responsibilities of an SMSF trustee.

Just as important is recognising when clients no longer have the cognitive ability to function as an SMSF trustee. Assisting clients with succession planning and/or winding up their SMSF is crucial at this time.

More Australians seek understanding on early access to their superannuation

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As individuals get closer to retirement, many are seeking further advice to help them better understand the circumstances required to allow them to access their superannuation savings, often with the desire to access their super at an earlier age. Many consumers often don’t  understand the rules and conditions necessary to allow for the release of their super savings.

According to a recent AMP report “In particular, many Australians don’t realise they can access super early if they change jobs between the ages of 60 and 65, even if they continue working in a new job, however, super benefits can be accessed as a tax-free lump sum during this period, or used to commence a retirement income stream, which receives both a tax exemption on earnings, and has no maximum pension restriction.” 

With respect to the desire to access super balances early, there are very limited circumstances when you can access your super early. These circumstances are mainly related to specific medical conditions or severe financial hardship.

Consumers need to be aware that some promoters claim to offer early access to your super by transferring your super into a self-managed super fund. These schemes are illegal and heavy penalties apply if you participate. Access to your superannuation outside of the traditional “retiree – commencement of pension” methods are limited and well policed by the regulators.

Access on compassionate grounds

You may be allowed to withdraw some of your super on compassionate grounds. Compassionate grounds include:

  • paying for medical treatment for you or a dependant
  • making a payment on a loan to prevent you from losing your house
  • modifying your home or vehicle for the special needs of you or a dependant because of a severe disability
  • paying for expenses associated with a death, funeral or burial of a dependant.

Access due to severe financial hardship

You may be able to withdraw some of your super if you have received eligible government income support payments continuously for 26 weeks and are unable to meet reasonable and immediate family living expenses.

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. The minimum amount that can be paid is $1,000 (unless your super balance is less than $1,000) and the maximum amount is $10,000. You can only make one withdrawal from your super fund because of severe financial hardship in any 12-month period.

There are no cashing restrictions under severe financial hardship if you have reached your preservation age plus 39 weeks and you were not gainfully employed on a full-time or part-time basis at the time of application.

Access due to terminal medical condition

You may be able to access your super if you have a terminal medical condition.

A terminal medical condition exists if:

  • two registered medical practitioners have certified, jointly or separately, that you suffer from an illness, or have an injury, that is likely to result in death within a period (certification period) that ends no more than 24 months after the date of the certification
  • at least one of the registered medical practitioners is a specialist practising in an area related to your illness or injury
  • the certification period for each of the certificates has not ended.

Your fund must pay your super as a lump sum. The payment is tax-free if you withdraw it within 24 months of certification.

Access due to temporary incapacity

You may be able to access your super if you are temporarily unable to work or need to work less hours because of a physical or mental medical condition. This condition of release is generally used to release insurance benefits from a super fund.

You will receive the super in regular payments (income stream) over the time you are unable to work. A super withdrawal due to temporary incapacity is taxed as a normal super income stream.

Access due to permanent incapacity

You may be able to access your super if you are permanently incapacitated. This type of super withdrawal is sometimes called a ‘disability super benefit’.

Your fund must be satisfied that you have a permanent physical or mental medical condition that is likely to stop you from ever working again in a job you were qualified to do by education, training or experience.

At least two medical practitioners must certify this for you to receive concessional tax treatment.

You can receive the super as either a lump sum or as regular payments (income stream). A super withdrawal due to permanent incapacity is subject to different tax components.

Superannuation Balances less than $200

You may be able to access your super if your employment is terminated and the balance of your super account is less than $200, or if you have formerly lost super held by a super fund or by us that is less than $200.

Other questions often raised with advisers include:

  • How much can be contributed to super through non-concessional contributions?;
  • How transition to retirement pensions work?;
  • Understanding how the superannuation death benefit works; and
  • Understanding how total and permanent disability insurance works within superannuation.

Consumers should seek out advice from their financial planner for further information. 

Government needs to increase access to advice, not reduce it

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The release of ASIC’s Report 627 Financial advice: What consumers really think, highlighted that among Australians who have received professional financial advice, 89% intend to get advice again in the future.

The report also revealed that almost four times as many Australians who received advice in the past 12 months had a ‘great deal of trust’ in their advisers compared to those people who had not received advice recently.

It was a resounding endorsement for the advice industry but one that is not reflected in the level of support it is currently receiving from the Federal government, which is standing by while the Australian financial advice industry is experiencing death by a thousand cuts.

The other very important piece of information that Australian consumers provided in this research was that the main reason they did not obtain advice was that it was too expensive.

And yet the industry is about to have a reform agenda thrust upon it that will greatly increase costs to the consumer.

The ASIC report also highlighted that advised consumers are more engaged with their financial affairs, have higher incomes and levels of education. If their interaction with advisers has improved their financial behaviour, then that is another reason to seek advice.

Either way, the government should be looking at ways to get more people into advice rather than increasing the barriers such as cost and creating trust issues by blaming advisers for things that are out of their control, such as product failures.

In the absence of strong government leadership, the mainstream media has filled the vacuum and been allowed to drive the narrative on this issue.

During the Royal Commission, the mainstream media focused on the horror stories that mostly came out of the wealth management arms of the large institutions without making the distinction between that model and the non-institution aligned financial planning model.

The ASIC report indicated that there was significant mistrust of financial advisers, but that it was mainly prevalent among people who had never received financial advice.

The only conclusion that can be reached from this is that those people who don’t trust advisers have formed that opinion from statements made by politicians and sensationalist mainstream media coverage. Actual recipients of advice remain overwhelmingly positive about their experiences with advisers.

This has had the effect of vilifying all 30,000 financial advisers in the industry when the over- whelming majority of them always act in the best interests of their clients to improve their financial circumstances.

This would indicate that the government has dropped the ball on this issue and our elected officials need to develop a better understanding of our industry before they destroy it, to the detriment of all Australian consumers.

My belief is that the negative perception of financial advisers can also be attributed to lack of understanding. As the ASIC report acknowledged: “Even limited knowledge of recent reforms (e.g. the Future of Financial Advice (FOFA) reforms or the professional standards re- forms for financial advisers) appeared to improve perceptions of the financial advice industry”.

To its detriment, the industry did not speak up in its own defence in the wake of the Royal Commission.

For example, planners themselves have no control over product failures but this fact was never part of the public debate.

The government has agreed to act on the recommendations of the Royal Commission, which were essentially motivated by public pressure to rectify the dysfunctional situations in the large financial institutions. But around half of the advisers not aligned with institutions ended up as collateral damage and by the time all the advice arms of the institutions are closed down or reduced in size, it will be many more.

These small business people, who invested their own savings to build a business, and al- most all of whom followed the rules to the letter, are suddenly looking down the barrel of a significant and permanent loss of income.

The recently announced legislation to remove trailing commissions from the industry has not given due weighting to the fact that commissions act as a vital funding mechanism for Australians who cannot afford to pay high fees to access financial advice.

In addition to a loss of commissions, increasing compliance, education and licensing costs are also cutting into advisers’ bottom lines, with some saying that revenues will fall by 30%. Most of these costs will have to be passed on to clients.

This upheaval is forcing many advisers out of the industry. Almost 3,000 advisers, around 10% left the industry in the first half of 2019 alone.

For those that remain, the stress is having a terrible impact. It is at the point where a few licensees actually have some of their financial advisers on a suicide watch list.

Furthermore, advisers who have successfully served their clients for 30 years or more have been told that they have to become degree qualified. Thankfully, the deadlines for completion were extended last week as a small concession.

All of this has advisers wondering what’s lying in wait for them around the next bend.

As Julie Bishop said in her address at the Association of Financial Advisers National Conference: “It’s so important that politicians and regulators understand the impact of legislation”. The Royal Commission certainly failed to recognise unintended consequences for the industry by focusing its efforts on stamping out misconduct and ignoring all other factors. The government owes it to the public to look at the broader effects of these reforms. ASIC’s Report 627 provided vital information in this regard that it would be negligent to ignore, as it highlights the fact that consumers are better off with financial advisers. We need a reform agenda that enables more Australians to seek advice, not less.

Why it doesn’t pay to pay off your uni debt

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Australians who have racked up sizeable study debts should not rush to pay them back and instead should divert their money elsewhere, experts say.

The Higher Education Loan Program (HELP) debts are one of the cheapest forms of debts people can have because they do not attract interest charges.

Lifespan Financial Planning’s chief executive officer Eugene Ardino said Australians should be focused on paying down debts that attract interest.

“It should be a priority, all other forms of debt generally come with minimum repayments and you must repay them irrespective of whether or not you work,” he said.

“If you have any other debts I would be paying them off first. HELP debts are indexed at inflation on June 1 every year.

In 2019 they rose by 1.8 per cent.

Most credit cards attract rates around 20 per cent, followed by personal loans at often more than 10 per cent and home loan debt at about 4 per cent.

Those owing still owing debts at death, must have all their tax returns filed and once that is completed, any further outstanding HELP debt is wiped.

Financial comparison website RateCity’s spokeswoman Sally Tindall said the government had failed to do enough to encourage people to pay back their loans sooner.

“The government isn’t doing much to encourage people to clear their loan early,” she said.

“In 2017 they scrapped the 5 per cent bonus for voluntary repayments, and in doing so, they took a very large carrot off the table.”

But she warned Australians having a HELP debt could impact their ability to get other loans down the track.

“An outstanding HELP debt could potentially become a thorn in your side when you go to get a mortgage because the compulsory repayments can eat into your disposable income and potentially curb how much you can borrow,” Ms Tindall said.

University debt

  • AGE: 0-19 DEBT: $353m
  • AGE: 20-29 DEBT: $33.64b
  • AGE: 30-39 DEBT: $17.8b
  • AGE: 40-49 DEBT: $6.3b
  • AGE: 50-59 DEBT: $2.5b
  • AGE: 60-69 DEBT: $962m
  • AGE: 70+ DEBT: $315m
  • AGE: N/A DEBT: $44m

TOTAL: $62 billion

Source: ATO 2017/18 financial year, numbers rounded up

Mr Ardino said investing any excess money you had would be better down into the sharemarket than paying off HELP debts.

“For younger people you would be better to use excess savings and start an investment portfolio or potentially put the money aside to buy your first home,” he said.

But he warned the government that writing of HELP debt at death meant they were costing themselves money.

Let’s make the Retirement Income Review Worthwhile

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The federal government has appointed a panel to undertake a review of the three pillars of the Australian retirement income system: the age pension, the superannuation guarantee (SG) and voluntary contributions. Here are the key issues I believe the review panel should highlight for further attention.

I must admit that I am not convinced that the retirement income review will deal with anything that the Morrison government deems remotely problematic for its re-election prospects, such as the inclusion of at least a portion of the family home in the pension assets test, increasing the age pension eligibility age and increasing the superannuation guarantee (SG) beyond 9.5 per cent.

Lifting the SG gradually to 12 per cent, as proposed, would increase fund flows to industry super funds, whose values are aligned with those of the unions – a group whose influence this government would very much like to diminish.

Having said that, it must be acknowledged that this review is an opportunity to confirm the baseline information on which future policy decisions can be made to deliver a much-needed reset of aspects of our retirement income system.

I don’t pretend to have all the answers but I do know that the best way forward involves strong political leadership and industry consultation, which will hopefully follow this fact finding review. Here are some points I urge the review panel members to consider.

Shifting the focus from accumulation to draw down

The focus of the Australian superannuation system until now has been on the accumulation phase – and that has been successful. Recent research has shown more than half of Australians aged 66 are not accessing the aged pension at all because their assets and incomes are too high, and only 20 per cent are on a part pension.

Regardless, both self-funded retirees and those entitled to the age pension need support, education and appropriate retirement-income solutions. The focus now needs to shift to helping all Australians achieve their income needs and goals in retirement.

There are a number of obstacles that need to be removed, or at least addressed, in order to optimise superannuation savings for the average Australian such as housing affordability, wages growth and persistently low interest rates. There is also the issue of too many women still retiring with inadequate superannuation balances.

The first generation of contributors to our compulsory superannuation system is about to hit retirement. Super funds must be prepared to meet the retirement income needs of this group.

The age pension system is outdated

Since the Commonwealth age pension was introduced in Australia back in 1909, life expectancy has gone up 25 years for men, to 80.5 years, and 26 years for women, to 84.6 years. Yet the age pension eligibility age has increased by just one year for men and six years for women.

With many Australians now enjoying a good 30 years of retirement, clearly, something’s gotta give. The age pension framework has simply not kept pace with Australia’s changing lifestyles and demographics. Its original role as a safety net has been transformed. The age pension now primarily serves as a supplementary source of income to superannuation savings.

Improve incentives to keep seniors working longer

People are living longer and the age pension eligibility age is increasing, albeit far too slowly, but incentives to keep working are not developing quickly enough.

People aged over 65 are healthier than ever before and, increasingly, want to continue to work in some capacity. My experience with elderly people also has shown that they are generally happier and healthier when they are productively contributing to society so long as the work is not too stressful. But financial incentives such as the Pension Work Bonus need to be improved and employers’ attitudes towards older workers must change. Tax incentives to employers of seniors would also encourage them to employ older Australians or keep more retiree-age people in the workforce.

Strategies to increase the ratio of workers to people on welfare

As the Australian population continues to age, the ratio of workers to people dependent on welfare falls. The vast majority of welfare payments are made to age pensioners and people on disability pensions; a relatively small amount goes to unemployment benefits. This trend is largely due to the fact that people are living longer but also due to the natural phenomena that as societies become more affluent, their citizens have less children per capita. This trend is obviously unsustainable and needs to be reversed if possible.

A significant lever to correct this imbalance is immigration. There is never a shortage of people wanting to migrate to Australia, and generally migrants are young people (the median age in 2017-18 was 26), often with families, ready to work and spend and contribute to GDP growth.

Sadly, more recently, there has been populist rhetoric against immigration and, as a result, the number of migrants and people with temporary visas allowed into Australia has dropped significantly in the past few years.

I have no doubt that this is one of the factors causing our economy to slow. The most counter intuitive reason I have heard is that immigration puts strain on our infrastructure therefore we should slow it down for a while. This is an infrastructure problem not an immigration problem.

If some of the lifts in a building broke down, you would not stop new tenants moving in or existing tenants from hiring new staff until the owners got around to fixing the lifts. You would fix the lifts immediately, make do with what you have in the meantime so long as it was safe and allow business as usual. It is absurd to suggest that because our infrastructure needs to be enhanced we should reduce population growth. The very core of GDP growth is population growth.

With interest rates at record lows, now would be a great time to borrow to fund massive infrastructure enhancements, creating jobs and GDP growth. A new influx of immigrants could help do much of the work, and at the same time increase the ratio of workers to people on welfare.

Instead, the government has taken a populist approach and fought to keep our budget in surplus, potentially missing a once in a century opportunity to borrow money for next to nothing to fund much needed infrastructure enhancements.

Former political foes, Paul Keating and John Hewson, have both spoken about the opportunity for an infrastructure-led recovery. I hope the government takes notice rather than taking the road that secures the most votes in the short term.

Increase the superannuation guarantee

Labor introduced legislation in 2012 to increase the super guarantee to 12 per cent by this year. The timetable was subsequently changed by the Abbott government with the SG now set to hit 12 per cent by 1 July 2025.

However, the Morrison government is facing increasing pressure from its own MPs and senators to delay or abolish the planned increases. Those on the other side of the debate such as Rice Warner are saying that a higher SG would alleviate pressure on the age pension system and grow capital markets, which would benefit the entire economy.

In my view, any increase to the SG rate equates to money out of the economy in the short term. The government has said that the current precarious state of the Australian economy is the reason for delaying this.

However, I suspect that the real reason is that it would see more money flow into the coffers of industry super funds, some of which would inevitably find its way to the Labor Party.

Address housing affordability

Another major issue that directly impacts the pension system is housing affordability. Our retirement system was built on the assumption that most people would own their own home by the time they finished working. As it currently stands, an increasing number of Australians are likely to be paying rent in retirement, placing greater pressure on the pension system.

Recent modelling from the Grattan Institute found that the number of people aged over 65 who own their own home will fall from the current 76 per cent to 57 per cent by 2056. For low-income retirees, it will be well under half. The pension system, as it currently stands, is simply not equipped to manage these pressures. Rents have been outpacing the CPI-indexed government rent assistance payments for some time now, particularly in the major cities. There is a definite need to increase assistance for the growing number of retirees who do not own their own homes as well as thinking outside the box on housing affordability.

Treatment of the family home

Is it time for the high-value family homes to be included in the age pension assets test? Again, the likelihood is that no politician would touch this with a barge pole. Just look at what happened to Labor after it took the removal of franking credits to the last election.

Be that as it may, I don’t believe we should throw our hands in the air and give up on the implementation of big picture policy reform in this country. As Paul Keating recently remarked, large scale reform will be necessary to halt the increasing levels of inequality in our society.

There are clear anomalies with the current system. For example, a retired couple with a home worth $4 million and $245,000 in assets is eligible for a full pension, while a couple with a home valued at $500,000 and $860,000 in assets will receive no pension at all.

However, there are two sides to this issue. The above example shows an extreme situation that I am sure most would consider to be quite unfair to the second couple. Others would say that it is equally unfair that a couple who have lived their lives in an affluent area and are entrenched in that community, are forced to downsize to the point of having to move to where housing is more affordable.

So, this is certainly a tricky one. Innovation and competition in the home equity release product market may result in retirees being able to remain in their homes, but to cheaply and efficiently access some of the equity to top up their retirement incomes.

Conclusion

In any case, these changes are going to be unpopular. Whichever way you look at it, they will take money out of the pockets of elderly Australians, which are a large and growing portion of the voter base. However, the longer this issue is left, the worse it will become. Slow and steady change over the next 10 to 20 years will be much more palatable than large sudden shocks. This is also why we should look to employ other mechanisms such as migration to minimise the impacts on the elderly.