New retirement report pins partial blame on advisers

The Government has released its long-awaited Retirement Income Review, which aims to assess the efficacy of Australia’s retirement system across three pillars: the Age Pension, compulsory super and home ownership.

In assessing the cohesion between these pillars, the review found that financial advice has a material effect on people’s retirement outcomes. Those who are not advised, the review explains, tend to transfer a much larger proportion of their wealth into “cash and equivalents,” which would “likely leads to lower income during retirement.”

Illustrating this, the review references a 2017 Investment Trends report which shows that approximately 6% of the retirement savings of advised clients went into cash and cash products, while that proportion rose to 23% for research participants without an adviser.

As the report notes: “Complexity, combined with fear and uncertainty, can lead people to make poor choices, such as switching assets to cash during periods of market volatility.

“Switching can protect balances from further falls in the short term, but means members are likely to miss out on any rebound in markets. As cash delivers significantly lower return than balanced funds over the long run, this behaviour typically impairs retirement outcomes.”

All of this goes to justify the RIR’s suggestion that a greater proliferation of financial advice “would lead to higher drawdown in retirement” – a sentiment that’s echoed in today’s episode of Secrets of the Money Masters, which extensively discusses the role and value of advice leading up to retirement.

The problem is, of course, that most people don’t get financial advice. According to the review, and accompanying research by ASIC, this is because of three key reasons. The first, perhaps unsurprisingly, is cost – referencing a 2019 Rice Warner survey, the review notes that consumers are generally unwilling to pay more than $500 for comprehensive advice. The second reason, limited finances, is tied to the perceived high cost of advice.

The third reason, though, was a perceived lack of trust in the advice industry. Referencing ASIC research again, the review says that “almost half” of participants felt that “advisers were more interested in helping themselves and their clients.”

Expanding on this, the review says that the Royal Commission identified “weaknesses and misconduct in financial advice,” and that the reforms that might restore consumer trust in the industry are “still underway”. Because of these issues, the review has suggested potential changes to the regulatory framework so as to allow super funds to step into the role of guiding their members into retirement.

“Superannuation funds are uniquely placed to provide advice and guidance because members have to contact their fund to commence a retirement income product,” the review says. “But funds can have a conflict of interest between the interest of members and maximising funds under management. Funds are also restricted in what they can consider when providing intra-fund advice.”

A joint press release from Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume, Treasurer Josh Frydenberg and Minister for Families and Social Services Anne Ruston has identified parts of the Morrison Government’s policy agenda – including the “Your Future, Your Super” reforms and various measures to expedite home ownership – as reflecting some of the suggestions made in the Retirement Income Review, but it remains to be seen how any of the review’s comments around financial advice will be incorporated into future reforms.

We will discuss the other major take-outs from the RIR in the coming weeks.

 


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