Why super planners need the right stuff
When it comes to a retirement strategy, the benefit of a good investment education cannot be overstated
When we think about the value of financial planning - if we think about it at all - most of us think about the planner's ability to pick the best funds or shares, or to build a portfolio that produces the best return for the least possible risk. But there's another, less tangible benefit from dealing with a properly qualified and competent financial planner: education.
Right now, as superannuation funds and other managed funds mail out returns for 2007-08, the benefit of having a good investment education cannot be overstated. The contrasting experiences of two of the funds management industry's largest players underline this very issue.
The chief executive of industry superannuation fund Australian Super, Ian Silk, and the managing director of Colonial First State, Brian Bissaker, say planners play a critical role in informing and educating investors, answering their concerns when performance turns down, and shielding super funds and fund managers from the worst of investors' wrath.
Silk and Bissaker shared the stage at the recent Investment and Financial Services Association conference on the Gold Coast. Their experiences could not be more stark in the wake of the returns reported by funds for 2007-08. The majority of money under management at Colonial has come to it via advisers and planners, while the majority of the money managed by Australian Super is placed directly by members.
Silk said he expected call volumes and complaints to go through the roof as statements arrived in members' letterboxes. "The only place you don't want to be in the second half of this calendar year is in the call centre of a superannuation fund," he told the conference.
On the other hand, Bissaker said the volume of calls received by Colonial had spiked by about 20 per cent after statements were received by investors during July.
"And that's not up significantly on what the normal year-end [call volume] is for us," Bissaker said. "The advantage for us is that advisers take a lot of the heat. It may be that if you have a large percentage of advised business, as we do, that it may enable you to get through that hump quicker."
Silk said disquiet among his fund's members was "based on profound ignorance".
He cited a recent survey that found even though 70 per cent of investors said they knew about the turmoil in global markets, roughly the same proportion still expected their 2007-08 financial year returns to be in the order of 10 per cent to 15 per cent.
The actual return posted by a typical "balanced" superannuation fund in 2007-08 was, in fact, about minus 6.5 per cent.
Silk said that all parties in the superannuation industry had to do more to address this lack of understanding, and that tinkering with disclosure requirements was missing the point. "How well has disclosure worked for [our] customers? Well, it's worked about as well for our customers as it has for any customers in the industry, and that is, it hasn't worked very well at all," he said.
"Disclosure is a necessary but far from sufficient … consumer protection mechanism. There are umpteen reports from objective parties within the industry that show that from any number of perspectives, disclosure is not working in terms of facilitating people being informed about what their superannuation provider is providing them.
"The [Bureau of Statistics] earlier this year released the latest version of their life skills and numeracy survey. They surveyed a range of Australian adults, aged between 15 and 74, and ranked them between one and five on the issues of literacy, numeracy and life skills, one being the lowest and five being the highest, and the middle ranking - three - being for people who meet the minimum required to meet the complex demands of everyday life.
"Nearly one in two Australian adults could not meet that criteria. Now, you read any [product disclosure statement] that this industry produces - and I mean any, including an Australian Super one - with that in mind, and you've got a fundamental mismatch. The sort of disclosure that all of us produce in our material is not addressing that issue.
"There is a yawning gulf between [our materials and consumers' financial literacy] and the notion that's put forward from time to time, that disclosure, in its various guises, can bridge that gap is just utter rubbish."
It's obvious financial planners can fill the gap between the "profound ignorance" of many investors and the inadequate or ineffectual disclosure by most product providers.
But Silk acknowledged a big impediment to planners making greater use of industry super funds was the funds' relatively poor administration, communication and service.
He [Brian Bissaker of Colonial] said advisers favoured funds and fund managers that make it as easy as possible for them to do their jobs, and that helped advisers spend as much time as possible doing what they did best: meeting clients and investors face to face.
"But an issue I want to raise in this area … is to do with subsidisation, the question around subsidised advice," he said.
"Product manufacturers subsidise - for want of a better word - advice-givers in many forms.
"When a product manufacturer subsidises, in that sense, advice, there's a potential conflict. But does that mean it's bad?
"In my view, no, because it gives access to reasonable advice in a cost-effective way.
"Potential for conflicts can produce good outcomes for consumers, because they will be better advised and better insured."
Silk said it was critical that fund managers and financial planners understood that they occupied a privileged position, and that their job was really to implement the Government's retirement incomes policy.
"We've got an interesting point here about the intersection between public policy and private delivery," Silk said.
"I don't think it's in the interests of any party in the industry for the competitiveness to ebb away. We are the custodians of the nation's retirement incomes policy, except for that part of it that is held by the Government, which is principally the social security system and the age pension.
"So we have this act of Parliament which dictates that this torrent of money is in our hands, and that behoves us, I think, to operate in a way, or be conscious of the fact that this is not an entirely competitive market. There's not too many industries where the Government says 'This industry is going to grow'. It's going to balloon, in fact.
"That puts an extra onus, I think, on all of us in the industry to act with public policy considerations in mind, rather than strictly commercial considerations in mind."
Silk said that even though there had been cost decreases among commercial superannuation providers and cost increases among the not-for-profit industry funds, there would remain a distinct price advantage to the industry funds.
"If the business models remain broadly as they are, there should always be a material margin between the two - that's a structural issue that defines the differences between the two funds," he said. "I can't see them having parity with one another, nor can I see them getting effectively close to parity, so there's no material difference."
However, Bissaker said "value" was not the same as "cost" or "price".
"Price alone tells you nothing," he said. "Price is only ever relevant to the 'utility' you derive for that price. And utility is understood or calculated in a consumer's mind by looking at the other elements that they're getting access to [such as high levels of service and efficiency]. So in my mind, it's around value, not just price point. This second element of what advisers are looking for is the least understood in the industry. The people who understand this most are the people who work daily in the retail market and the advisers and dealer groups who work with them.
"There's been an enormous amount of work done, and we talk about innovation, and efficiencies and productivity that's been brought to bear in the last 15 to 20 years which is manifest in the way these products are built and the efficiencies they provide in the advice market.
"There is no better person in the market to understand service levels than advisers, simply because they do hundreds, if not thousands, of transactions a year, with hundreds of different providers.
"They get a better feel - better than any consultant, better than any single player - as to who has the best efficiency and accuracy and timeliness around service.
"That's a critical element for them - and for their clients - because if they've got good service levels it gives confidence to the client that the administrator, the fund, is on top of their game, and it's [the client's] life savings we're dealing with."
From an article by Simon Hoyle August 16, 2008 Sydney Morning Herald