Do advisers have something to learn from super funds?

In a conversation with ifa, Jim Hennington, chief executive officer of Apricot Actuaries, explored whether advisers could learn something from superannuation funds as the latter prepare to expand their role in advice off the back of the Quality of Advice Review (QAR).

Examining the QAR, specifically the recommendation that pushes for the expansion of the advisory role super funds play, Mr Hennington drew a comparison between the distinct benefits that both advisers and super funds bring to retirees seeking to optimise their retirement income.

“The advantage that financial advisers have over super funds is in understanding their client more deeply. This includes the client’s complete household situation and preferences. Super funds don’t have this data, even though it’s critical to any meaningful conversation about retirement income,” he told ifa.

“What advisers may lack, however,” Mr Hennington countered, “is the tools and techniques to determine the probability that a given retirement plan will work out (or not) for each client, particularly for ‘mum and dad’ Australians.”

According to Mr Hennington, while wealthy retirees can easily afford their living costs for life, everyday Australians who want a lifestyle that costs more than the Age Pension often encounter extremely complex actuarial analysis.

“The advantage super funds have over advisers is scale and (hopefully) fresh expert thinking to incorporate the research and government policy over recent years. Funds are used to working with actuaries and consultants and are likely to deploy advice frameworks that are ‘stochastic’ in nature,” he said.

“The disadvantage super funds have is they’re used to only looking at things through a lens of their own product. In reality, you need information on the household to get retirement right.”

“The winners are likely to be those who can utilise the best of both worlds,” he explained.

“Those who properly understand financial planning but can also incorporate techniques for risk and confidence levels. It’s important to be able to do this at scale and at ‘household’ level, not just product level.”

As such, Mr Hennington has predicted a growing recognition within the industry regarding the importance of actuarial tools capable of evaluating, comparing, and stress-testing products for diverse retirees across various risk scenarios.

“The rates of income paid from ‘lifetime’ retirement products are based on life expectancy statistics as well as margins for risk and cost. Advisers will need excellent new research tools and techniques to assess and compare what’s best for each client,” he concluded.

Amid discussions last year on what the Retirement Income Covenant would mean for retirement advice, actuarial firm Accurium expressed a similar sentiment to Mr Hennington, and urged advisers to adopt a “more sophisticated” approach to retirement modelling.

Namely, Accurium said that while most advisers already know how to manage risk, maximise income, and balance flexibility for a retiree’s individual circumstances and objectives, they also needed to think about how to evidence those considerations to showcase the value of their advice.

“Super fund trustees are engaging professionals such as actuarial consultants to undertake sophisticated and comprehensive retirement modelling to comply with the covenant and develop retirement strategies for cohorts of members. However, there is no reason why financial advisers cannot access similarly sophisticated tools to evidence the benefits of their personalised retirement strategies,” the actuarial certificate provider wrote in an online article last year.

In his response to the QAR last month, Financial Services Minister Stephen Jones stressed that super funds are “well-suited to safely meeting the needs of their members”.

“They are already governed by strong obligations to act in the best financial interests of members and act for the sole purpose of providing retirement benefits to members.”

The government is, however, due to run a consultation to address questions regarding the scope of advice that can be provided by a fund, the education standards needed for an employee or representative of that fund, as well as how funds are held to an appropriate duty.