Are super funds an effective pathway for advisers?

Speaking in Adelaide last week, Minister for Financial Services Stephen Jones hinted that non-relevant providers working in superannuation funds will provide “narrower advice” and will therefore have to meet “narrower qualifications”.

“I think if we get it right, and we’re determined to, what we do is create a new pathway for someone who has a part of a qualification to then move through perhaps to a fully-fledged financial planner,” Mr Jones said.

This, he explained, would open up a “logical pathway” for someone who starts at a superannuation fund but wants to then become either a self-licensed adviser or work for a licensee.

“That becomes the incentive for them to complete their qualifications,” he said.

Steve Prendeville, founder and director of Forte Asset Solutions, said that he agreed with Mr Jones’ comments.

“I agree with him. I think it is an entrée to the industry, even if it’s the provision of limited advice,” Mr Prendeville said.

“We saw that super fund-based advisers were a large part of the exodus that we have experienced over the last four years. And I think it was because of basically risk management that super funds took once they saw what was happening to the banks and other institutions.”

He added that with an increase in the number of super funds and funds under management, the need for super fund members to access advice would make it an obvious path for aspiring advisers.

“I think there’s an obvious need for some funds to employ advisers and I think it is a stepping stone or an incubator for talent to then come into a full advice role,” Mr Prendeville said.

Eugene Ardino, chief executive of Lifespan Financial Planning, expressed a similar sentiment, pointing out that without institutional advice players, there is a “void of advisory groups that can accommodate” training advisers.

“As a result, you’re going to have all these PY people that maybe can’t find an employer who can do it. And even if you do take on a PY, if you’re running a small business, it could be harder to put in place an academy-type framework for them,” Mr Ardino said.

“I suppose the issue with going and working for a super fund is the advice that you’re going to be giving is going to be very, very limited, but the flip side to that is virtually every adviser will need to be able to provide advice on super. So, it’s not a bad place to start.”

Nathan Fradley, senior adviser at Tribeca Financial, noted that he and many other advisers still in the profession were beneficiaries of the bank system.

“That was how advisers became advisers, because we’re a cottage industry, to train, develop, and bring people up is very difficult,” Mr Fradley said.

“It takes an enormous investment, especially for young people. When we interview young candidates, they like the idea of financial advice, but they don’t know what it’s about. In essence, what they want is to work in investments or they want to work in finance, but they’re not sure exactly where.”

Glen Hare, co-founder and financial adviser at Fox and Hare, said he has conflicting views on the possibility; however, conceded that the ability to funnel graduates into financial advice through the super funds is a positive opportunity.

“The challenge with the industry is that people studying financial planning and coming through those traditional means, they’re thinking about their first step into the industry, given that the banks have obviously exited financial advice,” Mr Hare said.

“More broadly, as a student, they’re thinking about how to get into the industry, what internships are available, what grad programs are available, so it definitely feels like there’s an opportunity for super funds to provide structured training and development for those that are still studying or recently graduated.”

The devil is in the details

On the flip side, Mr Hare raised concerns about the structure that advice within super funds might take and how clear the difference will be to the end consumer.

“It’s really important that the Australian community and the customer, if they’re sitting in front of an adviser from a super fund, they understand the educational requirements associated with that, they understand the scope that that particular adviser can provide, versus if they were an adviser at Fox & Hare,” he said.

“Maybe it’s as simple as they don’t actually call them financial advisers, they might be consultants or something along those lines.”

Mr Hare added: “I do believe there has to be a distinction between the two. It’s really important for me that the customer understands who it is they’re speaking to and understands the qualifications of that person. As the minister said, there’s still uncertainty around what the education requirements would be for that.”

Mr Ardino also stressed that the framework under which super funds are able to employ advisers needed to be “sensible”.

“It sounds as though the minister is thinking about not just allowing any employee of a super fund to be able to give advice, but you have to have some baseline level of qualification that’s much lower than the degree,” Mr Ardino added.

“One of the parts of having a profession where everybody has to have a degree is that when the barrier to entry is higher for the professionals, the barrier to entry is also going to be higher for users of that profession.

“If you create a second tier with a barrier to entry for those that are looking to venture down that path that is lower, then potentially the cost of their service is going to be lower. What’s equally important with this, though, is that the framework for these people to give advice is simplified. What you don’t want, I think what some people are concerned about, is if it’s made too simple, or too easy or too loose for super funds to give advice, that might cause issues for other areas of advice.”

Righting wrongs

Mr Fradley added that while there have been missteps in the existing process, especially regarding the education standards and their disproportionate application, it is crucial to acknowledge past errors and do better.

“While I don’t agree with how we got to where we got to, and I think a lot of people were wronged in this transition period, do we want to make everyone else in the future be wronged as well?” Mr Fradley said.

“Or do we want to actually put together a sustainable profession that has feeder of junior people coming through the ranks who have a good experience in giving more limited advice so that when they get to more complex advice, they don’t have to learn how to give advice, they just learn the complexity?

“It’s also a great breeding ground for talent, funded by large institutions, that the cottage industry cannot afford to do.”

Peter Johnston, executive director at the Association of Independently Owned Financial Professionals (AIOFP), is among those expressing concern about how super funds would effectively provide this pathway or “nursery”.

“In theory, industry super funds replacing the major banks as the ‘nursery’ for the advice industry makes sense … until the past circumstances are analysed. Like the cost of child care today, it is prohibitive and a black hole of ongoing expense unless a ‘cash cow’ instrument is created to fund the activities – which is commonly at the expense of others,” Mr Johnston said.

He opined that the banks have “exploited vertical integration” to fund their adviser incubation, and added he does not believe “industry funds would want to play in that space”.

“The other question is, will funding a nursery be in the best interests of super fund members? Considering many large industry funds are now diversifying out of funding internal advisers to reduce cost/mitigate AFSL risk and gravitating to contracting advice out to the independent sector, this move seems unlikely,” Mr Johnston said.

“The return on capital for fund members is just not there and we think APRA will have a similar view.

“It seems many are viewing superannuation capital as some type of social funding mechanism and forgetting that any investment decision must be in the best interests of the fund members and no one else.”

The government’s policy position on the expansion of superannuation funds’ advisory powers should be known by the end of this year, with legislation set to be released for consultation early next year.