Why expanding the scope of intra-fund advice is not the solution

Calls to expand the scope of intra-fund advice to include retirement planning come from a good place but they are fraught with danger.

According to CoreData, only one in four Australians get financial advice, despite evidence that those who do are better off as a result.

The government, as part of the Quality of Advice Review (QAR), is looking for solutions to make advice more accessible and affordable.

The QAR Issues Paper proposes a series of questions around expanding the scope of intra-fund advice and changing the regulatory framework to encourage superannuation trustees to actively engage members in relation to retirement issues.

This coincides with the introduction of the government’s Retirement Income Covenant on 1 July 2022, which places an obligation on super funds to deliver retirement income strategies and “innovate to improve outcomes for their members in retirement”.

Professional financial advisers will play an important role but it won’t be through the delivery of intra-fund advice.

There is no question that intra-fund advice is an integral part of the advice accessibility and affordability puzzle. It allows super trustees to cover the cost of general advice on simple product-related matters.

Realistically, it is the only information and advice many members will ever get.

But retirement planning is not simple.

It is far more complex than discussing a fund’s investment options and insurance arrangements, or talking to a member about increasing contributions.

Retirement planning is complex and deeply personal. It goes far beyond the scope of intra-fund advice.

Intra-fund advice is primarily general financial product information and the cost is borne by all the members of the fund. Where it gets personal, it is always limited.

The Australian Securities and Investments Commission (ASIC) describes intra-fund advice as “not a type of advice” but rather a “cross-charging mechanism”.

Before making any changes to the intra-fund rules, the government must first understand what retirement planning entails and the potential consequences of getting it wrong.

It is not just about starting a retirement income pension from the member’s accumulated super. There needs to be an understanding of how this will impact the member’s social security entitlements. If coupled-up, their partner’s situation needs to be considered and included as part of the advice. It is impossible to plan for one partner alone.

A member may be financially better off putting some money into an annuity because, under the social security assets test, only a portion of the purchase price of an annuity income stream counts as an asset. This may help a member qualify for benefits like the Commonwealth Seniors Health Card and the Pensioner Concession Card, which provides a range of discounts on things like medicine, health care, utilities and travel.

Assets can also be sheltered in a younger partner’s name until they are eligible for the age pension.

In retirement, when people are not earning a regular salary and have a finite pool of money to live off, seemingly small savings can make an enormous difference; particularly relating to health care costs.

When it comes to retirement, there are so many strategies for minimising tax and maximising income.

For members with complex needs, such as those who own more than one property, professional advice can be extremely valuable.

Estate planning is another important consideration that goes hand-in-hand with retirement planning.

The limitations of intra-fund advice mean that it is primarily suited for super fund members in the accumulation phase of life with relatively simple needs.

However, contrary to popular belief, many industry super fund members are very sophisticated and wealthy. Over the past 20-30 years, they have accumulated considerable wealth, including property.

People commonly believe the best retirement plan is to own three or four properties and live off their rental income but, in many instances, it’s not. They underestimate the stress of managing property and paying rates, maintenance, insurance, agency fees and land tax. They miss out on many of the tax benefits on offer.

These critical issues can’t be addressed by an intra-fund proposition. Even if the scope of intra-fund advice is expanded, it’s still too far a leap to make.

With the product manufacturing institutions largely out of personal advice, it’s time for financial advisers and industry super funds to collaborate to ensure members get access to high-quality holistic advice.

Recognising that there is an inherent conflict in super funds providing advice on their own products, and keen to avoid the same mistakes as the vertically integrated institutions, super funds should work with independent financial advisers to help members adequately plan for a comfortable retirement.

Gareth Hall, CEO and senior financial adviser, Lifestyle Financial Services

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.